Bud Matthews has been battling for months to avoid foreclosure on his small company's offices in Chatham County, a scenario that he says would put him out of business. He faces this predicament even though he's been diligently making the monthly payments on his loan.
Matthews rails that his lender, SunTrust Banks, hasn't been willing to renew his five-year commercial real estate loan, which ran out in June. In the absence of a new loan, he owes SunTrust a balloon payment of more than $200,000 - money he doesn't have.
"You just don't shoot the people that have been good to you," Matthews said, referring to his years of doing business with the Atlanta-based bank. "It just isn't right to take someone's business who has made all the payments and has played by all the rules."
Matthews, 59, is one of many small-business owners across the state that has seen one of his financial underpinnings disappear in the wake of the recession. Real estate has long been used as collateral to finance small businesses; in addition, businessmen like Matthews rely on commercial real estate loans to buy the properties that house their businesses.
But real estate has become an asset that banks find troublesome.
While the economic downturn was triggered by loose lending practices in the residential mortgage market, trouble quickly spread to other real estate loans as all types of property values dropped. Now, under pressure from federal regulators to reduce their exposure to real estate, banks are calling in commercial real estate loans that in years past they would have happily renewed.
"If you think about what has historically been the prime collateral asset for a small business, it has been real estate," said Scott Daugherty, the state's small business commissioner.
The banking industry's pullback from the real estate market couldn't come at a worse time for small businesses, many of which were hurt big-time by the recession.
"It does an enormous amount of collateral damage," said Grant Yarber, former CEO of Raleigh-based Capital Bank. "It destroys jobs, and it puts small businesses out of business. A lot of banks don't really care about that."
Matthews employs 10 people at the two companies he operates: Bud Matthews Service, a heating and air conditioning and appliance repair company, and Bud Matthews Home Repair and Building, a plumbing and carpentry business.
When Matthews and his late wife, Suzi, lost a bundle in the stock market after the dot-com bubble burst, they decided investing in real estate was the best way to create a retirement nest egg. Today he owns more than 15 commercial and investment properties - some of which he has been unsuccessfully trying to sell.
Both of Matthews' businesses have been struggling, forcing him to pare back his staff from a high of 18 employees before the recession. Matthews is real-estate rich and cash-poor, acknowledging that he is barely scraping by in making his monthly loan payments.
"We have all the equity in the world, but equity doesn't get you loans in today's market," he said. "It's all about cash."
When Matthews purchased the 4,000-square-foot house that serves as his businesses' headquarters in 2001, and when he renewed his loan five years later, he operated under what were common assumptions about the real estate market and how bank financing works. But those assumptions no longer hold in today's world.
SunTrust spokesman Hugh Suhr said he's not at liberty to discuss relationships with individual customers. "Generally speaking," Suhr said, "we have been, and continue to be, committed to making loans to credit-worthy individuals and businesses, taking into account various factors on a case-by-case basis."
But Yarber, who was CEO of Capital Bank from 2004 to 2011 and parted ways with the bank in November, said banks across the Triangle are putting borrowers in the same untenable position in which Matthews finds himself.
"I have found that to be the case more than you can imagine," he said. "It's standard practice."
Still, Yarber said, it's "highly unreasonable" for a bank to refuse to renew a commercial real estate loan when someone has demonstrated their ability to make their monthly payments, because the bank well knows that the customer will have difficulty obtaining financing elsewhere without a pre-existing business relationship.
Matthews has been turned down by eight other banks because, he says, his cash flow doesn't meet their standards.
That doesn't surprise Tony Plath, a finance professor at UNC Charlotte.
"All the big banks have cut their exposure to commercial real estate," he said. "The little banks have done it too. But they have done it at the behest of the regulators."
Matthews and his attorney, Thomas Holt of Chapel Hill, concede SunTrust has the legal right to foreclose on the property, which is about five miles from downtown Chapel Hill.
Commercial real estate loans aren't like mortgages. The loan on Matthews' headquarters building was amortized over 20 years, but the loan itself was for five years. Looming at the end of those five years was a balloon payment.
In the good old days, borrowers could count on renewing such loans as long as they had proved themselves credit-worthy by being current on their monthly payments. The amount of monthly payments would be adjusted upward or downward depending on the prevailing interest rate.
In 2006, when Matthews' five-year loan was up for renewal, it was a no-fuss transaction to get the $240,000 note renewed. "Not even a question," Matthews said. "I walked in, signed the papers, walked out."
But when Matthews' loan came up for renewal in June, SunTrust demanded his balloon payment. The bank wanted to wash its hands of the property.
Matthews and Cynthia Cole, his bookkeeper, say they have pressed SunTrust about working something out. But the best offer they were able to extract from the bank was for an 18-month loan at 7.25 percent interest, which would boost his monthly payments by $263. Moreover, the bank wanted him to pay $2,700 for an appraisal and more than $500 in fees.
"It's not even close to acceptable to raise our payments when we're barely getting by now," Matthews said. "And then we'd have to do it all again in a year and a half."
So he hired an attorney, Holt, who asked SunTrust to agree not to initiate foreclosure proceedings for a specified period of time while Matthews seeks alternative financing. The agreement would be contingent on Matthews continuing to make his $1,987.19 monthly payments, something he has been doing all along.
Last week, SunTrust responded to that request, offering to in effect extend the loan through Aug. 31 if he pays an upfront "forbearance fee" of $1,000.
Matthews' initial reaction was negative: "I still don't consider this fair," he said. "They want to charge me $1,000 to continue to pay them for another few months."
Without the benefit of an appraisal, it's difficult to gauge the market value of Matthews' property. But since he took out his last loan, Matthews said he has invested $175,000 in renovations to convert it from a house that he rented out into offices.
Chatham County lists its tax value as $377,099, well north of the $206,638.33 Matthews owed as of Jan. 31.
Given that differential, Holt contends that SunTrust would not be risking anything by renewing Matthews' loan, because "the value of the collateral far exceeds the value of the loan."
SunTrust ordered an appraisal of Matthews' property after he pressed the bank to renew his loan but hasn't shared the results with him, nor would it share the results with The News & Observer. However, a SunTrust vice president wrote in an email to Cole on the day the appraisal was being completed: "Although we have not seen and reviewed it, the value will apparently (as expected) be more than enough to support the loan request."