Lenders dedicated to the veterinary community say construction loan requests are up in the first quarter of 2012—in some cases double that from the first quarter of 2011. This increase is in part attributed to veterinarians’ need for additional space and lack of existing practices for sale.
Not only are more veterinarians asking about loans, but more banks are willing to lend. While criteria for loan approval differ among lenders, experienced veterinarians able to prove a potential for profit are given consideration.
“The down economy has forever altered the criteria by which veterinarians are approved,” says Annemarie Murphy, senior loan officer for Live Oak Bank of Wilmington, N.C. “A big difference is that lenders previously willing to give practitioners who filed bankruptcy a second chance, now are not. But strength of the individual to pay bills that would be acquired with a new practice on the amount of revenue currently generated is a good start.”
Murphy says some who filed bankruptcy in the past but were given another loan again filed bankruptcy when practice revenue dropped. This is a risk banks are no longer willing to take.
Lenders say interest rates for construction loans at the end of March are between 5 and 7 percent, which is low. While some lenders’ interest rates are based on risk, others give a consistent rate to veterinarians who meet their lending criteria.
“We don’t regionally price rates,” says William Murray, senior vice president and national sales manager—veterinary at Bank of America Practice Solutions. “If a veterinarian is approved for a loan, she gets the best rate we can offer at that point. We allow 100 percent first-time financing for construction loans, which are typically for 10 to 15 years. Real estate loans are typically financed for 25 years with 15 percent down.
“Separating the loans allows vets to pay down the construction loan faster,” Murray continues. “We are offering low rates now and we don’t expect rates to make a major jump in the next 12 to 18 months.”
While some banks’ policies will welcome cash down on a loan, others prefer that veterinarians with liquid assets hold onto the money as they start up their new facility. The decision to keep or contribute cash should be on every veterinarian’s list of things to discuss with the lender.
Good Lending Risk
“When a veterinarian wants a construction loan, we look at his historical ability to repay, existing personal and practice debt, if bills are paid on time, how many years he’s been in practice and their general business sense,” Murphy says.
Murray says a clean license, basic business plan, and one to two years’ worth of tax returns are the basic requirement for loan approval.
“After wanting to know what they need to organize for loan approval, vets typically want to know how much time the process will take,” Murray says.
A veterinary lender can typically verify credit approval in three to five business days, but the entire process can take two months or longer. The time needed to close a loan varies, sometimes vastly depending on the stage in which the potential lender became involved in the process.
“A common mistake made by veterinarians is they start making plans with architects before they contact a lender,” Murphy says. “When vets come to us, they may have already paid thousands of dollars for blueprint designs that cannot be financed. Getting the lender involved first lets a vet know what he/she can afford. Also, lenders can provide references for architects or construction companies experienced in veterinary practice.”
Byron Farquer, DVM, AVA, advisory board member at Veterinaryloans.com in Cheyenne, Wyo., and CEO and senior appraiser at Simmons and Associates Pacific Inc., says a common error vets make is selecting a plot of land to build on for the wrong reasons.
“When building a new practice, it’s all about location, location, location,” Dr. Farquer says. “Too often vets want to build in areas because they are close to their homes or because the land is inexpensive.
“Finding an area that isn’t already oversaturated with practices and geographically or demographically holds evidence a practice could be successful is the best reason to choose an area to build,” he continues. “Especially in a down economy, location is important. It’s so important that I would recommend choosing a location that is likely going to help generate more revenue than one that allows a vet to use loan money to build a bigger practice.”
A common misconception among veterinarians is that the current lower rates mean buy now and a bigger project can be financed, Farquer says.
“It’s not necessarily healthy to build a 4,000-sq.-ft. building for a one-veterinarian practice,” Farquer says. “Veterinarians say they can grow into the practice, but it is far more intelligent to build to suit current needs, but build on property that will allow for future expansion if and when it is necessary.”
Farquer says many practices are reporting 1-2 percent revenue increases from 2011, but this is after loss of revenue and the absence of previously experienced 10 percent annual growth.
“When veterinarians feel optimistic, they want to borrow money. When they start regaining revenue, they’re hopeful and if they’ve lost money, they cut off all spending they can,” Farquer says.
An emerging trend is that veterinarians are starting to buy sooner, according to Murray
“In the past, we’d see loan requests from associates in practice for 10 years or more,” Murray says. “Now, with students graduating with $150,000 in student loan debt, higher consumer debt than in the past—all with lower associate pay than previously enjoyed—vets want to open their own practices in six years or less.”
Once a veterinarian is approved for a construction loan, there is a long road ahead involving choices from whom to hire to what material to use. Embarking on new construction promises one thing—stress.
“A business construction loan is the biggest type of loan a veterinarian will undertake in her lifetime, which means a lot of stress,” Murphy says. “Lenders familiar with the profession do what they can for clients in the process to let them do their jobs as veterinarians while protecting their investment and their clients.’”