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Kansas and regional news

Kansas and regional news

Tight credit slows state’s business development

November 27, 2009

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— It’s harder for businesses and entrepreneurs to find financing in Wichita and nationwide.

A year from the national economic collapse, the commercial credit cycle in Wichita has tightened so much after aviation layoffs that good deals aren’t getting done.

It’s frustrating everyone — bankers, brokers and developers — as commercial development slows to a crawl with no turnaround in sight.

Little credit available

“I’m turning down deals, good deals that I know we should be doing,” said Jeff Ronen, president of Kanza Bank’s east Wichita office. “I am of the opinion that lending standards aren’t going to loosen over time like they have in the past.”

The bottom line: Sources say there’s little or no credit available in Wichita for retail, office and condo development. There’s some financing available for multifamily housing since vacancy rates are low, but that’s about it.

“In today’s market, retail is difficult and office is difficult unless you have an owner-occupied deal,” said Old Town developer Dave Burk.

Tight credit couldn’t come at a worse time, brokers say, as Wichita prepares a plan to redevelop its downtown.

“My business has dried up absolutely, completely and totally,” said veteran Wichita commercial broker and developer Rod Stewart.

Two years’ change

Two years ago, Wichita banks were happy to offer 100 percent financing if a deal had good potential and respectable tenants.

Today, that same deal is dead on arrival on a lender’s desk, replaced by requirements for at least 20 percent developer equity, a spotless credit record and 100 percent personal guarantees if and only if the deal in question is 100 percent leased to tenants with spotless credit records.

“It makes it harder for our clients to do multiple deals because people only have so much ready cash,” said Marlin Penner, president and managing broker of Wichita’s NAI John T. Arnold Associates.

“And secondly, it ends your ability to do a transaction that might be just reasonably good.”

Local and national economic prosperity ratcheted up competition for business among lenders, a Wichita State economist said.

“Competitive pressures are hard when a customer comes in and you tell them you need this down payment,” said Stan Longhofer, director of WSU’s Center for Real Estate.

“It’s tough when the developer tells you, ‘I can go down the street and get a better deal without all your requirements.’ You have to decide as a lender whether you lose the customer or whether you lower your underwriting standards to keep the business.”

‘No business’

As those underwriting standards slipped, more risky business was done and more loans failed, more so nationally than in Wichita.

“In Wichita, we were never doing the crazy deals anyway, yet here we are,” Stewart said. “We were doing regular honest banking that didn’t have phony applications for 100 percent loans.

“No matter. The regulators have swooped in and some 30-year-old kid is telling a 40-year banker what he can and cannot do. The practical effect for me and every broker up and down the street is no business.”

Today, underwriting standards have been elevated to 20-year highs in tightness, Ronen said.

“Today, it’s more money down, and in addition to that, they’re looking much harder at the borrower,” Penner said. “They’re drilling a level deeper to look at the developer’s other loans, other loans that he’s personally guaranteed.”

Gary Schmitt, executive vice president for real estate lending at Intrust Bank, agrees that the tighter lending standards are regulator-driven. He’s not ready to call the changes bad.

“I’ll bash the regulators as much as anybody, but what’s happening is the regulators are putting more scrutiny on us so we’re putting more scrutiny on our borrowers. Rightly so, in my opinion, in the economy we’re in,” he said.

“If we don’t take a hard look at their deals, making sure the i’s are dotted and the t’s crossed, then we’re letting down that customer, our shareholders and our community.”

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