BY Anne Miller

Jan 30th 2023

Financial PerspectivesCFOs and Treasurers

Commercial Real Estate:  Unlock Hidden Value in Your Balance Sheet

Jan 30th 2023

Over the past 45 years, the Pappas Family has established itself as one of the most respected and reputable real estate development companies in Northern California.

Founder Louie Pappas and his family have been through some great times: the Great Inflation of the 1980s, the Great Recession of 2007-09. And they’re continuing to grow in today’s uncertain times.

Working closely with their relationship banker, Pappas Investments was recently able to conclude a savvy financing that consolidated loans, locked in interest rates, and expanded ways to access cash quickly for future deals. The loan consolidation provided liquidity and increased operational flexibility.

Many markets rebounded somewhat as the world re-opened, and interest rates remained at historic lows. But more recently, rising interest rates, talk of recession, the impact of war and Russian embargoes, and a bear market generated further uncertainty in real estate markets.

Their story offers insights to other businesses as we enter 2023 facing the risk of recession, rising interest rates, and a strong dollar. Commercial real estate’s role as an inflation hedge is uncertain, capitalization rates are climbing, and foreign investment is cooling.

Turbulent Times for Real Estate

The disruptive events of the past three years—the spread of a global pandemic, supply chain disruptions for the ages—caused some real estate markets to plummet quickly, like the value of urban office space in various cities, including San Francisco and New York.

“These are unprecedented times, which means financing decisions are more complex, but also much more important,” says Bank of the West’s Guy Steffens.

Soft tenant demand coupled with higher capitalization rates “reflected a higher risk premium” in commercial real estate, notes Fitch Ratings in a report out last August.

At the same time, interest rates remain near historic lows. A look at a fed funds chart puts interest rates into clear perspective: We aren’t anywhere near the peaks of 6.5 and 5.2 percent of 2000 and 2007, nor the astronomical rates of 1981. We’re just back to pre-pandemic territory.

So how should a commercial real estate firm navigate these choppy waters?

There are ways to unlock value on a firm’s balance sheet by working with a trusted financial partner. Financing packages can consolidate numerous loans into a single financing instrument that can both lock in lower rates and increase available credit so a company can continue to grow. This results in streamlined debt, without losing the financial flexibility a firm needs to continue to grow as opportunities arise.

Pappas Investments’ Story

Pappas Investments is a full-service real estate development company with 40 employees. The company boasts 2.9 million square feet of owned buildings with 179 tenants. Their properties extend from Sacramento to San Diego.

The company’s stated vision for each project is to add a sense of enjoyment and value to the places where people live, work, and shop. Committed to building a more dynamic and successful community, they like to say that the properties they develop and hold onto are more than just investments but part of their family.

Specializing in a wide range of real estate services, they are able to take a project from start to finish. From acquiring land to designing and developing retail, office, build-to-suit, and mixed-use projects, and finally to managing each project with their in-house property managers.

Creating Financial Solutions, Together

To develop a financing solution tailored to a specific real estate firm, “you need to really understand the client and their business plan, how they’re growing, and how they want to grow the company,” says Steffens, Managing Director, Regional Manager, Real Estate Vertical, Corporate and Commercial Banking at Bank of the West.

Pappas Investments had loans with Bank of the West, but because the company developed such a close relationship with their banker, Steffens could see how much time Pappas’ staff spent managing different loans and financing. The real estate firm held multiple loans that all had different monthly payment days and interest rates, and different timing for when the loans came due.

Steffens took a holistic view of his client’s needs to identify opportunities to support the business.

The relationship facilitated refinancing individual loans to increase financial efficiency and access unrealized capital for future growth.

Steffens and his team thought big: How can a company leverage their assets in the most efficient way to continue to grow?

Loan consolidation was a way to streamline payment dates and cycles and facilitate growth. Some of the money has a fixed interest rate. Some of the money has a larger borrowing cap, which provides a large, fast line of credit as needed. This can enable a company to close on a new property purchase in as little as 30 days because of the access to cash—a clear competitive edge when many firms need 60 or 90 days to close in order to secure funding.

Three Steps to Ensure Partnership

This strategy can work for many businesses. The key is finding the right financial solution that adds value to the particular business based on its structure and operations.

Steffens has three suggestions on how finance leaders can approach solutions that support growth in the current environment.

  1. Understand that family businesses have more options than they may realize.

    In uncertain times, businesses, both large and small, should capitalize on the financial tools that are available to them. Knowing the range of options that are available is a good place to start. A valuable banking partner in this scenario would be one willing to sit down with the company’s leadership, review their current financial tools, and offer solutions that help the business achieve its goals.

  2. Look for solutions with the flexibility to shift as markets do.

    Cookie-cutter solutions don’t work for businesses of different sizes. Depending on a firm’s size, it will grow and shift based on geography and markets, but also based on unique factors. Smaller companies, for example, may need financial guidance and solutions related to including children in the business, creating trusts, and succession planning.

    “Make sure your financial institution has other product types or other structures that they can bring in,” Steffens says.

  3. Work with a hands-on banking partner.

    Steffens routinely has to speak with various Bank of the West departments to pull together deals tailored for specific businesses. Finance leaders should assess the depth of support a bank offers in-house. Is the bank representative pressing to close a loan or really willing to spend time getting to know a business and design financing that fits the business’s needs?

    In these uncertain times for real estate, thinking creatively about both your balance sheet and your financing options is more important than ever. If you’re interested in learning more about the options available to your business, a good place to start is by reaching out to a finance partner with a strong reputation for serving the commercial real estate industry.

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Anne Miller

Anne Miller is a Brooklyn-based content marketer, editor, and writer documenting how technology and business shape our lives today. She can also direct you to the best bagel and lox in the city.

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