On this episode of The Mobile Home Park Lawyer, Ferd is joined by guest Nathan Frese. Ferd and Nathan discuss a series of topics including how to get approval from a loan committee, credit scores, and banks’ legal lending limits. Enjoy!
“When you’re going to make application with a bank and you think you have a lot of due diligence done, that you’re providing a lot of information, a little bit extra won’t hurt.”
HIGHLIGHTS:
0:00 – Intro
1:15 – Nathan tells us about himself and how he got into banking and MHPs
2:45 – Ferd asks Nathan to share advice that he would give to a new borrower and what it takes to get approval from a loan committee
5:18 – Nathan states that location is important for first-time buyers
9:06 – Ferd asks Nathan to tell us how much credit matters and how the approval process works
16:18 – Nathan speaks about convenance on different deals
22:10 – Ferd asks Nathan about typical terms for a deal
22:40 – Nathan states that typically you’re looking at a five-year, fixed-rate but this can change based on the interest rate environment
24:53 – Nathan speaks about how each bank has its own legal lending limit, but banks can work together to get deals done
28:15 – Nathan shares some final tips and recommends always bringing extra information when applying for a loan as it helps with the approval process
28:53 – You can contact Nathan through email – nathan.frese@firstbankers.com
FIND | NATHAN FRESE:
Email: nathan.frese@firstbankers.com
FULL TRANSCRIPTION:
Ferd Niemann: Welcome back mobile home park nation. Ferd Niemann here again today with another episode of The Mobile Home Park Lawyer Podcast. My guest today is a guy I’ve known for a long time, we grew up together, couple of years, separate class, but we played baseball together. Grew up, the same high school, done many loans together. He’s told me yes more than no, so I really like him. Please help me welcome one of my favorite bankers, Nathan Frese. Nathan, thanks for coming on.
Nathan Frese: Thanks. Ferd I appreciate you having me and excited to dive into the mobile home finance world with you today. Certainly had more fun playing baseball than doing deals, but this isn’t a bad alternative.
Ferd Niemann: Not too bad. Not too bad. Yeah, I like to say I was a good player. I think Nathan, he was a little better, but it depends on the day I guess we both had a pretty good run. Had a lot of good deals together. Nathan’s out of Quincy, Illinois, first bankers trust commercial loan officer there and you are vice president there as well. And I know that about you, tell us a little more Nathan, about how you got into banking, how you got into MHP, and then we’ll talk more about what it’s going to take to get you some more loans and get some of my friends and clients approved for loans with guys like you.
Nathan Frese: Sure. Well, yeah, I’ve been in banking now for 16 years, time flies when you’re having fun. I got into banking really, I didn’t know what I wanted to do when I grew up, I graduated from college and had a job offer to become a collector. So my first experience was repossessing cars and that gets old in a hurry. It’s not a fun job. You’re always seeing people on the worst day. So quickly moved into automobile financing and then shifted into commercial lending now for close to eight years. Really my first dabbling in the mobile home park communities was through you. We’ve done several deals together now and now first bankers I’m known as the mobile home park guy. So any deal that comes through that has something to do with a park, I get to put my stamp on it and see, you know, what it looks like and make sure we’re doing things the way we want to do them.
Ferd Niemann: Yeah, that’s great. Glad that I could be the corrupting influence in bringing you into mobile home parks. You know, you’ve met my mom and I think she was a little disappointed and shocked when I told her I was going to quit practicing law and become a trailer park owner. But I think it’s worked out okay. But at first, she was like, you’re going to do what you know, but it’s been good to work on deals together. So I know a decent amount about you and your bank and what it takes to get a yes, and what it takes to get a no, cause you know, I get the occasional no, if I’m too greedy on my ask. You don’t like those zero down non-recourse loans as much as I would like to convince you, but tell us, give us some advice for a new borrower, I mean, first time borrowing and then a seasoned operative what it takes to get approval from a loan committee. Because as I told you previously, and for our audience, I’m doing a multi-part series here on bank approvals and lending, and you’re in the more local bank regional bank brand. And it’s different than obviously a 10 million agency lender that wants a different kind of a borrower, a different kind of asset. So maybe give us some tips and tricks on there that we can all learn from.
Nathan Frese: Sure, as you mentioned, cash down is always a king for these types of deals and really any financing. You’ll find that I’m sure most regional type banks and that’s always a good rule of thumb anyway, you should always have something invested in and you know, your project that you’re looking at regardless of the financing that you’re looking for. Really when I review a request for a mobile home park, I really want to, we treat it more as an operating company than a real estate loan. So it’s not, it is secured mostly by mortgage and assignment rents, those types of things, but it’s really an operating company, you know, you’re collecting rents, you’re dealing with collection issues, making sure you’re taking care of the maintenance of the park those types of things. So when I’m reviewing a loan request, I want to see, you know, what experience does the principal have? How can they deliver timely and accurate financials? That’s a huge deal. You know, when we get into something like this, if it starts going sideways, it can go sideways in a hurry, as you would well know. So it’s really reviewing a due diligence packet and having the trust in the principal borrower that they’re doing their due diligence to make sure they know they understand what they’re getting into. They’ve identified their sources and uses of cash. That’s a huge deal too. You know, those can be cash intensive assets. They need road maintenance, what kind of sewer system does it have? How many park owned homes, what are they doing with that? Really looking and diving into those numbers and Ferd you do a great job of providing probably more details than I even need, which I would rather have than not enough, because then I can really grasp, do they understand what they’re getting themselves into. And do I feel like they’re going to be able to provide me with the details and the information that I needed in a timely manner
Ferd Niemann: Makes sense. So basically providing detailed information and proving you’ve got the wherewithal, you know, intellectually, operationally, and financially to pull off this kind of deal.
Nathan Frese: Absolutely. And location’s a huge deal too. You know, do you have the infrastructure within your own company to handle a part that’s two, three hours away from you? Does it need to be something that’s 15, 20 minutes away from you? You know all of that plays into each deal. The more experience someone has and the proven track record on a series of mobile home parks, obviously a little further away may not be so bad, but if you’re just getting started, you need to be able to be there when you need to be there and keep an eye on things for sure.
Ferd Niemann: No, I agree. That makes sense. I see a lot of guys buying stuff, their first deal halfway across the country, and some people can pull it off. I see guys doing the works. I see some guys doing it, and I’m nervous for them, for us. I was in college, but or just out of college, but it was kind of in our own backyard. It seems to take some of the risk away. And I know for you and for your bank’s footprint, how far away, what does that footprint look like? Would you, you know, if you go four hours near base, will you go eight, well, will you do it. At this point, you know, you’ve done some deals for me that are, you know, further than that a way or a bigger realm. But I think it was my first deal, you’d probably not want to be, you know, four or five hours away, things like that.
Nathan Frese: Right, right. It does matter the length of time that we know the borrower and obviously we’ve gotten to know each other well and how you operate. I guess the simple question or simple answer to your question would be in Quincy, we’re kind of on that little bump in Illinois, right by Missouri, Iowa, just about 45 minutes up the road. So we’ll look at anything geographically, Illinois, Missouri, and in Iowa. That’s not to say for some of who we’ve got a lot of experience with, a high level of trust and everything is working as it should that we couldn’t look at an outlier, but that would probably be the exception rather than the norm. You know, if I can get to it within a few hours, that makes it easier for me to lay my eyes on the asset because I want to see it too. And know what I’m loaning on, really that Illinois, Missouri, and Iowa region is where our focus would be.
Ferd Niemann: Yeah. That’s one thing I’ve appreciated about interesting that you do that some bankers don’t is you go look at the asset, you tell me to meet you there. Sometimes you just say, oh, I looked at it yesterday and you’re out there driving around, making sure that it’s real. And you probably got horror stories. I’ve heard horror stories of bankers that don’t do that. And he’s like, it was an empty building. It wasn’t full of tenants or things like that.
Nathan Frese: Sure. And that’s, I mean, not even just for this asset class, it’s always good to understand what you’re loaning money on and, you know, see, actually see the asset. And the last thing I want to do is we have to foreclose or take action on the note and I show up and it’s the first time I’ve seen it and I have no clue what I’m getting into. Now I certainly am not claiming to be any kind of mobile home park aficionado. I mean, I drive through them and I probably don’t see them the way that an investor like yourself would see them, but I still think it’s important to walk the dirt. See what I’m loaning on.
Ferd Niemann: Oh, make sense for sure. Tell me about the borrower, what does it take? And is there a general rule of thumb from a liquidity standpoint or a net worth or a credit score. I realize this is different than buying a single family house. It’s going to be collateralized, but how much does credit, you know, if I got bad credit, am I out of luck? If I’m new in this industry, change of career, change of life path, am I out of luck? Am I okay? And then maybe tell us a little more about the loan committee and loan approval process. Cause you don’t own the bank, right? So you don’t have the, you can’t immediately give yes, there’s a process. So I know that part of my job is to give you information so you can articulate the business plan and the project to people higher up at the bank to help, which is for our mutual interest to get that loan approved. So tell us a little more about those two areas, borrower, and then the approval process.
Nathan Frese: Sure. So every deal is different. That’s one of the things I enjoy about my job. You know, you might be buying a park that’s 98% occupied and it’s ticking along, everything’s cleaning and there might be a few tweaks you can make. You know, there’s not going to be large cap ex issues that you’ve got to deal with day one or you could be buying a park that’s distressed and rents are below market because the park has been taken care of. You have some vacancy issues, those two assets are entirely different. So from a capex standpoint, number one, understanding where’s the cash going to come from if you need to infuse some of that into the park is important. From a credit standpoint, we don’t, it’s always tough. I get the question a lot about credit scores and we do use credit reporting obviously. I can’t say you got to be at a 680 or I can’t do anything for you. You know, anything above 700 as a general role would be what would be looking for, but to say, if that’s below that, I don’t, or can’t do it kind of thing, it’s just not how it works. A lot of things go into those credit scores, the way they calculate those. But just really taking a full picture at a financial statement. What kind of debts does the borrower have? Where’s their source of income coming from? Do they have outside you know, another job that is supplementing their income or is this their sole deal? We really dig into that and see where, if something goes wrong, can they survive a bump in the road? Kind of a thing. So credit is important. I mean, if credit is really poor, I probably don’t have much avenue to get support from a loan committee side. Kind of shifting into the approval process. It really varies here at least at the bank that I work at the size of the relationship. So if it’s your first deal, if it’s under a certain amount of dollars, you know, it’s rest with me and I can review it and either say yes or no. The larger deals or the more complicated relationships we get, as you borrow more, if you have five or six deals going the structure then would be that I would underwrite it. And then I would take it and present it to a committee structure. That committee then would review, take my recommendation, or not take my recommendation if they see it differently, certainly can ask me questions and vet out, you know, what it is I’m requesting you know, is there a certain covenants or other items that we need to address. And then if I get my approval, then I either move forward, depending on the size, again, up the food chain then into another committee, or I have my approval and I’m ready to go. So all told, start to finish, If I get a full packet of information on a part, I have the borrower guarantors information, I can usually have it reviewed and something turned within a week. And then from there going to the appraisals and title works and all that kind of a thing.
Ferd Niemann: I laugh because people are going to not believe you when you say a week, but I can vouch because some banks take, I just did that deal at Fannie Mae, it took 90 plus days, and this is like 90 days. So that was a more complicated process. But I was telling a couple of guys right here, and we turned in the loan for, I think our St Charles deal. And I gave you on a Friday and I had approval on Tuesday. They’re like what? Within three days you got approval or four days like, yeah, these guys are fast. So I appreciate that. It really helps with due diligence, take some of the uncertainty out. And then it also allows me to be more aggressive on timelines on due diligence because I know I can get a loan approval quickly, obviously the target to get a surveyor to go fast. It’s often hard to get an appraiser to go fast. Phase one guy’s really good. He usually takes like 10 days. So it’s, looking at loan committee going is super important.
Nathan Frese: And that’s, I will say not maybe not the norm. I mean, certainly I try to move as quickly as I can, because I don’t want to jam you up, but it all depends on what’s going on too and workload. And I don’t want to warrant that I can turn things in four days all the time. That is also one of the advantages of working at a regional bank like that. You know, our board is very engaged. If I need to get something to a board loan committee level, I can do that without having to wait, you know, for their regularly scheduled meeting. They’re very easy to reach and attainable to me if I need them. And that’s actually one of the things I enjoy working at a regional bank. Regional bank, we’re about one, I think we’re about $1.2 billion bank right in that area right now. And you know, it’s just, I like being able to go up and walk in and talk to the president if I need to and get approvals quicker than you can, when you get stuck into more of a bigger bank and in hierarchy. They certainly have their place because they can do things that I can’t do. But that is one of the things I truly enjoy working at a bank of this size.
Ferd Niemann: No, it’s great. It’s I think it’s, I was, you know, I’m not saying this to blow smoke, but I was telling somebody recently, you know, people like, who do you value? Who do you value more, you know, your employees, your tenants, or your equity guys. And I was like, how about my bankers? You know, like the debt guys are more important than the equity guys. Cause there’s not as many debt guys that can get deals done. There’s a lot of rich guys put equity in deals, but the debt is important, man, and customers are important too. And I think employees are obviously vital to the team success. So I put bankers ahead of guys like you, especially ahead of equity guys. And hopefully none of my equity investors are listening, but will tell it to their face, but it’s definitely important.
Ferd Niemann: So tell me also, one thing I know we’ve had to address over the years is sometimes there’s additional loan covenants or loan provisions that sometimes are good for me, sometimes they’re bad for me, but sometimes they’re just the reasonable thing. What can I do to get a close loan over the hump? For example, additional guarantee, another person guarantee, life insurance, other covenants reporting requirements, you know, and so on. How does that typically work? How does that go through the committee process and the review of the borrower. Because you mentioned, for example, 680 credit score, it is pretty high. And then we got a lot of listeners that are like, I can’t, I don’t know, I’m at 500, is the kind of 500 toast, or can the guy with 500 credit score get over the, if grandma left him a million bucks or if he’s also a doctor with the $200,000 salary or if his spouses or he’s got his dad will co-sign, what are those items help us to turn a, maybe, cause as I joke sometimes bankers are trained to say no right? Underwriters no, as the borrower, you know, I’m in the business of borrowing money, you’re in the business lending, let’s get together. I’ll try to sell. How do I convince you when your gut is no because I know it’s not an absolute, there’s got to be some way to get you to flip your answer a little bit.
Nathan Frese: Sure, sure. Well, and yeah, I certainly understand what you’re saying. Bankers are, we don’t get our reputation for nothing. But yes, you are correct, there are covenants, a lot of the ones that we’ll typically look at debt service coverage requirements, both specifically on the park and from a global standpoint if you’ve got multiple projects going or other sources of income, we’ll look at both of those. You know, the reporting is what I mentioned a few minutes back on a financial reporting that’s timely and accurate. That’s a big deal on these deals because there’s so much going on. And again, as I mentioned, it starts going off the rails. It’ll go in a hurry. We do like to keep a tabs and you do a great job of, you know, you can do monthly, you can do quarterly, whatever makes sense with the specific asset we’re dealing with. And again, you’re getting into, is it a park that’s running like clockwork or is it a you know, a vacancy situation where you’re trying to improve things? It depends on how we look at that. Those types of things are what I will try to put in place before I would get to the committee. It’s not unheard of for them to say, okay, I see what you’re doing here. I think we should also add A, B or C or you know, something along those lines, you mentioned life insurance. You know, if there’s one, if you’re the one person that’s making this thing go, is that something we need to, you know, how do we feel if you’re not here tomorrow, you know, how does that change the relationship? And as you get bigger, banks will ask for stuff like that because there’s just more exposure there. And I’m certainly not an expert at operating mobile home park. So, you know, I want you to be there running things. As far as credit scores go, I will say that, you know, to your point, maybe it’s never a never, you know, if I’m looking at something and I can’t do it, it’s just maybe not right now, kind of a thing. Credit scores are fluid. I mean as you move through time, things can be cleaned up. You know, I’m not certainly not saying you have to pay a company to help you do all that or settle or however they do all their magic to increase your scores. But if you just pay off any collections improve your pay history as you move forward on notes that report to the credit agencies, in a year you can turn your score from a 500 or 650 from a 650 to 700, you know, you never know. So it’s always, it’s not usually a never, it’s just a not right now. So I guess that would be how to answer it. If you have a, you know, something in the 500, it will be difficult to obtain some kind of financing, but there’s always additional credit enhancements if you will, that can be introduced or discussed to try and get over to that hump.
Ferd Niemann: That makes sense. And I know from experience, the norm at the bank is about 25% down payment. I know my first deal was near bank. You were at a different bank at the time. It was $695,000, zero down. So it was a great loan for me. You guys don’t like doing those anymore, but if I’ve got that bruise credit and I get over the hump by getting my down payment up 30, 35, 40, 50, or is that just isn’t really no, it’s still not right now because I know banks who can take property, you’re going to take a haircut, you know, at least 20%, probably more like 40 and MHP, perhaps even more because of the operation components.
Nathan Frese: Sure, sure. And I don’t have the expertise nor the time to try to give the attention to it that it would need. With credit scores like that, if it’s a challenge with credit history that probably needs to be cleaned up before I can move forward with a larger down payment or some credit enhancement that would be able to get the deal to approval. But again, that’s a fluid thing. I mean, it’s not, it feels like, you know, everybody’s in a hurry. You want to do it right now, which I understand if you have a great deal on the table and you want to get it done, it can be frustrating. But that, certainly the down payment can be something that can be worked with and may fluctuate based on your experience or what the deal again, is it a flip? Is it a stable park? But credit needs to be at least in decent shape, regardless.
Ferd Niemann: Fair enough. What about recourse? I know almost all your loans are going to be recourse. You’re going to say that they’re all recourse. Is there a down payment threshold that helps me burn some of that recourse or pro-rata recourse and I know it’s always case by case, but if somebody walks in and everything else checks the box and they get approval, they say, Hey, I’d like to get rid of the recourse and I’m willing to go 40% down instead of 25%. Does that help? Does it get it done or does it take 50, 60, or does it take a 100?
Nathan Frese: So there’s not really a hard and fast rule on that as far as an equity standpoint. I would never come out of the box and say, oh, I’ll do this without recourse. As you mentioned, 99% of the time that, I mean, it’s not usually my negotiating point where we’re just a recourse bank. And I think most people in our space most likely are, certainly can’t speak for them. Now is that to say, if you had a loan for, you know, 10 years, it’s seasoned and everything’s fine, you’re like a 30% loan to value. Could you make that request? Absolutely. You could make the request and that can be made at any time. And what keeps me honest is my competition, because if somebody down the street is willing to do it and I’m not, well, then I just lost my 30% loan to value on a performing asset. So that’s, I guess the great equalizer is there’s sure a whole lot of me running around trying to get these deals as well. But it’s not something that if I received an application and I would just say, Hey, I’m going to do this deal and I’m not going to require a recourse. I would almost never offer that. It can be something that the borrower brings to the table and a situation where they feel it’s merited and we can certainly review it. And if we can get on the same page, great. Otherwise we’ll try to figure something else out.
Ferd Niemann: And what about, what are the typical terms if I bring a loan in, I mean, I bring a deal in ammo interest rate, you know, I know we’ve talked about recourse. We talked about down payment. What does the rest of that equation look like?
Nathan Frese: Sure. So typically we’re on a five-year rate locks, so fixed rate, and a maturity at five years, generally on a 20 year amortization, it depends again on the asset. If it’s a real small park and you want to pay it off quicker, it could be less, but typically we’re looking at a five-year fixed rate and a 20 year amortization. Now, all of that depends entirely on the interest rate environment. You know, if it makes more sense to do a three-year rate lock, because you can get a better rate or you have, you know, there’s been deals that we’ve worked on before Ferd where you said, I’m not going to hold this for more than a year. Well, if I can get you a better rate on a one year fixed than a five-year fixed, and your plan is to be rid of it in 12 months, there’s no point in doing a five-year rates. So that’s another one of those discussions that has had it depends on the goals of the client. You know, what are they trying to achieve here? As far as what the rate would be, it’s always a moving target. I mean, it’s different with every deal, certainly again with the competitive factors of other banks out there looking for business will keep you honest, but it really, that’s a hard one to answer, it just, it depends on so many different things. But it should be a competitive rate. If you feel you’re getting something that’s not competitive, I certainly would encourage an applicant to look at multiple sources to make sure they’re getting a good deal.
Ferd Niemann: Oh, good tips. And just for our audience too, I know with local banks and regional banks, it’s considerably less likely to get interest-only loans. And it’s considerably less likely to get a 30 year amortization compared to say an agency lender or CMBS lender. So there’s pros and cons, product type. Your regional banks would probably be better with relationship, better with customer service in general. Better timelines for approval. Different thresholds, like minimum loans are going to be a little smaller with you than with Fannie Mae’s minimum loans, a million bucks, they can kind of get them to go down to 750, but by the time you put, you know, down payment in there, you’re looking at a deal that’s a 1.2, 1.25 million. So I can’t take a $600,000 our deal to them. I got to take $600,000 deal to a local bank. So you guys definitely serve a place in the marketplace. I know we’ve done loans much bigger than that with you too. So you guys can go up, what’s the loan, what’s the maximum loan size that banks like you and or your bank will do on a particular project?
Nathan Frese: So it’s, each bank has its own legal lending limit. That there’s a calculation that’s done in the finance department or somewhere above my pay grade. But then we also have an internal limit that’s set by our board of directors. It’s an aggregate limit. And that’s not, I shouldn’t say it’s hard and fast. There’s always exceptions to every rule, not the legal lending limit. That’s you know, there is no hard and fast, but on internal stuff. And even if you know, we need to do something where break, we bring in a partner bank, banks can participate with other banks to take care of something. So like Ferd in your instance, if you had a deal that you really had to get done and you needed me to help you, and I was bumping up against an internal limit and couldn’t convince the board to take the full deal. I have options to call you know, a partner bank and we can sell some of the debt to them. So that from your end, you’re still dealing with me, but I’ve then moved some of the deal to them. We would still service it. It looks the same to you, but I’m able to keep my board, you know, happy with the total amount of indebtedness we’ve got. So it ranges by bank. I mean, it just depends on how much risk a board wants to take with one borrower. And really, you know, we can look at any deal you bring to us, and either we’ll just tell you straight off, this is too big for us, or we’ll find a way to get it done. So always an avenue to get a deal done if we need to.
Ferd Niemann: Great points. And you’re my favorite banker. But as I tell our audience here, it’s good to have more than one banking relationship for some of those limits, because you run into the bank limit, oops. Or sometimes bank doesn’t want to have more than one or two heavy lift projects at a time. I know a couple years ago I had, I think, three at a time going that were all heavy lifts. It’s like, you know, maybe one banks like, I want one or two of those type, and then let’s do some stable. And then once you get a stable that’s converted, now we can do some more heavy lifts. So it’s good to have, good to have options not just for price competitive things like that, but good to have options just like, you know, you helped me out on one project where I had another bank that they told me yes. And then it went to committee, they told me yes. And then the CEO vetoed it. I wasn’t even aware the CEO could do that. And he’s like, I don’t like that state. And I was left at alerts with 10 days till closing and no loan. So luckily that bank was worked out well, and it was nice and shared the appraisal with you guys, allowed you guys to act really quickly and get that deal, you know, in committee approved and funded using the appraisals from the prior bank that ended up vetoing it. So I was really happy that I had two good bank relationships. I still am happy with both banks. And then and now that loan has moved on to Fannie Mae. So there’s a different place in the marketplace for different types of loan products and different types of just, you know, relationships. But I appreciate everything you’ve done for us, Nathan. I appreciate you coming on here. Before we go, any other last tips or tricks, and if not, just where can people find you or how do you want them to contact you if you want to give them your email or phone number? I don’t recommend giving your cell phone out because you’re going to get blown up probably. So maybe not the best option.
Nathan Frese: Sure, sure. Well, I really appreciate you having me on, and I hope I’ve provided you and anyone listening, some kind of some valuable information. I will say, going back all the way to the beginning, when you’re going to make application with a bank and you think you have a lot of due diligence done, you’re providing a lot of information, a little bit extra won’t hurt. We’ve worked together for a long enough that you pretty much send me all the stuff that I’m going to do on my own. And it makes it so easy to have my fingertips to look through and see what assumptions are here. How’s he getting to here? You know, when you think you have enough information, add a little bit more. Because you can’t possibly provide the bank too much information. It just helps through the approval process. I can be reached, I’ll put my email out there. It’s Nathan.frese@firstbankers.com. That’s all spelled out in plural dot com.
Ferd Niemann: All right. Thanks Nathan. Appreciate it.
Nathan Frese: Hey, no problem Ferd. Have a good rest of your day.
Ferd Niemann: You too.
