By John E. McNellis, at real estate developer McNellis Partners
Silicon Valley Bank’s overnight collapse cold-plunged us into reality, a grim reminder that nothing is more constant than fear and greed, and it has us all scurrying to protect ourselves.
We hold an SVB letter of credit as rent security from a start-up tech tenant, and we have an operating line of credit with the bank. Whether we can draw a dime on either today is a coin toss.
Not that we’re ever wholly innocent, but this one isn’t on us—we were shanghaied into SVB.
Decades ago, we were happily ensconced with Borel Private Bank & Trust, a small Bay Area bank that understood real estate, was comfortable with California’s astronomic valuations and renowned for swift decisions. Too good to last. Boston Private Bank bought Borel in 2001 and lending decisions began wobbling, coming from the Back Bay rather than the Bay Area. SVB bought Boston in 2021.
In two chess moves, we went from cozy lenders to a tech bank that, as far as we could tell, had little interest in mundane shopping centers.
In 2011, I published an essay on the need for multiple banking relationships that hits the SVB coffin nail on the head.
It subsequently became chapter 18 of my primer, Making it in Real Estate. Here it is:
A picture of a developer and banker shaking hands could illustrate Wikipedia’s explanation of “symbiotic relationship.” Developers need to borrow and bankers need to lend, despite their occasional issues with regulators. We could almost end this chapter right there, but a few nuances in this often-happy relationship are worth touching on.
Unless the announcement of your birth appeared in the New York Times, you have to get started somewhere and, for successful deals at least, a banker’s money is always the cheapest in town—far cheaper, no matter the interest rate, than giving away half the deal. Yes, rookie developers must part with nearly everything regardless. But with a bit of luck, they may over time be able to decide for themselves how much to rely on banks versus equity partners.
Veteran developers usually argue in favor of partners, noting that you have to personally guarantee bank debt whereas you promise your equity partners nada (at least in the fine print).
https://wolfstreet.com/2023/03/26/my-company-ended-up-with-some-exposure-to-silicon-valley-bank-i-warned-about-monogamys-downside-years-ago/