Large Loans Push Past Legal Limits

If your name is John Q. Hammons, seeking a $30 million loan only involves a phone call.
For most, asking banks for large amounts of money is tricky and risky for the lender and the borrower. No one wants to end with up egg on their face from failed projects or acquisitions, so everything is scrutinized to the nth degree before any major deal is funded.
“You’ve got to pledge your first born,” joked Richard Alexander. Alexander along with John Nock through purchased the 15-story Radisson Hotel in Fayetteville for $9.92 million last October.
A Northwest Arkansas bank alone can’t handle loans much larger than the Radisson deal, such as the $400 million needed for a recent purchase of three malls, including the Northwest Arkansas Mall. That forced John Flake, Sam Mathias and Doyle Rogers to shop seven national banks before choosing LaSalle Bank of Chicago and Bear Stearns of New York City.
Outside of company acquisitions — mostly by J.B. Hunt Transport Services Inc., Tyson Foods Inc. or Wal-Mart Stores Inc. — the purchase of the malls on Dec. 31, 2006, was the largest since the Northwest Arkansas Business Journal began tracking big deals in 2000.
Flake declined to disclose exact terms, but did say it was a long-term fixed rate on both loans.
“Our belief was that the market is so fluid, we did not want to take a risk of having any type of flooding rates, so we locked everything down with fixed-rate financing,” Flake said.
According to public records, the group, through their MMP Arkansas LLC entity, paid Macerich Fayetteville LP $150 million for the Northwest Arkansas Mall. MMP Arkansas also is credited with obtaining a $125.6 million loan from LaSalle on Jan. 11.
Those terms don’t necessarily reflect exactly what was paid for the mall in Fayetteville only, Flake said. The $150 million is what Macerich’s accounting department has allocated for the mall for tax purposes. The $125.6 million is not accurate either, because LaSalle financed both the Northwest Arkansas Mall and a mall in Colorado Springs. Bear Stearns financed the purchase of a mall in Oklahoma City.
“We did not make an offer (to Macerich) on individual properties,” Flake said. “We just looked at all three properties and made one bulk offer.”
Regardless of how many millions were paid, an individual Northwest Arkansas bank wouldn’t have had the lending muscle to be as heavily involved. Even the strongest, Arvest Bank-Fayetteville, has a max benchmark of $25 million on loans.
Every bank has a legal lending limit that is equal to 15 percent of its capital.
“Ours is larger than most,” said Arvest loan officer Payne Brewer. “Our limit is still much lower than our legal lending limit, though, just to manage risks.”
Usually the lead bank handles the initial underwriting before bringing in other banks to finance part of the loan. To finance a project worth $100 million or more, Northwest Arkansas banks would have had to team up to get it done through what are called participations and syndications.
Of course, that means more red tape would have to be cut in order for banks to see eye-to-eye on how much should be awarded for a project.
“It’s one way a lot of folks get around [legal limits], but it is considerably more involved,” Brewer said. “When there’s six or even 10 banks involved, there’s going to be many more hoops to get through.”
Hammons developed his first of many hotels in 1958 and has since even ventured into helping build a minor league baseball park in Springfield, Mo., and the $77 million Hammons Convention Center in Rogers.
“Mostly, the lending sources try to keep up with him,” said Scott Tarwater, senior vice president of development for John Q. Hammons Hotels in Springfield, adding that Hammons regularly uses about 10 lending sources from the state of Arkansas. “When they hear about a new project, which we are doing all the time, then the phones start ringing off the wall.
“A normal developer would be pounding their shoes trying to prove their net worth.”
That’s not all. Proving the project will produce a steady return on investment is often the biggest hurdle, even for large-scale developers like The Pinnacle Group in Rogers, which has executed so many projects that it has utilized virtually every major bank in the region.
John George, marketing director of The Pinnacle Group, said the group was fortunate to join up with General Growth Properties Inc. of Chicago on developing the Pinnacle Hills Promenade Mall, which initially cost $137.79 million. When the idea for the mall was first floated, General Growth came to the table with multiple lending sources that were completely satisfied after doing business with GG before.
Just like Hammons, having a reputation for developing wisely goes a long way in gaining a bank’s trust.
George said that as Northwest Arkansas grows, so does the size of the projects. Most deals now start with marketing folks from one entity talking with marketing folks from another.
“The higher the value, the higher the risk,” George said. “As you drill down and do pro formas and everything to make sure the banks are comfortable, then it’s a lot more like two people sitting down at a table and one saying; ‘I want your business,’ and the other one saying; ‘I want to give it to you.'”
Banks evaluate commercial projects from all angles to determine things like what cash flow will be once completed. A secondary determining factor can be the borrower’s collateral and financial reserves.
Brewer said everything is factored in on even the smallest deals, not just for the bank’s protection, but for the borrower’s as well.
So once plans meet a lender’s strict standards, a sense of relief calms developers because banks, often through trial and error, don’t dish out money to any Joe with an idea.
“With the FDIC and banking laws in place today, it’s very difficult to get a loan, locally or nationally, unless they are assured it’s a plausible project and it’s a loan that gets repaid,” George said. “So if you get the loan, you feel pretty good.
“Then the hard work starts. You have to get it done.”