Alumnus Offers Banker’s-Eye-View of Property Loan Assessments

“In loaning money to a prospective buyer of property, I’m not giving advice; I’m negotiating,” emphasized  PeoplesBank CEO Tom Senecal ’88 in a visit to HTM professor Bob Wilson’s  course, Real Estate Finance, Analysis, and Investments. “I’m not in the business of owning property; I’m in the business of loaning money,” added Senecal, whose network of community-focused banks rule as the largest mutual bank business in western Massachusetts.

The Isenberg accounting graduate revealed a banker’s perspective that shed light on a case study recently tackled by the students. The problem at hand: Evaluate the business viability of purchasing Oceanside Apartments, an upscale residential development in Winthrop. In his remarks, Senecal offered  an evaluation checklist for assessing the risks and benefits in considering the property loan.

“I want to make sure that I’m as protected as I can be,” Senecal told the students. To that end, he posed a battery of questions: How much debt can the property support?  Are its expenses appropriate? Are its current rents achievable based on historical results? Is there significant deferred maintenance? (e.g., How old is the roof?) Does the property pass muster via stress tests that include rental and vacancy rates, expenses, sufficient net operating income, and other performance variables? “As a banker, I greatly prefer long-term leases to tenants at will,” he added.

Adding flesh to the proposition’s bones, Senecal trained an analytical eye on Oceanside Apartments’ cash flow, its occupancy rate, and its rate of return based on its expected generated income (its Capitalization rate). He dissected potential sources of repayment, including cash flow, collateral, and various degrees of guaranteed loan repayment. And he offered a rubric: “If you as a buyer have skin in the game, you’re not walking away.”

The Isenberg alum then turned to an analysis of the local real estate market, including its trends and outlook, retail and vacancy rates, nearby planned or extant construction, the impact of large employers on the community, local amenities, and the property’s access to transportation alternatives. “In considering commercial loans, I always look for one page—the Cap rate—because it changes so much,” he emphasized. And he touched on financial terms of agreements, with their origination fees, amortization arrangements, and prepayment penalties.

Senecal concluded with a description of preclosing and future annual reporting requirements. “If you miss a covenant, they can foreclose,” he warned the students. “Don’t ever violate a covenant!” Tough luck for one unprotected lender: In parting, Senecal described sloppy leasing arrangements of former retail space (value: $45M) in northern Connecticut between a lender and a Fortune 100 company, which had used the space as a data center. When the company failed to renew its lease, the lender was left high and dry, i.e.—No debt covenant; no lender recourse.