If you’ve recently tried to refinance your home, you’re probably quite aware of the changes in the lending market from a few years back. Even though interest rates have been held artificially low by the Federal Reserve, obtaining financing can be worse than getting a tooth extracted – even if you have pristine credit. That same market exists for commercial loans, and that’s why I sat down with industry guru Steve Gold to discover what’s going on.
Steve has been in the commercial financing business for forty years, during which time he has arranged both equity and debt for commercial properties of all kinds. In 1976, he became president of Center Financial, which he ran for fifteen years and during which it became one of America’s largest lenders for commercial properties. He chaired the advisory board for the Real Estate Curriculum at UCLA; and, in 1980, formed the UCLA Hotel Conference (although now housed under another entity) which attracts 2,500 attendees every year.
In 2000, Gold formed Hotel Financial Strategies, specializing in loans and equity funding for hotels. It quickly became one of the premier boutique firms in its field, annually supplying over $1 billion of financing for hotel development and acquisition. Gold’s extensive experience and influence in the lending industry made him the perfect person to explain why the economy remains so stagnant almost three years after the recession was declared over.
Gold reminded me that the real estate market started to plummet in the fourth quarter of 2007, and by 2009 he was down to two offices (from seven) and down to $50 million (from $1 billion) in annual finance activity. During the first nine months of the downturn, he had potential customers walk away from a billion dollars in commitments – a perfect, if concise, example of why the economy went into a free fall. The question is why it hasn’t bounced back.
The principal answer is Dodd-Frank. The recession left very few players on the field, and, while there used to be multiple sources of financing, the nation’s ten largest banks now control between 75% and 80% of the market. Dodd-Frank may not officially be in effect, but Gold explained how each of these banks is acting as if the law is in full force. In addition, the banks are spending huge sums of money dealing with the regulators who are crawling all over them and restricting their activities.
For those who continue to blame bankers for the downfall of our financial system, that may all sound fine; but for people looking for a job, or waiting for the economy to turn around, this is bad news. Big banks prefer to lend to their largest customers or the ones with whom they have long-term relationships, thereby leaving out in the cold both new entrepreneurs and anyone who wants to take the risk of a new project. This means that the Administration (that campaigns against the 1%) is actively encouraging policies that restrict the 99% percent from even getting a chance. Right now, if you don’t have a big bankroll or a long-term relationship, don’t expect to get a bank loan.
And if you want to actually build a property, you better have a lot of cash. Historically, developers need to pony up 20% equity to get a deal done. Of course, during the crazy years, deals would get done with little or no equity at all, but now things have swung too far the other way. Today, a builder needs to put up 35% equity to get a loan for a new project. That is an impossible hurdle for almost everyone in this business, which is why so few deals are being consummated. (Oddly, the exception seems to be apartment financing.)
But in Gold’s segment of the market – hotel construction – the need for new development is significant. Occupancy rates are higher than they were in 2007, causing room rates to soar. The lack of development in the last four years has created substantial demand for new product. This, of course, would generate substantial construction activity and loads of jobs for the 99%, but there is no money being made available. As a result, we experience a stagnant economy.
Gold told me that in his forty-year career, he’s never seen a finance market like this one. Even though banks have significantly cleaned up their balance sheets, they are preparing for much higher reserve requirements scheduled for 2014. Fewer lenders, combined with higher reserve requirements, will always result in less money to stimulate the economy.
Gold believes that Dodd-Frank needs to be repealed. He concedes that to avoid the mistakes of the last decade, new rules need to be in place, but the harsh regulations of Dodd-Frank are killing the hopes of the current generation of developers and investors. The rich will get richer and the rest of us can say goodbye to the American Dream – all courtesy of our current President, his friends, and their anti-business policies.