Small Business

Shortly after becoming a MAI designated appraiser, I founded FRG. The firm was built on a client base of strong regional financial institutions who needed quality commercial real estate appraisals for their loans and portfolio management. For a good three or four years that client base grew as banks provided loans to small businesses that were seeking to expand their own business. However, there has been a shift over the last twenty-four months, and I have noticed a flattening and decline of financial institution business lending.

I can’t say with 100% certainty the reason for the decline, as there is no one single reason for this shift. However, over the last couple of years I have observed some bank lending trends:

Shifting Geographic Focus to High Growth Markets
Several banks that previously held a strong presence in the Midwest have shifted their focus to higher growth areas on the east coast. One such bank is First National Bank of Pennsylvania; in 2015 and 2016 they stated that the Cleveland and Pittsburgh MSAs were focus areas for growth. However, as we moved into 2017 and 2018, their focus shifted to the mid-Atlantic and Southeast. First National Bank confirmed this shift in their 2017 Annual Report, stating that Raleigh, Charlotte, Winston-Salem, Greensboro, High Point, NC and Washington, DC joined Pittsburgh, Baltimore and Cleveland as the bank’s largest commercial regions .

Prioritizing Mid-Cap Companies over Small Businesses
Banks have been shifting their lending to mid-cap companies instead of lending to small businesses. A reason for this shift could be because it is more difficult to package loans under $1M into bonds that can be sold to a third party.

Bank Consolidation and Banks Getting Larger
In the past two years, there has been a great deal of bank consolidation. For example:

• The largest bank headquartered in Michigan, Chemical Financial Corporation acquired Talmer Bank, a less than 100 branch bank also headquartered in Michigan and recently announced a merger with Minnesota-based TCF Financial Corp resulting in the bank becoming one of the 50 largest banks in the country.
• The second largest originator of SBA loans for the state, Columbus, Ohio-based Huntington National Bank acquired First Merit Bank of Akron, Ohio

The Federal Reserve Bank’s Small Business Lending Survey reported that in the third quarter of 2018, there was 1.4% growth in large institution loans for commercial & industrial small business, while mid-sized and small banks decreased their loan activity by 4.2% and 1.5%, respectively. Smaller banks are more likely than large banks to lend to small businesses. Therefore, the consolidation of the banking industry, and the rising average size of lenders, might account for some of the shift away from providing small business credit. According to the Federal Reserve’s Small Business Lending Survey, small banks offer lower interest rates on fixed rate terms loans than large banks, meaning small businesses may be able to secure more favorable loan terms from a smaller bank as well.

These shifts in lending make it hard for a small business seeking funds to expand, buy equipment or secure a building to accomplish their goals. So where can these small businesses turn? Many businesses look to the federal and local government to secure loans when financing is unavailable or too expensive elsewhere.

One example of this is the SBA 7(a) loan program, which is the SBA’s flagship loan program.  Proceeds from 7(a) loans may be used to start a business or assist with operations, acquisition or expansion of an existing business. These loans can offer more “flexibility, longer terms and potentially lower down payments compared to other financing options.”[i]  The average 7(a) loan is ~$420,000. In 2015/2016 there was a peak in both the number of 7(a) loans and the dollar amount loaned to businesses nationwide and since 2016, the number of approved loans has declined across the US.

 

In the last six years in the Midwest, SBA loans have increased. However, these states diverge from the national trends with increasing dollars loaned since 2015. Ohio holds the lead in total dollars loaned, reaching over $930 million in loans approved for the FY2018.

 

Added barrier for small business success: 2019 Government Shutdown

For small business across the United States and particularly those located in the Midwest, SBA loans are critical to support business operations and growth. Unfortunately, the recent government shutdown resulted in many businesses unexpectedly losing out on funds or not being able to obtain the finances they need. For small businesses to succeed, they need to be able to plan for growth. This means being able to reliably pay for and invest in that growth. As a fellow small business owner, I understand how important access to capital can be – and as I have observed the shifts mentioned above in financing options for small businesses, it is more important than ever that political differences be put aside and we keep the government open to ensure needed funds can get into the hands of business owners.

FRG wins contract with the Northeast Ohio Regional Sewer District

Feasibility Research Group (FRG) has been selected to provide Appraisal Services for the Northeast Ohio Regional Sewer District.

University Heights, OH (January 4, 2019) — FEASIBILITY RESEARCH GROUP (FRG) a real estate appraisal, market research and consulting firm based in Northeast Ohio, has been selected for Appraisal Services with the Northeast Ohio Regional Sewer District.

The Northeast Ohio Regional Sewer District (NEORSD), requires professional appraisal services to support its property acquisition activities.  The NEORSD programs that FRG will support include the development of various tunnel, collection sewers, plant upgrades, and green infrastructure components, which will result in a variety of real estate and property impacts.

“FRG looks forward to supporting the development of critical infrastructure with NEORSD” said Gregory Williams FRG‘s Managing Director. “Accurate and timely real estate transactions or valuations from FRG can assist NEORSD in providing superior service to Northeast Ohio residents.”

Appraisal consultants with NEORSD are selected to provide property appraisal, appraisal review, and expert witness services, depending on the needs of each individual project. As an appraisal firm experienced in working with Right of Way projects for public entities, FRG’s managing director is pre-qualified with the Ohio Department of Transportation for acquisition services specifically for value analysis, appraisal, appraisal review and title research.  FRG understands the unique challenges or potential issues that may arise during the public right-of-way acquisition process and will ensure NEORSD complies with the most current regulations and procedures.

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Supporting Adjustments with Market Data

Appraisers are analysts, problem solvers, and decision makers who need to make a professional and informed opinion of the value of a property as well be able to communicate their decision-making process. One of the most important aspects of an appraisal is the integrity of the data and decision-making used.  Appraisals must explain clearly why adjustments are being made and clearly state the reasoning for how the adjustments are being made.

Here’s a look at the process FRG requires to validate adjustments when comparing properties in a residential appraisal:

Why?

An adjustment is needed when there is a difference between the property being appraised and a comparable property that would impact the sale or rent price

  • Differences that require adjustments to value include building size, number of rooms, condition, parking, or amenities like pools or fireplaces

How?

An adjustment provides an estimated dollar value of the difference

  • Appraisers must explain the reasoning behind that specific dollar value; what makes an adjustment worth a specific amount in that market?

Simply stating that an appraiser is experienced and therefore knows how much things would sell for is not an accepted justification for adjustments in sale price. Every appraiser has their own unique perspective and bias, and it is the responsibility of that appraiser to create as objective and informed an opinion as possible.

How can appraisers remove themselves from the process and create a reasoned explanation for differences in sale prices? Here is an example:

A single-family home with 1 bathroom in a suburb is being appraised, and a sale comparable has 1.5 bathrooms. The appraiser believes buyers in this market recognize the value of an additional half-bathroom. An adjustment will need to be made, but for how much?

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Growth on the Lake: The Power of Green Technology

Over the last couple of years Cleveland has really done a lot to change outsiders’ perception of the city. No longer is the city referred to as the ‘Mistake on the Lake’. In fact, recently I was on an Amtrak train traveling from Washington DC to Baltimore, and in the seat pocket was “The National”, Amtrak’s onboard magazine. And on the front cover of the National was a gorgeous plate of food and the caption “Next Stop: Cleveland – A booming food scene is helping this postindustrial city shake off the rust”. The six-page cover story featured Cleveland’s hippest neighborhoods, celebrity chefs and their restaurants.

After reading the article, I thought to myself, Cleveland really has a lot going for it – exceptional museums, cool neighborhoods, world class healthcare, it has the 2nd largest theater district in the country, stellar higher educational institutions, home of big budget film productions and a championship sports team. And on top of all that, Cleveland is becoming known for making real advances in green technology.

Lake Erie TurbineCleveland, like most metropolitan cities has its environmental issues, whether that be runoff from urban fields or commercial sites contaminated by prior use or contaminated sediments at the bottom of Lake Erie. Cleveland is starting to find unique solutions for these issues.

One of the region’s greatest assets is the Great Lakes, which provide freshwater for drinking, transportation, power and recreation. And 21% of the world’s supply of freshwater comes from the Great Lakes.

So, I am happy that the U.S Army Corps of Engineers (ACE) and the Ohio EPA are working together to find a better solution for where to put the sediment dredged from Lake Erie, a solution that does not include dumping the sediment back into Lake Erie. Recently, it was reported that they are exploring the solution that the Port of Cleveland is using to re-purpose sediment. The Port contracts with a supplier that recycles the dredged sediment and uses some to restore wetlands near the harbors being dredged and sells some of the clean sediment to construction companies to use on their sites. Re-purposing prevented the need to build a containment dike, thus saving the Port of Cleveland $150 million.

Another green technology project in development is the placing of six (6) 3.45-megawatt wind turbines eight miles off the shore of Lake Erie. The goal of putting wind turbines in Lake Erie is to funnel renewable energy into Cleveland’s Public Power infrastructure, enough to generate energy to power 7,000 homes.

Initiatives like these are exciting to see as they build on Cleveland’s strong science and technology competency and continues to diversify the area’s economy. A diversified economy attracts diverse talent from all over the world. The need for more talent can help to increase the area’s population and ultimately increases the need for housing, retail and infrastructure development. All of which are things needed for a thriving city. It’s nice to see ‘Growth on the Lake’.

I’m Ready! Are You Ready for Some Football?

It’s that time of year again. Tonight is the official kick-off of the NFL season with the Super Bowl champion Denver Broncos hosting the Carolina Panthers at the Mile High Stadium.

And after the excitement of the Cleveland Cavaliers winning the NBA Championship and the Cleveland Indians currently leading the American League, it’s only reasonable to hope that this will be the year of the Cleveland Browns. In the 2015 season, the Cleveland Browns finished tied for last place in the AFC, so being the Cleveland Brown’s year, here’s to hoping that they do better than last year.

NFL BlogSince 1999, the Cleveland Browns have played in the First Energy Stadium – a first-class, 67,000+ seat stadium paid for by both public and private dollars. In the United States, there are 226 stadiums with seating capacities ranging from 20,000 to 107,000. And of them, 31 are NFL stadiums – remember the New York Giants and Jets share the MetLife Stadium.

Funding, owning, maintaining and filling stadiums is a tough business and is a business that is reliant on having a marquee primary occupant. And when that occupant leaves, stadiums have little hope for survival. For example, the Detroit Silverdome was home to the Detroit Lions from 1975 until they moved to Ford Field in 2002. Four years after the Lions moved to downtown Detroit, the Silverdome closed and was demolished this past Spring. The majority of NFL stadiums are funded by taxpayers and when the primary tenant moves, the stadium eventually closes and the taxpayers are left holding the bag. Looks like this same scenario will happen in St. Louis. The Rams moved back to Los Angeles leaving the 70,000+ seat Edward Jones Dome empty. Taxpayers will be responsible for paying $12M per year until 2022 for on-going maintenance costs and to fulfill the original construction debt.

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The Oscars Diversity Problem – Who’s to Blame?

It’s Oscar week and that means Vanity Fair parties, Russell Simmons’ All Def Movie Awards and numerous corporate and agency sponsored luncheons and receptions – culminating with the 88th Academy Awards this Sunday.  movie realFor the last couple of weeks much of the talk surrounding the Oscars hasn’t been around which movie will win best movie, but instead about the lack of minority representation in the top four category nominations. The media has made sure we knew who was boycotting the telecast and giving us their thoughts on what Chris Rock, the host of this year’s Academy Awards, should say on the topic.

Throughout these discussions the Academy of Motion Picture Arts and Sciences has received a lot of flak. The Academy responded by changing their membership and voting policies. And many industry insiders have moved the discussion and blame from the Academy to the movie studios. Question. Are the movie studios to blame? If their goal is to make as much money as they can from each movie release by mitigating risk and taking what they consider safe bets – franchise films, sequels and remakes – are they to blame for a lack of diversity in Hollywood? Well, I am a commercial real estate appraiser so I can’t say with a fact that they are to blame. But, I do believe that real change in what the major studios produce likely won’t happen until the movie industry experiences a major downturn. As we saw with network television, low ratings led to the networks being more adventurous with their programming. And the result, was more diverse shows that better reflected the viewing audience.

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