Too much information?

I’m a few years retired from being chairman of the credit committee or CEO of my regional bank, two principal responsibilities in my past banking experience. But I was reminded this week about how similar some internal processes can be even though the enterprises themselves seem so disparate. In this, there is a lesson for lenders. First, some background.

Repurposing a charitable building

I served as corporate secretary for several years in a not-for profit corporation that managed an assisted living facility as a ministry of my downtown Albuquerque church community. The building was erected 60 years ago to house the community of nuns that staffed our large parochial school. The nuns left 25 years ago and the building became a rest home and operated successfully for years.

Functional obsolescence of the building overtook the economics of the project in recent years and the place closed and the last residents relocated about two month ago. It would take too much money to upgrade the facility to be competitive with larger and more accommodative facilities that have opened in the last ten years or so. The rent rolls simply wouldn’t support extensive and needed capital repairs.

We have elected to try to convert the site into a complex of 50 or so units for low- to moderate-income senior citizen residents. There are some very financially attractive programs utilizing federal income tax credits targeting such specific uses. We think it’s possible to raise a large portion of the costs of construction that way, but we will be required to be the community sponsor. That means an ongoing limited partnership role for us for the economic life of the development partnership.

We have a 501 (C) (3) entity that had for many years managed the facility, so in some ways it’s a simple process from our point of view. Complicating the proposal, though, is the need for us to convey the property, currently a downtown site with the old convent/rest home building, to the development partnership.

The property’s deed is in the name of the Archdiocese of Santa Fe. Though we are now in the process of having the site appraised, for discussion purposes we think it’s probably worth about half a million dollars—though there’s not a particularly robust real estate market in our downtown right now. The building has become a liability, owing to the high cost of renovating it for any other purpose.

I’m one of a small group of church members who are organizing to get this done. First order of business is to get the approval of Council of Consultors of the Archdiocese, a committee of 15 or so, charged with the responsibility of overseeing the acquisition and development of real estate for the archdiocese. Most of the members are pastors, but other than the chief financial officer, none of these people are business people or commercial real estate experts—nor do they need to be.

They just need to understand our proposal and, if they agree, recommend our proposal to the archbishop.

Parallels with a credit committee

I made a presentation to this group about five years on the acquisition of an adjacent tract to the school for a playground. I know what it’s like to go before a group like this and of course any of us who have ever presented to a large credit committee can imagine the process pretty accurately.

Think of a group of people who know very little about commercial affairs who meet bi-monthly to consider a very wide range of property matters covering a very large geographical area of central and northern New Mexico.

Like your credit committee and mine, some members will be well prepared. Others may not be. Most are sincerely interested in doing a good job while a couple may wonder why they were appointed to the Council in the first place and when lunch will be ready.

So the last few days I’ve been the scribe of our written proposal. At this point, it’s six pages, single-spaced in 12-point type.

How do I present fairly the risks of the deal? 

What are the opportunities? 

Even when there is no “gain,” there are risks

In the bottom line financial sense, there is no tangible upside as we are creating the opportunity to provide a service for which we will not be compensated in the normal profit-making way.

But there are risks and competing opportunities to consider.

• What if the developer we ultimately select cannot bring the project in at or near budget? 

• What if the economics of center city real estate over the next generation causes the project to founder? 

We have to assume that some external funding will be needed to complete the project and that there will be a mortgage to service.

• Can the value of the property be better utilized in the construction of new churches or schools elsewhere in New Mexico than in downtown Albuquerque? 

• Should we simply land-bank the property and figure out its highest and best use in an environment other than the current one in the wake of the serious economic downturn of recent years? 

• How do we convey the urgency of doing something with the building where the absence of activity will likely create an eyesore with financial consequences? 

 (“If you need an answer right now, the answer is ‘no’.”)

• We also have to line up our ducks for the annual funding cycle.

That process starts next month and we’ll only get one shot for 2015. If we miss that, we will have to wait another year. How do we accomplish this without creating concerns that we’re trying to move too fast while all but one of our small group doesn’t know much more about commercial real estate development than our audience does?

Not all of these issues are ours to answer at the parish level. Yet we must consider the questions running through the minds of the Consultors and try to address their concerns while improving the chances of our proposal being approved.

Balancing need versus ability to intake

It’s a classic dilemma that all lenders face regularly in presenting a new credit to our committees. How much information is enough?  How much becomes too much?

Experienced credit hands know how to present the risks to committees in a prudent and judicious way. Yet I was reminded in this process of the tightrope we all walk in our business. This is often where ethics and practice meet, though we probably seldom think of our presentations to credit committee as ethical situations. They are, though, and how we present the risk/reward trade off is at the heart of it.

I am reminded too of how useful our accumulated experience as bankers can be to our local communities.

Most bankers I know are concerned that the community bank business model is dying.

The experience of recent days reminds me that the communities we serve should be concerned too.

How many of the “big boys” will pay any attention to projects like this one? 

The community will be the ultimate loser.