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Spigot for real estate financing opens wide

Slim Chickens Financing

Spigot for real estate financing opens wide


Toppers opened 17 stores last year, fueled by good access to capital for franchisees. Franchise groups looking to finance renovations of an existing store or the construction or acquisition of new locations are finding plenty of options.

“I think the markets have definitely made a turn for the better over the last three years, and they have been very good for the past two,” says Tom Gordon, co-founder & CEO of Slim Chickens in Fayetteville, Arkansas. “There are multiple financing opportunities out there in the marketplace right now.” Slim Chickens and its franchisees typically seek financing to fund site acquisition and ground-up construction for its 2,900-square-foot restaurants.

Slim Chickens predominantly uses bank financing on the new construction, and also has used Real Estate Investment Trust financing to fund the sale-leaseback of existing corporate stores once they are built and operational. However, REITs also have been clamoring for a piece of the construction financing with very aggressive rates, notes Gordon.

The good news for borrowers is once again a lot of lenders are in the market looking to do deals. “It is a strange mix of frothiness of credit and debt availability and caution,” adds Gordon. Yet even though access to capital has improved and lenders are very competitive on rates, the memory of the financial crisis is still fresh. “So, sometimes it does take a little extra work to get a deal across the goal line,” he says.

Banks are flush with capital, and they need to get it deployed to make a return on that capital. There also is a high demand from investors, such as REITs, to invest in commercial real estate. “So, there are tons of lenders out chasing too few deals, because while the economy is getting better, I don’t know as though the demand for financing has grown at the same rate as the supply of financing has,” says Rick Thompson, managing director, franchise finance at BMO Harris Bank in Irvine, California.

“We have certainly seen over the last two to three years an increasing availability of capital, both in the SBA world and conventional financing,” agrees Rich Grant, an executive vice president at TMC Financing in San Francisco. TMC specializes in providing real estate loans through the SBA 504 loan program.

The 504 loans provides businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.

The Small Business Administration 504 program is still a good option for many franchisees right now, because it will allow borrowers to put as little as 10 to 15 percent down versus 25 to 30 percent in conventional bank financing. The basic idea behind the SBA loan programs is preservation of capital. So, instead of putting all of that money into the real estate, it allows borrowers to hold that capital for other business needs.

A recommendation to preserve cash

Money is pretty inexpensive right now. So, even when franchisees have significant cash reserves, it is generally better to secure a good loan and protect cash for future projects, says Mark Cairns, director of franchise development at Toppers Pizza in Whitewater, Wisconsin. The franchise typically works with SBA preferred-lending banks. “A big piece of it is that the banks are comfortable with the concept. They know who Toppers is, and they are probably approving the brand as well as the franchisee at the same time,” says Cairns.

Toppers Pizza opened 17 stores last year and plans to open another 12 this year. Franchisees have to have good credit, some cash and the proper net worth, and banks are willing to loan money, says Cairns. The majority of Toppers Pizza stores are leased properties, which means franchisees are usually financing the build-out and furniture, fixtures and equipment. All-in, including the construction, signage, FF&E and point of sale, the cost for franchisees amounts to about $300,000 to $325,000.

The banking relationships have been the most effective in financing new construction for Slim Chickens. There are some distinct advantages if you can get lending from banks, because they are regulated. You know the rules of engagement. Everyone understands what has to be done, and generally, the cost is a little less, notes Gordon. That being said, REITs also have been more aggressive in pursuing “front-end” construction financing, as well as the purchase of an operating property on the back-end via a sale-leaseback.

“It is such a relationship-driven game. You want to make sure you have that relationship with your bank or that REIT group to complete a project,” says Gordon. There is nothing worse than getting 90 percent of the way through a project and then coming up short in terms of financing. If you have a good working relationship and a good degree of trust with your financing source, that is the most important piece of the puzzle, he adds.

Certainly, it is not all smooth sailing for borrowers. Lenders are more diligent in underwriting in the post-recession environment, and borrowers do have to have their ducks in a row when applying for a loan today.

Pre-crisis, if borrowers could “fog a mirror” they could get a loan, because the fundamentals of underwriting were pretty much out the door, says Grant.

Now lenders are very much back to basics in their underwriting standards and requirements. “It is not so easy to get financing. The fundamentals of the deal still have to make sense,” he says.

On the personal side, individuals should have their personal financial statements and tax returns ready. On the business side, lenders generally require two to three years of sales and revenue data for an existing business.

For a new business, lenders want to see a business plan or projected cash flow, as well as the assumptions behind those projections. For franchisees, that also means providing any franchise information that might help to support those cash flow projections.

Says Grant, “We have seen a number of franchisees in a number of different industries, such as hospitality, where they are looking to do their second and third locations. So, we certainly look at information from their existing operations, as well as other available information.” Even if interest rates increase later this summer as many anticipate, it remains a very favorable financing climate. “I think it’s a good time to borrow. Rates are historically low and will continue to be low even as we expect them to tick higher,” he says.