Marry the Project, Date the Rate – Ep. 259

Welcome to the Accumulating Wealth podcast. I’m Judson Crawford. And I’m Hunter Satterfield. We are CPAs, wealth advisors, and partners at Cain Watters and Associates, a financial services firm here to help business owners navigate the decisions they face every day.  

Yep, and we just bumped into some of our friends at the Cain Watters coffee bar, so today, we thought it’d be the perfect opportunity to jump on the pod with our friends from Live Oak Bank and dive a little deeper into the current lending environment. That’s right. It’s a full house. Let’s go. 

Okay, Hunter, you ready? We’re ready. We have got four at the table today. Who we got? That’s right. Just in from Wilmington, North Carolina, standing 6’2″. I actually don’t know how tall you are. I wish. Okay, whatever. Burt Smith and Chandler Wrightenberry from Live Oak. And guys it’s great to see you. 

They actually came in, folks, from Wilmington, to hang out with our team today, and we’re like, “This’ll be perfect.” Interest rate environment’s going down, a lot of changes in the space, so we’re going to talk all things loan, construction, et cetera, et cetera. It’ll be fun. Our colleagues always want loans. That’s right. 

So, there you go. Welcome, guys. Thank you for having us. Great to be here. Oh, you already talked. So, there you go, too. I guess the one thing we do need to cover is that Chandler is a semi-professional football player, or was. Still. To this day. Yep. Who’s your football team, Chandler? What was your NLI package? 

So, Elon University out of Burlington, North Carolina. Oh man, I was actually going to make Judson name what state. I would’ve said Ohio. I always say Ohio for all- … to all other universities … colleges? Yeah. The Elon Phoenix. The mascot’s a phoenix? It’s a phoenix. That’s such a neat mascot. I thought that Dumbledore was on- It’s going to be the code factory fire. 

 It used to be the Fighting Christians, and then we had one of our buildings burned down, and we rose from the ashes. Oh, I love that. So that’s the phoenix. That’s good. But you all were really the Fighting Christians? We were the Fighting Christians before … and the mascot is unbelievable, so… 

I need to look that up and get a T-shirt. Right now, actually. Yeah. You need to do it right now. But between that and then the, oh, what, Delta State Fighting Okra. Two, those are my new, two new favorite mascots. That’s amazing. And then Burt’s a Kentucky fan. Rest in peace, sorry. Yeah, It’s okay. 

During college I went to three or four football games in four years, so that was my history with college football. It’s a basketball school. Most teams forward pass. But I don’t know how it works there. Yeah, we like the direct snap. Yeah, okay. Well, we’ll always start with some fun, so I think we should do fun questions first, which we’ll just start. 

We haven’t prompted them on these at all, so you want me to go first? Yeah. Okay, great. Guys, who’s your favorite Cain Watters planner? Hunter Satterfield. Judson Crawford. Oh, that is so lame. Unbelievable. Unbelievable. So lame. Unbelievable. They both lied, but- You’re both kicked off. There’s just no way. 

Next thing, I walked in this morning, to all three of you, I walked in this morning, and the Christmas tree was in the lobby of Cain Watters. Yes. Yep. And I think that is wrong. What do you guys think? Do you think that’s wrong? Is it post-Thanksgiving for you? It’s post-Thanksgiving. Yeah, the tree won’t come out till post-Thanksgiving. 

I actually have lights up at my house right now, and Eden said that I cannot turn them on until after Thanksgiving. And I appreciate it. Go Eden, go. I’m good. All right, next question: What does Live Oak Bank do? Who’s going to go on this one? I’ll take it.  

Live Oak Bank is the largest small business lender in the country by volume. We’re an FDIC-insured bank, but instead of having branches and tellers, we try to find industries and small business where the traditional lending options don’t always meet the needs of the customer, try to build a team and an expertise around that niche. That’s good. He’s not even reading that off anything, folks. 

Chandler’s heard me say that … how many times- I don’t know, it’s probably about a thousand … over the last 10, 12 years? Yeah. 12 years roughly. Okay, and Chandler we’ve been with you guys forever and again, a lot of real – a ton of our clients that are listening now have done stuff with you guys, and we preach y’all’s service and just how amazing Live Oak is across the spectrum. 

And it is, again, largely focused in the SBA space, but a lot of what is happening in the SBA space, especially when it comes to lending and costs and things like that, it’s applicable across everything, right? Across the entire industry. So, I think that’s a great place for, I think for us to start. 

And again, maybe Live Oak, so you guys are in healthcare, but y’all have other verticals, right, like vet and CNG and all those things? That’s exactly right. Chicken farming, insurance agencies, pharmacy. Fighting Christians. That’s right. Okay. That’s right. Up to 40. We’re into 40 now. 40? 40 different industries. 

That is awesome. Headquartered in Wilmington. It’s a sweet location. So, Judson, where do you want to start? Yeah, for the listeners just so they know, we’ve been throwing out this term SBA a couple different times. What is it, and why does it even end lending? It’s a good question. 

So, if you’re a business owner, practice owner, any type of business owner, you’re going to need money at some point. Maybe you don’t, but 99% of business owners are going to need a loan from a bank at some point to start up, acquire, expand. Banks have very particular restrictions on what they want to do and what they can and can’t do. 

The federal government, a few decades ago, put together what’s called the SBA. It’s actually a federal government agency. It’s supposed to help small business owners get capital. So, they’ve launched a couple of programs, and they do exactly what I just said. They help small business owners or help banks get comfortable giving small business owners loans when they typically would not be comfortable giving it to them. 

So specifically, can you give some of our listeners specifics? So, if we’ve got some associates out there that are looking to buy their own practice or they want to expand to a new location, why is it that somebody would specifically go and talk to you guys about an SBA loan instead of just going to their local bank and getting a traditional loan? 

Totally. And let’s take a step back. So if you’re a practice owner or an aspiring practice owner, if you want to do a startup or you want to acquire a practice and it is a very clean deal, you’ve got great history earning income, and you want to do a small project or something that is very conservative, a bank is probably going to give you a loan with incredible terms. 

But we work in the dental space. People have a lot of student debt. People want to borrow more money. Sometimes they want to own the real estate, and there are ways to do that with SBA programs that you cannot get a loan from a bank conventionally to do. And so that’s kind of where we fit in, right? 

Not every opportunity is the same, and so it’s very important to understand the options that you have available. And then furthermore, banks use the SBA programs differently. So there’s a notion that an SBA loan is an SBA loan from every bank, and banks will use the programs differently based on opportunities that they see in the market where they feel like they can add a difference, and that’s kind of what we do at Live Oak is help doctors get into real estate ownership primarily with SBA loans in situations where, other banks are just not comfortable lending them the money.  

Yeah, and I think one of the key differentiators between that and maybe just more of a conventional financing project where you might have to put some money into the project or they may not be able to flex if costs rise, because that’s a huge thing that we’ve dealt with in the past and will continue to deal with. 

I think the difference, the key difference here is obviously there is more risk to you as the bank, and therefore, yeah, your interest rate’s a little bit higher. You have SBA closing costs with the government that are the same for everybody, right? 

So, the cost of these loans is more, but Judson, over the years we’ve talked about, like, when a client says, “Man, but if the SBA program is more expensive, both on an interest and a closing cost standpoint, why would I do that?” And the answer is you may not be able to get that project done otherwise. 

And so it really is an opportunity cost of saying, “Hey, we’re going to go do this and we’re going to do this loan under the SBA program, Live Oak or otherwise, primarily so that we can build that building and drive the production that allows us to get to our long-term goals.”  

Well, and I think that opportunity cost is a really good thing that we can talk about right now is like I’ve seen clients, and I know you guys have too over the last few years, where it’s like rates went up and they’re like, “Oh I don’t want to do this project now because I want rates to come down.” 

Then costs went up and they’re kind of in a situation where it’s like, “Oh crap, I probably shouldn’t have waited for the cost to go up.” Where are you guys seeing both of those things right now? Talk a little bit about that, and then, from y’all’s standpoint, what are your thoughts on the waiting game? 

We talked a little bit about this. I’ve been in the business for 12 years. Chandler’s been in the business almost that long. It has probably never been less expensive to do a project than right now. Costs have continued to increase steadily over time, no matter what market you’re in. Now, there may be some differences, like if you’re in the Midwest, you might be able to build a building for less than in California or in the Northeast. 

But we have just seen costs steadily increase, and so timing the market is really hard. It’s kind of like the stock market. If you have an opportunity to build a project, and you need the expansion or you need the capital, you should do it now. You should not wait. We have never really seen a use case for waiting from a market cost standpoint. 

Well, and so much of the cost because we’ve referenced numbers in the past that y’all have actually provided on what current $450 a foot or $500 a foot or, shoot, $550 to $600 now we’re seeing in this. But so much of that cost, like we talked about this, Judson when we talked about back in 2021 whether inflation was transitory or not, and we said explicitly then, we said, “Once these costs stay, they are never going down.” 

And guys, that’s what we’re seeing, right? I mean, the labor’s not going down. The materials are not going down. The distribution to get the materials are not going down. And even if we see rate cuts come down there’s no way the costs are going to come down. Is that what you guys are seeing? 

Yeah, I would say so. The costs have, I would say, stabilized. They’re not continuing to increase. And then you just brought up a good point. If interest rates start to come down, does that increase demand? And when there’s increased demand, it’s a supply thing, so does that make prices increase, right? I don’t know. 

We have to see what plays out in the next year or two. Absent us being able to create massive growth in the supply, you’re right. 

I mean, and we will see… I think the takeaway here, listeners, is that costs aren’t going down. And so, I think you’ve have to work with your planner or whoever else it is in your life that, that works with you on this to understand, okay, when can I get the project financed? When am I ready to build? And then you have to get started if it’s something that can provide you an opportunity to produce well in excess of where you were previously.  

One of my most well-known projects that I did with you guys was a client of mine in Albuquerque who was in a smaller condo space and you guys helped facilitate him getting in, even in the middle of COVID, helped facilitate him getting into his building. 

He tripled his size and therefore damn near tripled the size of his practice. And without that, it doesn’t even matter what the costs are, the loan costs, the cost of construction, none of it, because now he’s obviously 1:1, 2:1, 3:1. He’s on that track now because of it. And that goes back to, and I was thinking about this earlier when you were talking is like you don’t go build to build. 

But if you have a business case to build, then you do it, and you do it now, right? There are tax advantages, there are growth advantages and all of those things. Absolutely.  

So we referenced earlier, guys, the $400, $500, $600 a foot. And folks, listeners, if you haven’t heard us use those terms before, that’s essentially to get your shell and your build-out all done. It doesn’t include your equipment, and it doesn’t include your land, but it’s everything else, right? And Judson and I laugh at that because we were building buildings at $200 a foot when we started here. And we’re not wrong. I mean, we have projects, but you guys have more than us. Y’all are both nodding your head. Listeners, they’re nodding their heads.  

But $450, $500, that’s- if you’re watching on YouTube, you can see it. That’s right. Yeah. That’s where we’re at, right? The days of $250 bucks a square foot for ground up are over. And I’m seeing $350 to $400 minimum in less expensive markets. That would be the Southeast, that would be the Midwest in California, God help you, it’s six, $600 a square foot right now. 

What about Hawaii? I don’t know if we’ve ever done a ground-up project in Hawaii. Can they even build in Hawaii right now? That’s a good question. Yeah, it’s a good question. $900 a foot. There’s nowhere else to go. I mean, I’m not sure Hawaii would be the most expensive. Yeah. Alaska?  

Yeah, maybe. They’ve got a lot of materials up there they could probably use, but who knows? Challenge accepted. We’ll figure that out. I don’t know. I’ve seen pretty high cost up there. Okay, what about… So that’s cost.  

What about timelines? Are we seeing buildings stall? Because you guys help basically the second they’re ready to go. You provide all the construction financing basically until the loan is termed out. So, you were involved during that entire process. What’s construction timeline now versus what it maybe was right after COVID?  

Yeah, I don’t think the timeline has changed once the contractor starts building. If you were going ground-up construction, usually what we’re seeing is anywhere from 10 to 12 months once they start to break ground. 

If you’re buying a building and remodeling, that’s probably four to six months. Now, the question mark in what can change the timeline is how long it takes to get permits and working with that city and that municipality. Bert can attest, he’s got a lot of different projects that maybe have lasted years to get permitting. 

If you’re in Colorado, could take anywhere from three to six months. So, it’s totally different just depending on where you are geographically. And that’s something that we see a lot. A customer comes to us and they say, “Well, I just want to buy the land,” or “I just want to buy the building, and then I’ll figure the project out later.” 

Okay, you can try to do that, but you’re carrying the cost of that project, land, or building interest in perpetuity. So, you should really be trying to do as much construction due diligence as possible before you commit financially to a property, because that’s just sunk money, right? You don’t get that back. 

So the other thing that we see, too, is if you don’t do enough construction due diligence on the front end, you can be surprised by the cost, and then you’ve spent time and energy and money trying to put a project together, and then you realize, “Oh, shoot, I can’t afford it.” So, we really push people to do as much construction due diligence as possible before you close on the property. 

It’s just good planning. If there’s somebody listening out there that wants to – let’s say that they want to either build a building or find a building and reno it for their practice, what point in that process would be best for them to contact you? As early as possible? After XYZ?  

As early as possible. So, part of site selection is what can you qualify for financially? So, we need to see your financials to do that. And that’s another thing that we see sometimes is a local bank, a regional bank that doesn’t understand dental is going to look at your practice’s historical financials and say, “Okay, well, based on what you’ve done, this is what we can lend you.” 

When the whole reason that you’re trying to do a big project is what you could do in a bigger, better space. So, working with a lender that understands projections and can lean into what you would project to do is really important because you’re going to get very different feedback from that bank versus your bank that doesn’t understand dental. 

Do you know any lenders like that? Chandler? I think we do. Okay. Yeah. Got it. So, this, and this may be an anecdotal, I was just thinking as you were talking through that anecdotally, do you guys see right now where construction bids are set at amount and we’re 15% or 20% over or things coming in relatively close to the contracted price? 

I think personally for me, and I think Bert would attest to this, is we have so much knowledge and experience within our marketplaces that we know the GCs, we know the architects, we know the real estate agents. We’ve been working in these markets for so long that I can pretty much guess what it’s going to cost per square foot, and usually we have a pretty good relationships with these GCs. 

So, I’m not personally seeing a ton of instances where these contracts and these bids are coming back 15% or 20% more. But what we are doing on the front end is understanding that they will come back a little bit more expensive, and making sure that the client can afford that, right? Not putting them in a hole where it’s 20% or 30% more, and now it’s $600,000 or $700,000, and oh my goodness, what are we going to do? 

You can’t afford this cash flow-wise. And you guys are building that into a contingency in the loan, or you’re approving them up to an amount even if the contractor’s saying, “Hey, it’s going to come in at $1.5 million,” you’re saying, “We can approve this up to $2 million”? That’s correct. Okay.  

All right, so let’s shift a little bit, shift gears a little bit to just the SBA program. Are there any dramatic changes that came out of One Big Beautiful Bill or anything else regulatory that’s changed in the last year?  

There have been some changes. Judson and I were talking about it, but one of the big changes that happened in June was related to startups. So, one of our flagship products, one of the best fits for SBA in the practice space was using an SBA 7(a) loan, that’s one of the SBA loan types, to do a startup for real estate or ground-up construction. 

We used to be able to do that type of loan with little to no money down. There was no required amount of money down to qualify as a startup. That rule changed, so now we have to have 10% cash or equity in from the customer to do a real estate or ground-up startup with an SBA loan. Existing businesses expanding, we can still do 100% financing. That’s one of our flagship products. But for a startup, now you do have to bring some skin in the game.  

And so what are you guys doing on those? I mean, because you do deal with a lot of startups. Are you saying, “Hey, you have to come up with this,” or are there other ways, other avenues to generate that cash? 

So, for ground up, if you want to buy a piece of dirt and start your first practice, there really is no way around it. You have to bring money to the table. For doctors that want to buy real estate and it’s an existing building for a startup, we actually have a unique product. Some banks have unique products where we can partner with one of the conventional lenders that does TI equipment working capital loans, and that allows us to do a lower down payment real estate loan in conjunction or in partnership with another bank. 

We built that product specifically as a response to the rule change, because we really like putting doctors in real estate ownership if it makes sense for their first practice. Get into the building and own it as soon as possible.  

Yeah, for sure. That’s great. Okay, let’s do rates. Yeah, rates. So we’ve got two Fed cuts. We’ve done a couple recordings, which I know y’all have already listened to, on the rate cuts that are coming. We’ve got another one end of year, several more next year. What are the implications? And we’ve talked to our listeners how this doesn’t just automatically flush through the system, right? 

So, we can skip over some of that talk. What are the maybe near-term 18, 24-month implications if the Fed gets down to 3.1%, 3.25%, to both probably conventional rates in y’all’s eyes and then also SBA rates?  

Yeah. I mean, on the SBA rate side, we go off the index Wall Street Journal Prime. So that is tied directly to the Fed’s funds rate, and it actually reflects when the Fed comes out and lowers or increases rates. So currently that’s sitting at 7%. So, if Jerome comes out at the end of December and drops it 25 basis points, now we’re at 6.75%. So that’s a tailwind. Can’t necessarily speak to traditional lending and what those rates will do, because I think those might be tied a little bit more towards T-bills, right? 

The Treasury, which that’s kind of different than what we’re thinking about when the Fed funds come out and drop those rates. That’s a little bit more short-term. So, the long end of the tail of the interest rate curve, I don’t know where that goes. Yeah, so I think what you’re saying is it’s an immediate impact for all of your borrowers, which is awesome. 

So, I guess that leads to the next thing, which y’all probably already got from some borrowers, “Hey, should I wait to start this project because there are more Fed cuts coming?” And of course you’re going to say the answer is no, and it’s probably goes with all the other things that we said. But if you want to sort of comment on why they shouldn’t wait, please do so. 

Bert? Chandler, you get all the interest rate questions. I thought we agreed to that ahead of time. I just have this one quote in my head that I heard, like, three years ago when I was at a show. “You marry the project and date the rate.” Right? “Marry the project and date the rate.” So, interest rates are going to change over time. 

They’re going to go up, they’re going to go down. But if it is the right time for you to take that next step, you’re working with your financial partner, you’re working with your partner in life and your family, and if it is that right time, you have to go jump, because interest rates will come back down, right? 

Yeah, and I think, Judson, we’ve talked about this before, too, right? You start playing those games, and you actually end up harming yourself in other ways, whether it’s costs have risen, you miss tax deductions one year because if maybe if you don’t start till January, you don’t get it placed in service before the end of the year, and now you’ve missed that extra year of tax breaks. 

So, there’s so many things that oftentimes when we’re talking to clients, it’s don’t focus on the tax implications of it, the rate implications. Just focus on if the project is right, get it done and get it done quickly. When we’re looking at this with our clients we’re playing this game of saying, “Okay, if you do this project, we think your monthly payment’s going to be X. But you know what? We think you can do X plus more in your practice.”  

And waiting for a quarter of a point is not going to make that much difference in that monthly payment. Yes, you can look at it over a longer period of time and say, “Well, if I waited and it was this much lower,” but that delays how many months that you can do the X plus that in production, which is less money in your pocket, et cetera, et cetera. 

So, like I said, it’s kind of like we were talking about before. If you have a business reason to do this and you can expand your business and make more money, then no, don’t wait for a quarter-point rate drop. That would be silly.  

All right, boys. It was fun. What else? Did we miss anything? You guys got anything else you want to kick in? 

I think we covered it all, Chandler. I think we got it. Awesome. Well, thanks as always, boys. Good to see you. Judson, get us out of here.  

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