Using a Guidance Line

Early in my commercial lending career, I had a client approach me about buying a series of houses that he would fix and sell or elect to fix and hold as rental properties.  He had a couple of houses in mind immediately, and could possibly be interested in buying up to 25.  He also needed a way to close rather quickly on the properties.

My first reaction was fear.  I knew the process we had to go through to get a loan approved.  The write up and presentation alone would take several days if not a week.  Much of the information would be duplicated and would require repetitive analysis.  I hate unnecessary repetition even though the industry I am in repetitive busywork goes with the job as much as jelly goes with biscuits. 

My mentor in the business provided me with a brilliant idea, use a guidance line.  We would underwrite the entire relationship up to the maximum that was comfortable by the lender and the borrower.  An agreement would be signed that covers the whole but individual loans would be booked for each property that was closed.  This allowed for the credit write up and approval to be completed one time, then loans could be closed as long as they fit the “guidance” of the guidance line agreement.

We specified in the guidance agreement what our lien position would be on each property, how much we would advance, how much the borrower would put in, at what level an independent evaluation would be required, the interest rate, amortization and repayment.  Other overall terms like the borrower, guarantors, and the length of the guidance line was specified. 

In this case we set out the guidance line for a year, so we could do adequate review.  Individual house loans could be closed under the line with an amortization of up to 15 years and term of 3.  The maximum we would advance on any one house would be 75% of his price and we would require a drive-by appraisal for any house over $150,000.  The smaller ones we would use the county assessment or a broker’s price opinion.  We also allowed him to have no more than 5 rental properties in the line at one time. 

The structure allowed us to quickly serve the customer needs once the overall structure for the individual credits to be approved.  The overall guidance line was not booked, only the individual credits under the line.  This allowed the overall credit to be approved at one time.  This saved a lot of time and hassle for all parties involved.

Over the years, I have seen guidance lines used for major development projects like construction of condominiums to purchases of pieces of equipment to acquisition of vehicles for a company’s fleet needs.  The structure offers flexibility to the borrower and certainty knowing how each loan will be reviewed and closed.  The loan committee did not have to see the same credit come before them with a hurried attempt to rush the deal through.  I, as the lender, could avoid some stress and duplication of effort and just manage each deal under the overall agreement.

If any deal fell outside of the outline of the agreement, it would require special approval.  The line was also able to be closed if we saw a deterioration of the financial position of the borrower.  The lender remained in control. 

This lending structure may be of benefit to some of your clients, especially those who seem to be buying equipment.  We often would approve guidance lines at the annual loan review time if we knew a client had upcoming needs for the next year.  This seemed to cover most of the needs of the client, unless some event came up that required us to investigate further into the borrower.