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Ponzi Scheme: A Lender’s Story

As an investor or lender, if you ever said or thought the question “ Is this a Ponzi Scheme? “ then you understand that queasy feeling in the pit of your stomach as your mind wraps around that thought. The American public has heard the word “Ponzi” over the last four years so many times; that you might think it’s a new pasta dish at your favorite Italian restaurant, or a new lead character in a “Happy Days” type sitcom.

So what is a lender to do when you first suspect this is the case with one of your borrowers?

My story starts with the bank finding out through the local newspaper article. The loan(s) for this borrower had been past due in the past, and recently a demand letter(s) was sent, with payments received prior to the litigation start date. Shortly thereafter all their accounts were frozen with those loan payments being subsequently returned.

Of course our borrower stated when we met with him that this is a “witch hunt” and their story was not based in fact and a total misunderstanding of the course of events. A number of years ago I was at a banking conference and a gentlemen from the press, who was being vilified for recent articles written in contravention to what the conference group believe was their opinion, say when it was his turn to speak, “ Never pick a fight with a business that buys its ink by the barrel “. Subsequent articles slowly started a daily progression of what private investor (lender) gave money to our borrower and was promised to be paid in the near future. Lawsuits were started and the list of victims and dollar amounts started to grow to $30 million dollars + and continuing.

Fortunately for the bank, all our loans were secured by first mortgages on commercial properties, with four of the six properties having third party tenants, with adequate cash flow to support the loan(s). Other banks were not so lucky (or good).

The events are still on-going and things can change in a flash. But if I can offer some advice if this happens to you in the future, this is what the experience taught me:

1.) Immediately contact your borrower and requesting a meeting- We did not have our attorney there and they did not bring their attorney. This was a discussion on our loan(s) solely. Do not get drawn into the details of what is happening, unless it directly affects your loan. In our case it did not. Most of these people of Sociopaths who deluded themselves that they are the victim, why the entire world doesn’t understand their particular genius.
2.) Senior Management and Legal Counsel needs to be fully engaged- Sometimes the initial reaction is that this cannot be true and to go it alone to find out the facts. The more people involved in the discussion is good to fully vet all the options, crystallize your plan and have one point man to handle the situation with constant communication within the bank.
3.) Move quickly and decisively- Like a gun with a laser target, your aim should be right at their forehead. In the case I was involved with that meant requesting the borrower to appoint a Property Manager to collect the rents while all their accounts were frozen. Our attorney’s moved for a court-appointed Rent Receiver and began litigation immediately. Ultimately, it is our belief that the liquidation of our collateral position will repay the loan(s) so filing our Lis Pendens in an expedite fashion was a way to cut off the number of judgments and liens we would anticipate on the asset(s) when our foreclosure complaint progresses.
4.) Insurance- We received cancellation notice of the insurance to our loan asset(s). It is much cheaper to pay the premium of a lapse policy then to obtain “forced insurance”, with better coverage both in amounts and conditions.
5.) Limit the conversations with your borrower- Once we began litigation, all communication between the bank and borrower was to be made by their attorney to our attorney.
6.) Expect the unexpected- Events got very heated than slowed to a virtually stand still. In this case a number of banks were involved with this borrower with different assets from ours. A review of our financial information we received from the borrower, never disclosed these banks or loans. Granted, most of these loans were made after our last loan closing, but for the banks that made these loans, what due diligence did they perform? Verification of assets and liabilities from an outside source is something I learned as a junior lending officer.

There will probably be more that I can add to this list as events unfold, but in the age we live in events you read about that happen in different places and to different people, could one day happen right in your own backyard.

HAVE BANKS SEEN THE END OF COMMERCIAL REAL ESTATE DEFAULTS/FORECLOSURE?

Over the last year my firm, Weichert Commercial has seen a number of commercial mortgage portfolios enter the investor marketplace as bulk or specific asset sales. For the most part, these sales are existing notes and mortgages, with very little being actual real estate foreclosed upon and owned by the originating bank.

There seems to be an increase in 2012 with these sales. Are defaults increasing or have banks finally decided to rid themselves of these loans that have not been aging like fine wine. The answer is I’m not sure. What’s happening at your bank?

While there are a number of investors looking for these portfolios, based on current returns now offered in money market accounts, treasuries, equities, corporate bonds that yield little to compensate even modest risk formulas. These investors are still very specific are what they are willing to purchase and there is still a disconnect between what price an investor is willing to pay and what a bank will sell the asset for in today’s marketplace.

In the early 90’s I was the Senior Loan Officer of a $400M community bank in Northern New Jersey. For those who can remember, we experienced our own mini Lehman moment with the creation of the Resolution Trust Corporation (RTC) and the FDIC taking down mostly Savings & Loan Banks who received commercial bank powers with the deregulation of their industry by Reagan in the early 80’s. Like kids with a new toy, my S & L brethren decided they could make more money by getting in to real estate development and construction lending. The result was over 8,000 banks were closed and a tremendous amount of non-performing loans hitting the books of banks that were closed and not closed.

As the saying goes “Those who do not heed the lessons of history, are doomed to repeat it” should be engraved on the tombstones of all the banks that have failed since. To think about it, it should also be the tag line of the remaining major banks that are still in existence with their “To Big to Fail” concept.

In those days I was a buyer of those loans from both the FDIC and RTC. Our bank was in a position to purchase those assets and banks with their problem loan portfolio, and resolve the assets in a timely manner that resulted in a net gain to our bank. Unfortunately, in today’s current environmental, banks cannot buy these portfolios without buying the entire bank and making a loss-sharing agreement with the Federal Government. Not the same thing.

At that time, buying problem loan portfolios was something that was never done before and there were few “experts” who knew how to market and sell those assets with even fewer investors. That is not the case today and the market is flooded with potential buyers and so-called experts marketing these properties.

As a strategy, the sale of a non-performing loan portfolio makes more sense that completing the foreclosure process on the assets and listing these individual properties for sale. The only time the reverse makes sense is when there is a specialty real estate asset where a better return can be derived by the ultimate end user. When you weigh the cost of maintenance, taxes, litigation cost and other ancillary costs associated with real estate, the adage of “Your first loss is your best loss” will always ring true.

The major problems I see with banks imploring that strategy is as follows:

1.) Current appraisal reports
2.) Not paying real estate taxes after the loan defaults
3.) Environmental Issues that arise after the loan defaults
4.) Pursuing guarantors
5.) Last minute decisions of Bank’s CEO’s and Board of Directors

CURRENT APPRAISAL REPORTS
In all the loans I review for sale, there is always an appraisal report that is updated after the loan goes in default. I would like to say these appraisals were done prior to our engagement, but I have seen those reports 3-4 years old.

Another common mistake is to reengage the same appraiser or appraisal company that did the appraisal when the loan was first approved. A possible conflict of interest seems to be possible with the chance of still overvaluing the asset at this critical time. Most appraisals are issued to manage the write-off of the asset and in the macro, the loan loss reserve. Is your bank being truly honest about the value of the loan or are you just documenting a file for the regulators?

Of course when the bid comes in substantially under the appraisal report the bank has in their possession, they question the marketplace. The answer is if it happens once —it’s a mistake, twice——a coincidence, a third time——it’s a trend.

REAL ESTATE TAXES
Another error I see at various banks it not paying the taxes after your borrower has stopped. This is a cost that is not going away and will cost you more if payment is deferred by way of penalties and interest. In some cases those taxes are sold to investors by way of “tax sale certificates”, increasing the cost of redemption, the time it takes to redeem those certificates and impairing your lien position.

Pay the real estate taxes while litigating the loan.

POST CLOSING ENVIRONMENTAL ISSUES
Although this event happens infrequently, it is a possibility never the less. The major suspects are owner occupied buildings or single tenant buildings, that are used for manufacturing, fabricating, assembling or other ing’s that need environmental monitoring, off-site transfers of used chemicals or filtration equipment in their process.

Once your borrower is experiencing financial problems, how many coroners do you think they are short cutting to stay afloat? How will you know if you cannot get access to do an environmental audit? What happens if you foreclose and then find out? Monitoring these loans while they are still performing through site visitations or including annual environmental testing in your loan agreements is the proverbial “ounce of prevention”.

GUARANTORS
Most banks will pursue guarantors simultaneously to starting foreclosure. I agree with that strategy until you weigh the litigation process and cost, including the time to foreclose, with releasing the guarantors to obtain title to the property. In my 30 years of banking, I have rarely seen a substantial payment from a guarantor, unless you had a specific asset of the guarantor as additional collateral to your loan.

In good times with defaults a rarity, I agreed—-pursue the guarantor. But in times like this take the emotion off the table and limit your losses by obtaining the primary asset the will recover the most dollars.

BANK’S CEO’S AND BOARD OF DIRECTORS
Enviably the final decision of selling the asset in a Community Bank, whether a portfolio sale or individual asset needs approval of the Bank’s CEO or Board of Directors. Like butchers at a meat market, they cannot help themselves from putting the finger on the scale. They always want a little bit more to approve the deal, sometimes for no other reason than “because”.

I can’t tell you how many deals were lost because the bank went back to re-negotiate the agreed upon price with the buyer, and the buyer walked and would not pay any price to purchase the asset. If you go to the next winning bidder, guess what he or she is thinking? Why did the winning bid walk? What’s the matter with this asset?

Remember, “Pigs are fed, Hogs get slaughtered”

RESTAURANT LENDING 101 TO INFINITE

Restaurant Lending
The restaurant industry is one of the most challenging industries to successfully finance, the sheer mention usually results in a negative response from most lenders. The odds are against any restaurant being successful. The failure rate for restaurants is 60% – 70% according to a number of studies (1) (2). As lenders we attempt to avoid business risk and only assume credit risk. Unfortunately funding a restaurant, particularly a start-up, is actually one of the greatest business risks any lender can take. Obviously, someone is making those loans. Are they successful, or are they just setting up their current employer for a future write-off? As a former commercial lender and equipment lessor, I have done my fair share of restaurant lending and have discovered a few things which may be helpful to anyone looking to fund a restaurant loan.

——————————————————————————–
First, restaurant lending is too broad of a classification to provide any practical insight. Lending to an existing McDonald’s franchise is fairly easy relative to a start-up upper scale restaurant. I use the following classifications when evaluating restaurant loans:

Existing operation vs. start-up
Acquisition
Single Location Growth vs. Expansion
Franchise vs. Non-Franchise
Real Estate Included vs. Restaurant Only

These classifications help provide guidance on risk and structure.

General Rules:

1. Don’t make a restaurant loan unless you and your board of directors are comfortable restructuring the loan sometime in the future – I have seen very few restaurant loans that didn’t require some form of payment restructure at some time during the life of the loan. This might mean an additional loan during the slow season to fund a short-term gap or skipping a few payments during a difficult summer.

2. It seems that everyone wants to start a restaurant or bar. It is the second largest industry for small businesses. While this results in a large number of ill-qualified applicants, it makes liquidating an existing restaurant location a possibility.

3. Insist that the restaurant keeps all of its checking accounts at your bank. The best way to monitor the health of a restaurant is to review its checking account and accounts payables. Inadequate working capital quickly reveals itself in the restaurant’s checking account.

4. The owner should know how to manage the kitchen. If the owner isn’t comfortable in the kitchen, stay away. An owner who is comfortable in the kitchen can fill in for the kitchen manager or cook who misses a shift. They are also more attuned to food costs.

5. If the restaurant has liquor, management should understand local laws. Many restaurants have lost their ability to sell liquor and have faced huge fines because a server provided a drink to an underage patron. An overstocked bar takes up cash that could be used elsewhere. Management should be keenly aware of their liquor costs, as “overpours” are common and kill a bar’s profit.

6. As with any industry, the ability to catch a problem early has a huge impact on the potential losses that a lender may incur on a restaurant loan. Frequent visits are essential to staying abreast of problems. An empty restaurant on a Friday night is a red flag that should be immediately addressed. A brief question to a waiter or bartender can provide early insight on management or supplier problems.

7. Evaluate the owners’ personal financial statements. Boats, planes and fancy cars as a high percentage of total assets or on which there are payments may indicate a number of expensive hobbies and outside interests. Be very careful! You want an owner who will be totally committed to the venture.

8. Stay away from restaurants with new management that lack prior industry management experience. Management’s experience should reflect longevity at their previous positions and increasing responsibilities. The restaurant industry tends to attract many job hoppers. If there are conflicts, it is easy for an employee to move another job. As a lender I wanted someone who is committed. Be vary wary of people who say “I always wanted to own a restaurant” as they probably do not realize just how much work a restaurant can become.

9. If any ingress or egress issues arise, such as road construction, be very cautious. I have seen more than one restaurant close down because customers did not want to drive through the construction to get to the restaurant. These projects frequently have delays that can devastate a restaurant operator who is hanging on.

10. Key person life insurance can be a valuable asset particularly when one person is primarily responsible for the success of a business. If they can not assign an existing life insurance policy, they should get one for at least the amount of the loan (excluding small ticket purchases).

11. Lenders are poorly equipped to evaluate restaurant concepts. Too many bankers have been burned because they assumed that a franchise concept couldn’t lose. Stay skeptical; if a concept is impractical because of the community demographics or the failure of other similar concepts nearby it is best to skip making the loan.

12. I don’t know of any studies but in my experience the restaurant industry has a disproportionately large percentage of chemical abusers, whether alcohol or illegal substances. It is important to pay attention to the behavior your restaurant clients. I once had a client who lost some very valuable franchises due to a problem with cocaine. A negative situation can quickly spiral out of control.

13. Verify the restaurant’s hiring procedures. Hiring illegal immigrants is common in the industry and can cost the employer big fines and the possible loss of a franchise.

14. The build-out process for a new concept can be expensive and can quickly use available cash. It is important to review the experience of the people developing the concept and the build-out estimates carefully.

15. Stay away from the restaurant owner who has a second set of books. They are the ones with a wink who slyly indicate that the IRS doesn’t see everything. Their character is questionable and the tax authorities will eventually catch up with them.

16. The most important point, take a pass on a loan on which you do not feel comfortable. Just because it may qualify as an SBA loan doesn’t mean it is a good one. Save your bank and yourself the hassle of cleaning up a mess.

Existing Operations vs. Start-Ups

Start-up restaurant loans have the highest degree of business risk of practically any commercial loan. Banks are not equipped to take business risk; they are equipped to take credit risk. Accordingly, to avoid the assumption of business risk, a start-up restaurant loan should be supported by liquid collateral and a strong guarantor or an SBA guarantee. Do not rely on the value of the equipment. Do not rely on the concept! And do not rely on inexperienced management. If you do, the value of equipment will be lower than expected at the time it is liquidated; the concept will be flawed; and management will make expensive rookie mistakes.

Take outside collateral not only in the contingency the loan has to be liquidated, but also to ensure that management is committed to the venture.

1. Even with a great concept and an SBA guaranty, new restaurants are especially difficult to fund because of potential cost overruns and ramp-up time. In all these cases, it is best to include an interest-only ramp-up period for at least three months and preferably six-months. If the area is highly seasonal, either structure the loan with reduced payments during the off-season or set-up a seasonal line secured with outside collateral to fund difficult periods.

2. Existing operations are easier to evaluate. Use common sense and look carefully at cash flow/earnings and leverage. A view of the checkbook can provide insight about how much management is deducting from the business and if working capital is adequate. If management is disbursing excessive cash, then skip the loan. The bank should not be replacing capital withdrawn from the business. Personal and corporate credit bureaus should be obtained, but not overly relied upon as a number of vendors may not report negative information. Supplier checks with Sysco Foods or other major vendors are essential in determining the continuity of vendor credit. Seasonality should always be discussed.

Acquisition

1. Acquisition loans are far more challenging than growth loans. Acquisitions involve a change of ownership. When funding a new buyer of an existing restaurant, the lender should ensure that the seller is willing to hold a fair amount of seller financing. The greater the amount of goodwill the higher the amount of seller financing that should be required. The seller should also be willing to stay involved for a sufficiently long period to ensure orderly management transition. Not only should the new buyers have their assets committed, such as a second mortgage on their home, they should have cash invested in the transaction. Seller standby debt is not substitute for an owner’s equity investment, it is a supplement. Too often, the lender is left picking up the pieces of a failed business acquisition loan when new management is not committed because it had little real financial commitment. The buyer should always have real “skin” in the game.

2. When dealing with an acquisition loan, the lender should be aware of the reason for the sale. The lender should speak to the seller during the evaluation process and ask some of the critical questions that the buyer may overlook:
a. Why are you selling?
b. What is your relationship with your vendors?
c. What are the reasons for any negative operating trends noted on the balance sheet and income statement?
d. What type of seasonality have you noticed?
e. Who are your customers (demographics)?
f. Have you seen any trends?
g. Is the liquor license included in the purchase price?
h. Will you sign a non-compete?

Single Location Growth vs. Expansion Loans

1. Growth loans for our definition constitute the addition to an existing location or the replacement of equipment with newer equipment. In this case business risk has already been addressed. The lender can focus on traditional credit analysis in evaluating the loan request. Depending on the amount of the expansion relative to the size of the business, an SBA guaranty may not be necessary. It is important for the lender to file a general lien on business assets as well as a purchase money security interest if a specific piece of equipment is being acquired.

2. Expansion loans for our definition are used for the addition of another location. Often management wants to replicate their success in a second location. Although less risky than a start-up, it does have a number of similarities. Some of the common challenges of an expansion are:
a. Management may be stretched too thin, negatively impacting the performance of both operations;
b. The second location may cannibalize business from the original location; and
c. The concept may not be transferable as demographics and preferences may be different.

Franchise vs. Non-Franchise

Franchises have a number of advantages over non-franchises and a number of disadvantages. It is important not to be lulled into a false sense of security because you are already familiar with a successful franchise concept. It is important to review SBA failure rates for the franchise and understand the responsibilities of the franchisor and franchisee under the Franchise Disclosure Document (FDD), formerly the UFOC.

Advantages
· Proven concept
· SBA history/ franchise review
· Consistency of product
· Franchise training
· Buying power (supplies & equipment)
· Advertising support
· Lender can use other locations as benchmark
· Possible replacement clients for failed operations

Disadvantages
· Exposure to franchisor problems
· Franchise fees
· Premium cost for products vs. local purchasing
· Lack of control of advertising dollars
· Issues with one franchise location may impact others
· Lack of adaptability to local tastes/preferences

One of the advantages of a franchise loan is that there may be potential purchasers in the event that the first franchisee fails. Franchisor commitments about waiving or deferring new franchise fees and finding replacement franchisees can be extremely helpful with a looming default.

Real Estate Included vs. Restaurant Only

In some ways it is easier to fund a restaurant based real estate loan than just a restaurant. The critical factors depend on the amount of build-out required and lease cost relative to the cost of purchasing a location. The higher the lease cost and the higher the required level of build-out, the more attractive it is for the restaurant to acquire the underlying real estate. This is especially true when the cost of build-out is compared against the lease term. When making a significant investment in leasehold improvements, it is important to have a sufficiently long term to support the amortization of the improvements.

Though the price may be higher, the real estate value of a good location (note: it has to be a good location) tends to make the entire operation more valuable and therefore potential exit strategies more abundant. The second aspect to this is that when a restaurant tenant falls behind in rent, the landlord’s actions becomes critical in the lender’s decision making process. A restaurant that falls behind with its landlord may fail to inform the lender until it is too late. Then the lender may be forced to sell the equipment under a distressed liquidation scenario, even with a lessor’s agreement in place. The downside to funding the real estate also is obvious, greater lender exposure. Although adding real estate results in higher loan balances, it can reduce competition for better sites. Additionally, the longer amortization period for real estate loans (25 years) may actually improve cash flow for the restaurant when compared with the cost of rent and the amortization of a shorter term leasehold improvement loan.

Finally, a building purchase may make sense for certain franchise locations or the growth or continuity of an existing restaurant. Many restaurants have closed when their leases expired because the landlord wanted a large rent increase, sometimes as a result of the restaurant making leasehold improvements and building a customer base.

Phily Diner and Sports Bar- The Future of Diners?

A number of years ago, I was working with a diner owner in Deptford, New Jersey (Exit 3 on the New Jersey Turnpike). On my way to that diner, I passed by The Phily Diner and Sports Bar in Runnamede, New Jersey. When I first went by the diner, I could not believe what I was seeing. Here was a 1950’s themed diner on one side and on the other was an inside/outside sports bar. I had never seen that concept before and was intrigued enough to stop in and have lunch.

In the years of working with a number of diner owners who had liquor licenses, gross sales from liquor accounted for no more than 5-10% of total revenues? Most restaurants have 25-40% of liquor sales to total revenues, which has a much higher profit margin as compared to food sales.

Diner owners have weighed the sale of the liquor license to generate additional capital or have created outside patio’s to generate additional liquor sales. All have tried to increase revenues through liquor sales, but none have succeeded in dramatically increasing liquor sales to leverage the cost of a license.

I met with Petro Kontos, co-owner of the Phily Diner and Sports Bar recently and we discussed his business model. Petro came to this country from Greece in the 70’s and work in diners in all capacities. In 1981 he came to the fore-runner of the Phily Diner for Thanksgiving Diner and loved the location. He ended up purchasing the diner putting down $10,000 and steadily made improvements in the years to come.

Next to the diner was a local watering hole named “Marlins Bar”. The President of a local bank was in the process of foreclosing on the bar and contacted Petro to see if he was interested in possible purchasing. Petro purchase the bar, but was more interested in liquor license to generate additional revenues for the diner.

As the years went on, he additionally purchased a barbershop to expand his diner, and then finally he purchased a gas station that was on the corner of the property which was the last piece of the puzzle. The gas station had contamination from ruptured underground gas tanks, and it was purchase once all the contamination issues were eliminated.

Petro, like other diner owners wanted to generate additional liquor sales. He turned to Bill Kantos, owner of United Diner Construction in Philadelphia. Bill has been in the Diner Construction business all his life and is considered the “Rembrandt” of Diner Design. For people in Northern New Jersey, United Diner built “American Dream Diner” located on Route 303 in Orangeburg, New York just before the Palisades Shopping Mall. If you haven’t been to the diner, it’s worth the trip just to see his incredible design.

In speaking to Bill, more and more diners, specifically in Southern New Jersey are creating a different atmosphere and entertainment experience for their patrons. Diners are becoming more Café’ dining experience with the customers staying longer and ordering more per table. The Sports Bar theme is catching on in more and more established diners to generate additional liquor sales and different menus from the typical diner fare. In Phily’s Diner and Sports Bar, they have two different kitchens for the diner and sports bar to maximize efficiency and maintain consistent quality.

In addition to Phily’s Diner and Sports Bar, other diners in South Jersey such as Hollywood Café in Woodbury Heights and Peter’s Diner in Williamstown have create similar experiences for their patrons.

Finally, that diner I met with in Deptford, New Jersey. Well they brought in a new partner and change the name to Seven Stars. By the way, it’s a diner and sports bar. Could it be that Philadelphia Sports Fans demand more than New York Sports Fans? What do you know—— another reason for our continued rivalry!

Prep Work: The Necessary Preparation for a Loan Request

All good chefs know that the start of a great dish always begins with the correct prep work of the ingredients that compose the dish. Proper prep work starts with choosing the right proteins, vegetables, fruits and seasoning——and putting in the work ahead of time to prepare those items prior to cooking.

The same holds true when applying for bank financing for your restaurant, diner, catering facility, or any other food establishment you own. Without the necessary work ahead of time, your desired results may be doomed right from the beginning. So let’s start from the beginning of the prep work.

Choosing the Bank

Banking is no longer a relationship business. Banks try to sell themselves as working with the communities they serve, but we now live in a global marketplace where results are measured monthly and quarterly, and the days of “It’s a Wonderful Life,” with Jimmy Stewart, is long over.

Most of the time, you will apply with the bank that holds your restaurant’s deposits and is the beneficiary of your money and credit card fees. That is a natural place to start, but the most important part of this process is not so much the bank, but the banker.

It is important that you deal with a banker that has experience in lending to your industry and is well-respected within his bank. Easy to say, harder to do. My first step would be to ask the recommendations of successful restaurateurs you know. First hand experience is important, therefore, I would ask as many of my peers as reasonably possible to share their experiences with their recent bank loans. This is not fool proof, but it beats making an uninformed decision.

Remember, initially choosing the wrong bank results in the need to reapply at other banks. Banks consider this a red flag and may dismiss your request based on the number of banks that have looked at your application and passed. Additionally, each request will trigger an inquiry on your personal credit report resulting in a reduction of your FICO score; which leads me to the next point:

What is your Credit Report going to show

What is your FICO score? FICO is a computer evaluation based on a number of factors to anticipate your future ability to repay a loan. The biggest factor is the amount of loans and your payment history of those loans to date. Scores range from a low of 450 to a high of 850. Most banks will accept scores as low as 650 with explanations but prefer to see scores in the 700’s and up.

Prior to applying for a loan, order your credit report online to determine what your score is and review your report for accuracy. A number of times, I have seen mistakes on reports and those inaccuracies have dramatically reduced the scores of the applicants. Again, knowing your credit history and correcting any inaccuracies prior to applying for a loan, is much better that trying to correct the mistake, or explaining the situation after the bank questions your credit situation.

Information

Like your patrons expect a clean and professional experience when they dine at your restaurant, a bank expects a clear and concise understanding of your business and loan request. There is nothing more frustrating to a banker than a disoriented, hodge-podge packet of information. Surely, this will render a slower decision process and a possible rejection of a loan request. Your presentation is just as important as the presentation of an entre’ on your menu.

What a bank requires is three years of business tax returns or financial statements of the borrower and any other affiliated companies or other business you own. Interim Financial information for the previous quarter ending within the year you are applying, generated from your QuickBooks, should also be provided. If your business has only been in existence shorter than three years, provide only what you have. Start-ups and business that are applying for loans with less than one year previous tax returns will find obtaining a bank loan near impossible. Banks want history. If you were successful at a previous restaurant that was sold, provide the financial information from that previous restaurant to show your ability to operate a restaurant. If you are purchasing a new restaurant or expanding an existing restaurant, projections of future revenues and expenses are required for the next two years.

Personal tax returns of all principals for the last three years with a current personal financial statement of the principal(s) are also required. Your accountant can prepare a personal financial statement, or you can obtain a form online to complete yourself.

Finally, contract of sales, copies of leases, copies of banking statements, mortgage statements and other confirmations of assets and liabilities, both corporate and personally, should also be presented with the application.

Appraisal

If you own your restaurant’s land & building, this will be the primary collateral on your loan. As a condition of the approval, the bank will require the current market value of that property “as is”, or if you are expanding and/or renovating the property—“when completed.” The same holds true if you are purchasing a new restaurant.

Should you order your own appraisal prior to applying? That is a tricky question that you should consider prior to application. If there is more than enough equity in your restaurant, based on either having no loan or a small existing loan on the building, then I would not suggest obtaining an appraisal. If you are purchasing a new restaurant, I would also not obtain an appraisal prior to application because this is part of the confirmation process in your contract of sale. For all other situations, I would strongly recommend getting your own appraisal. The cost of the appraisal can be as low as $1,500 to a high of $5,000 depending on the scope of the appraisal and the size of the building.

Most banks will not accept your appraisal as confirmation of value and order their own independent appraisal, as required by banking law—but in some cases they will only charge you for a review of your existing appraisal at a fraction of the cost. So why would you order an appraisal when a bank is going to order its own appraisal after approval? For two reasons—-markets change and so do real estate prices. Prior to 2008 appraisals supported values of $300-$500 per square foot, whereas, today it is not uncommon to see values at $150-$250 per square foot.

When a bank issues you a commitment letter, subject to an appraisal, in most cases they will require a commitment fee of 1% upon acceptance. For a loan of $3 million that’s $30,000. If the appraised value does not support the required loan to value ratio the bank imposes on the loan, that money might not be returned. That’s a lot of money to lose when you can obtain that information prior to application at a fraction of the price.

Additionally, banks and bank appraisals are not always correct. Appraisals are an art, not a science. I have experienced appraisals with inaccuracies in square footage and/or dated or incorrect comparable properties which should be challenged.

Should you Retain a Loan Broker

You would expect my answer to be “yes,” but every situation does not require the need for a broker to obtain your loan. The complexity of the transaction, amount of the loan, your experience within the industry, and your previous credit and credit score should be considered prior to hiring a loan broker. My personal mantra in this matter has been, if you are know you are a terrible potential borrower, or a sure bet —- you don’t need me. I’m best with the borrower on the fence, that can go either way.

That having been said, due to my previous experience in banking, I know the market. I have the ability to structure a loan in order to obtain a better rate and term than a bank may otherwise offer, because they are limited in how they finance commercial loans. Additionally, I deal with a number of banks and bank products that I can custom tailor to your needs, saving you the time and effort necessary to find the best bank.

As I tell my restaurant clients——“I don’t need to come to your food establishment to eat what I can cook home, for a fraction of the price. I come to your restaurant because I don’t have the time to cook and clean afterwards, and I will pay for a professional to give me a meal that I probably couldn’t duplicate on my best day.”

Isn’t that worth the price?

It’s Now or Never!

 

For restaurant owners and small business that own commercial real estate, one of the best kept secrets is the SBA 504 Loan Program.

 Must business know of the SBA 7A Program, which can be utilized for all small business purposes and has an interest rate that is tied to the Prime Rate on a floating basis, adjustable monthly as the Prime Rate rises or falls. For start-ups and borrowings that are in small amounts, this program is extremely popular, and during the latest downturn, a loan that banks were still making. Why? Because the bank received a Government Guarantee of the loan ranging from 75%-90%, therefore if a loan defaulted, the bank would receive that percentage of the loan amount paid by the Federal Government.

 What is not widely known is the SBA 504 Program. This program has the same maximum loan amount of $5,000,000 as the 7A Program, but its limitation is that it can only be utilized for acquisition or renovation purposes. Like the 7A Program, it offers the borrower the benefit of only requiring a 10% equity injection, but unlike the 7A Program, it offers a fixed rate on the loan.

 As an example, if you were purchasing a restaurant with land & building for a price of $2,000,000 the loan would be structured as follows:

 

                        Bank Conventional 1st Mortgage (50%)-                $1,000,000

                        CDC or SBA 2nd Mortgage (40%)-                                   800,000

                        Borrower’s Equity (10%)-                                                 200,000

 

                        Total Transaction-                                                        $2,000,000

 Terms of the Bank 1st Mortgage is usually made based on 20-25 year payout, with a maturity of 10 years. Interest Rates are fixed at the current market rates, for a period of 5 years, and then reset for the remaining 5 years, until balloon maturity.

 Terms of the CDC or SBA 2nd Mortgage are a straight 20 years maturity/payout. Interest Rates are fixed for the 20 years at current market rates.

 Currently the rate for the Bank Loan is ranging between 5.50%-6.50% and for the CDC/SBA 2nd Mortgage between 5.0%-6.0%. The advantage to the borrower is locking in favorable financing, with minimum equity contribution, at today’s low interest rates. Additionally, the CDC/SBA Mortgage is fixed for 20 years, with no reset ever.

 REMEMBER THIS DATE, 9/27/12

 On February 17, 2011 the SBA launched a temporary program. It would allow the SBA 504 Program to be utilized also to refinance existing loans. The Federal Government realized that a number of small business had existing commercial mortgages on their property that was made when real estate values were higher, and when these loans mature, the banks that hold the loan would probably not refinance the remaining loan based on the current appraised value of the real estate. This program allows existing borrowers to refinance their existing loan through the 504 program, which was previously limited for acquisition/renovation purposes only.

 Unfortunately, this program will end on September 27, 2012, and most likely, will not be extended. What this means is that you must have an application accepted by that date———- the loan can close after the 9/27/12 deadline.

 The borrower still must meet all the payment ability standards set by the SBA, but they can refinance if the Loan to Value of the underlining collateral has deteriorated.

 If you think you situation warrants consideration of this program, It’s Now or Never!

5 Ways to Kick Your Fear of Failure

 

5 Ways to Kick Your Fear of Failure

How to regain your motivation and determination on even the darkest days.

By Jeff Haden |  @jeff_haden   |  Dec 7, 2011

5 ways to kick your fear of failure

Losses come in a variety of forms, but the worst thing we can lose is faith in ourselves: in our ideas, in our skills and talents, and in our willingness and ability to overcome challenges and achieve our dreams.

When you constantly try to achieve big things, some amount of failure is inevitable. So is the resulting loss of confidence and self assurance. The key is how you respond and how quickly you regain belief in yourself.

If you’re struggling to find motivation and determination:

Think critically about the worst that can happen. Most fears and almost all worries are groundless. Whenever risk is involved—and trying something new definitely involves risk—it’s easy to back away when you’re stewing in a pot of vague, indefinite concerns. But nothing I’ve ever tried has ever turned out as badly as I imagined it could. (And I’ve done some really stupid stuff.)

Say you quit a full-time job and open a retail store. What is the worst possible outcome? Oh, your business could fail, your savings could evaporate, and your family could be out on the streets, homeless, and destitute. Possible? Sure, but not at all likely. If your store struggles you will work harder and adapt your business model, and if that doesn’t work you’ll shut it down and get a job. Failing would hardly be ideal but failure is something you and your family can overcome. Back away from the edge, determine the more likely “worst” things that can happen, and then create plans to deal with those possibilities.

Worries are just possibilities you haven’t decided to face. When you don’t face them, you can’t control them.

Recognize you aren’t different—in a good way. Spend time with a person who is very successful in some field or pursuit; it doesn’t matter what. After a few minutes you’ll probably think, “Wait, this guy isn’t any smarter than me.”  After a few more minutes you’ll probably think, “Hey, I’m actually smarter than he is.” Success doesn’t require a high IQ or some special intangible quality that you don’t have. Successful people only become “special” after they succeed; before they put in all that time and effort they were just like everyone else. Spend time with a few successful people and you will realize you are just as capable of achieving great things.

Get a buddy. The average business owner lives in the land of “If it is to be, it’s up to me.” Entrepreneurs actively seek authority and responsibility, but going it alone doesn’t work well when the only person you can turn to when times are tough is yourself. You don’t need a business partner, but you do need someone you can occasionally lean on for emotional support. Finding a buddy is easy: Just ask a friend how she’s doing and listen, empathize, and offer a little support. When you’re the first to reach out, creating an informal support network is easy… and while you may never need your buddies, it inspires confidence to know they’re there.

Think about a time you succeeded. How did you feel about yourself? How did others feel about you? Bask in the glow. Remember the praise you received. Remember when you took a deep breath, nodded your head, and thought, “Wow, that was awesome.” You probably felt like you were almost floating. Hold on to that feeling. Then…

Think about a time you failed miserably. Think about how horrible you felt. Then promise yourself you’ll do whatever it takes to make sure you never have to feel that way again.

And go get started.

How to turn LinkedIn into a Relationship Filter

By Jesse Stanchak on January 11, 2012

“This interview is with Dave Gowel, who has been recognized as a “LinkedIn Jedi” by Inc.com and The Boston Globe. He is the CEO of RockTech and the author of “The Power in a Link: Open Doors, Close Deals, and Change the Way You Do Business Using LinkedIn” (Wiley, December 2011). Gowel co-founded RockTech with Mark Rockefeller to build software that helps corporations increase productivity through quicker adoption of underutilized technology. The interview has been edited for clarity.
A lot of people see LinkedIn as a recruiting or job hunting network. What are some of the other ways professionals can put LinkedIn to work, once they’ve landed that dream job?”

I think one of the key ways to think about it is really a relationship filter, that when you put in all the relationships that you already have, it allows you to see the ones that you could have more easily, or get information about potential ones. That’s the real element of LinkedIn that I think is not really utilized as well by primarily senior executives still looking to figure it out, as well as either sales or marketing-minded folks who are outwardly looking: Trying to have that differentiable element that gets them to the person they want to get to.

How I can I turn second- and third-degree connections into valuable first-degree ties?

Well it all starts with your first-degree connections and the quality of them. So we recommend that people create a litmus test and think actively about who they’re connecting to — because then those second- and third-degree connections actually mean something. If you, say, connect to 5,000 people or you just connect to anyone for no reason, then what that does is it might increase your ability to have e-mail address for those people you connect to, but then it doesn’t accurately reflect who those second- and third-degree connections are. So the way to convert them is to start with a really high quality first-degree connection pool that fits your litmus test. The one I generally use is: I’m confident that if I reach out to them, they would either respond to me via e-mail or phone and then they can help progress my business goal.

Where [LinkedIn] really gets useful is thinking about what your business goal is, in terms of who you’re looking to meet, and then you create your advance searches and save them, which basically automates the. So then the search engine automatically looks through those second- or third-degree connections without you even being in LinkedIn and sends you an e-mail with the people you want to get to.

What makes a great LinkedIn status update? How is it different from a great update on Facebook or Twitter or some other social network?

I think every social network has a target audience and people know the dynamics are different for different networks. Twitter is not necessarily mutual acceptance; Facebook is much more social, perhaps more fun. In my mind, in LinkedIn people generally have one key professional focus … and therefore I think it makes sense to think about, before you send a status update, a couple of things. One: Who are you connected to and who do you want to actually see your status update? And also, what you’d want them to do? … And then, the frequency which would be overwhelming to those people — because a lot of time people get excited with that ability to send lots of status updates. But it’s really [important] that you don’t overwhelm them, because LinkedIn does have the ability to hide status updates.

How much does an employee’s profile reflect on their employer’s brand? Are there ways companies can use their employees LinkedIn presence to improve the way a brand is perceived?

That depends on the kind of business. So a consulting firm may have more person-to-person interaction with clients and employees whereas other businesses may have less interaction. But, in general, what we’re seeing is that the customer of any … product or service has more access to see who’s actually responsible for building or delivering that. So without a doubt, if somebody wants to do business with a company, they’re going to look at the company page, which has a lot of information about that company, but what’s even more valuable are the people that are in there. …

In terms of how a company can use the individuals’ profile pages, I think it’s important that companies recognize that the individual owns their LinkedIn profile. If any company tries to infringe on that, then that starts messing with the dynamic of who people will connect to and how they’ll use it or how they won’t use it. … Don’t send out a boilerplate thing that’s impersonal — because this is still a socially inclined network — but provide some guidance. ‘To be consistent with the message that we want to project as a company, to align us all, we’d appreciate these keywords, these messages.’ Maybe give recommendations for your peers or request recommendations from your clients.

What’s the biggest mistake you see people making on LinkedIn?

Depends on the person. Generally, I think it’s over-excitement about the potential. And either trying to say too much and including way too much information in a profile that’s overwhelming, or doing too many status updates or group postings too often. Or not thinking about who their target market is and what they’re trying to accomplish.

I think it’s important to think of LinkedIn as a business tool that is going to accomplish a goal for you. Now, that goal can change throughout the lifetime of your career. So for instance, if you’re job searching now and you get that job and you become a salesperson, well then you want to … use LinkedIn in a way that’s going to help you do lots of sales. And now, leading a bunch of sales people, you have to think as a leader hiring other people.

Is there a big difference, in terms of best practices, in terms of how job seekers use LinkedIn and sales professionals use it?

I would say the basics are generally the same. It’s always important, whenever you’re in a networking situation, you don’t want to be seen as ‘that guy’ who’s just looking to do something for themselves. … Generally, the way I break it down is: Actively look to give before you receive — which I think applies to both. If you can provide some value or some information to a client when you’re selling, that’s equally as valuable as when you’re trying to meet somebody and get an introduction to something that can get you a job, the mutual contact is someone you might want to try to make an introduction for, do something of value for. …

The difference is that when you’re job seeking it’s a lot harder to know who has the relationships that are about to open up a position. There’s a lot of knowledge about those job that are out there now — but the really valuable ones that you can get to are the ones that haven’t been posted, that when someone who you know happens to be like ‘I just talking to my friend and he said that they’re going to be opening up a position. I think you’d be a good fit for’ — obviously the earlier you can get in, the better chance you’ll have of getting an early interview and maybe even getting the job before they post it.

What’s your take on Facebook apps such as BeKnown that are trying to offer a LinkedIn experience within Facebook?

I think it’s still a very much evolving ecosystem. There’s a lot of data out there, there’s a lot of relationships and there’s a lot of motivation for people to use their relationships to help other people find jobs, either because of their job or because they’re friends. So it’s a very interesting market for me, because I think it still has a lot to be proven in terms of how people are going to be most comfortable sharing knowledge, making introductions and referrals, etc. I think it’s important to watch them all if you are a job seeker.

What to Expect in Restaurant Marketing in 2012

By Linda Duke, CEO, Duke Marketing LLC, and editor, Restaurant Marketing Magazine.

Ten restaurant marketing trends and tips for the New Year.

1. Quest for survival.

The great redwoods are hundreds of years old and without a devastating forest fire these trees cannot release their seeds and would never have new growth. The redwood fire is a perfect analogy for today’s restaurant brands. The restaurant industry has been through a devastating forest fire all its own. There will be some restaurant brands that will never come back.

Case and point, how many restaurant chains have declared Chapter 11 and shuttered locations this year? There will be some new growth on the old trees, like the old restaurant brands reinventing themselves for today’s consumer. We are seeing this with IHOP and Denny’s creating new hybrid brands along with Red Robin, PF Chang’s and others following suit. And there will be completely new growth that we have never seen before, just like some of the new restaurant brands that are popping up all over — particularly in the fast casual space. Which tree is your restaurant brand? Never to be seen again or reborn?

2. Reinventing your brand for today’s consumer — the new consumer mindset.

The new economy is creating a new consumer paradigm. Consumers that were once wary and kept their wallets closed may have to keep them closed for another year. All economic indicators still show consumers are not spending as much as they used to, and restaurant operators have felt this cutback firsthand. Unfortunately only the strong will survive and today’s restaurants are seeing a shake out of those brands that are weak and can’t survive, and those that can reinvent themselves, still will be profitable, and will dominate.

In case you haven’t noticed, there is a new consumer mindset. Spend less, save more, don’t use credit and whatever you do, don’t indulge. Maybe not every guest you serve, but consumers show no signs of opening their wallets anytime soon. Change is required. Those restaurant brands that realize that consumers have changed and understand what they can provide to those target groups of consumers will win! It is not going to get better for some time, so embracing change is the only option.

3. Negative feedback — from comment to crisis.

Every restaurant gets a bad review now and then. That is what we USED to think. Today, there are many places that consumers can complain about or praise a restaurant like Yelp, Trip Advisor and Patch.com, and there are dozens of comments, videos and photos posted online every day about businesses that can either help or hinder. Comments, photos, or videos can turn to crisis, as many saw firsthand from Domino’s employee video debacle. That is why it is IMPERATIVE to have a crisis communication plan for 2012. Understanding the threats and having a plan to deal with them if they arise is better than waiting. It could be too late.

4. Social media showing promise. Interactive relationship management for 2012 and beyond.

Marketing professionals were beginning to utilize the new social media applications in 2011 and this trend will continue to increase in 2012. The usage of Twitter, Facebook and mobile ordering has been showing promise for numerous brands that have dedicated resources to keep content and communications fresh. Video content is on the rise for restaurant brands and this will also continue through 2012. The New Year will also bring greater focus to “interactive relationship management” for restaurant marketers. Creating engaging, informative, and clever communications for your guests and keeping them involved with your brand online and off, is what we call the “new enhanced loyalty strategy,” a must for today’s restaurant operators and marketers.

5. Foodservice at retail — blurring lines.

Walk into any 7-11 in Chicago, and the first thing you see is fresh fruit. No you aren’t seeing things … the retailer has integrated fresh fruit and grab-and-go food items and seen tremendous results. Target and Walmart continue to transform their locations to be more food-focused. Other mass retailers are also getting into the game.

Influence comes from any number of directions. There aren’t hard lines between what is relevant to a marketer in one category versus another these days. Consumers tune in to what’s relevant, and what’s served up in a unique way, and tune out the rest. They don’t ‘consume’ marketing by category.

Foodservice-at-retail brands are watching restaurants, are you watching them?

6. CATERING!

Catering is not a new revenue channel, but with today’s new online social media applications, catering is a whole new ball game for restaurant marketers. Guests are now able to access their favorite restaurant in any city, and can place an order with a click of their cell phone. Today’s savvy restaurant marketers are using online catering resources and some are creating custom catering platforms to capitalize on this lucrative market.

Within the next year, catering sales will become a greater focus for restaurant brands determined to get the most out of their operation and generate sales outside of the restaurant’s four walls. The beauty of adding a greater sales focus on catering for many operators is it allows them to utilize their existing resources — food and staff — to make more money even if their dining room is not full.

Restaurant marketers should think of catering as another daypart entirely. Catering should have its own menu and training along with a catering marketing strategy, plan and target prospects. Those restaurants that incorporate these must-haves will win big.

7. Fast Casual is still the “sweet spot.”

Last year we said the fast casual segment of the restaurant industry has changed the way people eat, and the same holds true today. These fast growing, revenue-positive brands are still the ones to watch. Chipotle and Panera brands both reported double-digit sales increases, and continue to dominate by offering today’s consumers what they want.

Tomorrow’s fast casual players are starting to look like two different groups, perhaps three. Those fast casual restaurants serving high quality and oftentimes four-star dining-style menu items or what we term: “Fine Fast Casual.” Then there are those that are more on the side of quick-serve but enhanced menu items and décor make them more “Quick Fast Casual.” Finally, we are also seeing “Chain Fast Casual Hybrids,” IHOP and Denny’s chains replicating their concepts to fit within the fast casual framework. We will see growth in all three of these areas in the next year, and marketers should watch these brands and their marketing efforts closely.

8. Marketing today is like the combo platter.

There are so many different ways to communicate to guests today it is like a combo platter of marketing. From the traditional mediums like newspaper, direct mail, radio and television to in-store marketing materials like table tents, posters and check presenters, to all the social media touch points — it’s enough to make a person’s head spin.

It won’t be getting simpler anytime soon. The name of the game is to use a combination of communication vehicles to ultimately reach your end users. Integration of a message into all aspects that touch a consumer is how to make the biggest impact. The right mix of communication vehicles is unique to each brand and their specific target guest demographics. But one thing is for sure, a one-vehicle communication method is long gone — integrated marketing communications is here to stay. What does your communications combo platter look like for 2012?

9. Social Consciousness.

Ethical consumerism has become the phrase to describe Americans’ penchant for shopping with a conscience. And it’s no longer just about environmentally friendly materials, but now the consequences of manufacturing and consumption as well. Brands have responded by significantly stepping up the number of products taking an ethical stance, such as organic, hormone-free, ecofriendly, locally grown, cruelty-free and other “ethical” claims. So how do these impact restaurants?

To begin, they point to issues of biodegradability, recyclability, reusability, and even the reduction of packaging overall. Brands are now being held much more accountable for their environmental and social practices; if you’re not tuned in to all these ethical demands, you’re simply going to lose out.

“Enviro-biographies” are going to be attached to just about everything, letting consumers know the entire life story of a product: where the materials were harvested, where it was constructed, how far it traveled, and where it ended up after being thrown away or recycled.

10. CHANGE required! Bouncing back from the brink.

It’s time for restaurant marketers to realize NOTHING is the same. Change is required! For many restaurant marketers, change is already underway. Marketers are struggling to keep their brands relevant for today’s consumers and are using various methods to reach them. Getting one’s share of the dining out dollar is the ultimate challenge. Restaurant brands are waking up and realizing the world has changed and that consumers have the ultimate upper hand. How will your restaurant brand survive? Can you bring a brand back from the brink? Only time will tell