Sometimes – even at the last minute – a bank can suddenly change its mind and retract their offer to make a loan. What do you do then? In this Self-Storage University podcast we’re going to explore why this occurs and what the correct steps are to mitigate this potential event.
Episode 115: Surviving Banking Reversals Transcript
When you're trying to buy or build a billboard, you need capital. Not all forms of billboards are as expensive. On the low end, you've got things like wallscapes and 8-sheets, those kinds of things, abandoned billboards. And then on the highest end, you got big old steel monopoles, maybe full flag units. But even if it's nothing more than an old, dilapidated wooden sign on a road, it will still require some money to put that thing back in order. This is Frank Rolfe, the Billboard Mastery Podcast. I thought we'd talk a little bit about banking, particularly banking if you've not done banking before, to buy or build a billboard.
Now, how does the banking system work? Well, banks give you access to capital beyond whatever money you have, and everyone needs a little extra money. Even Sam Zell, the largest real estate investor in American history, he worked mostly with bank debt. He had some investor money for down payments, but everything was mostly banks. So the first rule of thumb is almost nobody enters the billboard business using cash. Even the biggest companies, they all use debt. So understanding banking is perfectly natural and just a part of the business.
So the first step if you're wanting to get a loan to build or buy a billboard is, we've got to build a loan package. Now, what a loan package is, this is something you take to the lender that specifically states how much you're trying to borrow and what you see, this asset that you're going to buy with their money, is able to perform and how that's going to pay back their debt. Because banks, at the end of the day, they just want to place their capital and they want some kind of rate of return on it, some form of interest on their money. And as long as you can make them believe that that is attainable, then you'll be in good shape. But the bank proposal you take to the lender, that's the first and most important piece of the puzzle. If you have a bad bank presentation, you'll never get a loan. If you have a good bank presentation, then you will. Remember that banks like things to be very, very conservative in nature. Because there's an old saying with banks. Before you can have return on capital, you have to have return of capital.
Remember that banks don't get any of your upside. If you built this giant billboard, you spent $50,000 to build it, and you later sold it for half a million dollars. Of that $450,000 of profit, how much does the bank get? Nothing. That's why it's kind of strange being a bank. You would think they might want to demand some share of the upside, but yet they don't. So a great bank proposal, that is key.
Also, how you handle the bank is important. When you talk to a banker, the banker wants to feel that you are a straight up individual. So you want to be buttoned up, obviously, dress conservatively, arrive on time, even earlier, look them in the eye, shake their hands. These are the attributes which bankers respect because the banker doesn't know you from Adam. And they're trying to just gauge whether to put you in the box of could be a good borrower and might not be a good borrower.
Understand how banks work. They're always going to want to have a down payment. If you're trying to borrow $40,000 to buy a billboard, they're going to want you to put down at least, probably 20%. So on a $40,000 deal, they're going to want you to put down 8,000 and they'll put up 32,000. It's not always that way. Some banks want more down, some will go with even less down. But what if you don't have the capital even for the down payment? Then what do you do? Well, then you're probably looking at what are called friends and family money. This might be a financial backer that comes from your scope of people you know inside your family, because people are always trying to get a higher rate of return. CDs right now are paying 3%, 4%. If you offer someone 10% interest, well, now they're definitely interested, but friends and family network are key.
And you probably know somebody right now in your friends and family network who could, in fact, provide the capital for the down payment. In fact, you may find somebody who says, we don't even need a bank. I'll just fund it myself. I'll just put up the full $40,000 and you just pay me 8% or 9% or 10%. We don't even need banks. Let's just get out of that rut altogether. And to be honest with you, if that friends and family person is a good person, someone you know and that you trust, that might be better for you anyway than going the banking route.
Definitely less stressful. Remember that not all loans work as planned. You may buy that billboard or build that billboard. They might have a giant windstorm that blows part of it down. The bank will not be nearly as forgiving as your friends and family person would be. So often, friends and family is an important potential option, either for down payment or for the entire loan. If you move on to even bigger types of billboards, there are other options beyond that. And you could form a partnership of many different friends and family people. Or at the highest end, you could do what's called a Reg D 506. Reg D 506 is something that was created by the government back during the Obama administration, allowing people to raise large amounts of capital. It was originally the concept was, you could offer effectively what are not really shares, but kind of like a public market framework in which you could do, I believe the original version was up to a million shares at a dollar a share.
Now there's two types of Reg D 506s. There's a B and a C. A B is a friends and family one, which means you can have, I believe, somewhere around 30 unaccredited investors. But don't quote me, it could be totally wrong. And then they have the C fund, which is everyone must be accredited, but it allows you to advertise. You're going to find when you go around looking for money in the billboard space, if you pay a high enough rate of return, you're always going to find interested parties. And you need to understand the structure of these deals. Normally what way it works is, you have what's called the preferred, which is the interest on their capital and then you have a profit split.
So if you have a financial partner, what they're looking for is their rate of return on the money they put down plus what they get of the profits. You're the operating partner. So basically what you would get would be sometimes an acquisition fee, definitely a management fee, and then you're split of the profits. What's the norm? Well, I would say the norm out there is probably 10% preferred and a 50/50 split between the financing partner and the operating partner. But that's not necessarily set in stone. You could vary that up or down based on what you can negotiate. But the bottom line is if what's holding you back of getting into the billboard industry is money, don't let that really be your hurdle because you probably already know people out there in your friends and family network that'd be happy to provide the down payment.
And you're also going to be able to find banks out there will probably provide the lending. Now, when you think about banks, don't think about things like bank of America, US bank, not those kinds of banks. The kinds of banks that will make loans in smaller amounts typically are local banks, the kind that only has one branch or maybe two branches, typically on the downtown square in the small town. Those are the kind of banks that will work with people on smaller amounts. When you go to those giant banks, they only want to do giant loans. It's really hard to get their attention, really hard to get to the decision maker.
And those who really are aggressive about it, about trying to find capital, find debt, they almost always succeed. I rarely get a call from anyone saying, oh, yeah, I had this tremendous billboard opportunity, but I couldn't get it pieced together as far as the debt and the equity. That's a very rare call indeed. Bottom line to it all is, don't give up. You can find the money. Good deals rarely go in finance. It's out there. You just have to work it properly. This is Frank Rolfe, the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.