The power of a personal signature: leverage that can get a deal done

Real Estate Weekly, Feb 18, 1998 by John Cook

Archimedes, the Greek inventor, was heard to say words to the effect of "Give me a fulcrum and a lever and I'll move the earth."

At M&T Bank, the close working relationship between its commercial real estate lenders and private bankers provides it with the financial equivalent of a lever and fulcrum to move, if not the earth, very complex deals that might otherwise not happen forward to completion.

Most commercial real estate loans on income-producing properties are done non-recourse to borrowers. However, there are situations where the cash-flow of a property is still developing, a turnaround is still underway or the owner feels there is substantial future upside in the rents and where that owner may be willing to sign for the loan (of a portion of it). These situations create a window of opportunity that allows private bankers to go to work.

In the private banking areas of most banks, emphasis is placed on asset management services for the wealthy, offered along with upscale banking services. M&T's private bankers are squarely focused on credit extensions to individuals as the lead product, with asset management services offered to clients who are becoming more liquid and thinking about estate planning after a successful period of entrepreneurship,

Private bankers specialize in understanding the value of a personal financial statement. Each asset and liability is analyzed and a true picture of a borrower's liquidity, cash-flow and overall net worth is arrived at. This often enables them to approve a personal guarantee as acceptable additional credit coverage on a loan where the value of the property alone is inadequate.

There are two keys to a successful alignment of goals between private banking and commercial real estate lending. The first is creating the working relationship between private banking and commercial real estate lending, which requires a willingness to expand the traditional role of private banking, ongoing communication between the two divisions, and an organization that is capable of creativity and flexibility within the framework of sound financial decision-making.

The second key is that by using the leverage of a personal signature, the borrower if able to dramatically improve the return on the deal.

In a recent example, the limit on a non-recourse loan on a $10 million office building was $7.5 million, leaving the borrower with the need to come up with $2.5 million in equity. He only wished to invest $1 million.

Private banking, after a thorough analysis on the borrower's statement, was able to arrange a second mortgage of $1.5 million with some additional softer collateral, including a partnership interest in another property.

Ultimately, after the owner has developed the cash-flow of the building, which should increase its value by $2 million or $3 million, he will have realized a significantly better return on investment having invested $1 million vs. $2.5 million. In a few years, the use of a personal signature will have made the difference between a modest return and a 50 percent-plus return.

For those seeking to take advantage of today's low interest rates and a very healthy real estate market, the power of a borrower's personal signature can provide the fulcrum for receiving attractive financing options which would otherwise be unavailable. It's a matter of applying the science of leverage to the art of moving complex financial deals to completion.