The Screwdriver, the Saw, and the Hammer

I remember growing up that I was not allowed to touch my father’s tools. The reason being, I would probably lose them or destroy them. Imagine giving a small child a toolbox full of tools. While the child probably has an idea what each tool is used for, they probably don’t care too much about using the tool the right way. I recall it was just plain fun to use metal tools to thrash objects and alter their shape by any means necessary.

For some people, it seems old habits die hard. In banking, I see the wrong tool being used for the wrong job constantly; just because it is there to be used. The issue with most modern training programs is they give you a toolbox full of tools, but they fail to explain how and when to use those tools. Current ratios have little use in real estate, just like NOI cash flows miss a whole host of issues in C&I lending. What the heck am I talking about?

Let’s look at the world of commercial lending this way: we have a hammer as a tool that helps us in commercial real estate (CRE); we have a screwdriver that is a tool that helps us in commercial and industrial lending (C&I); and we have a saw as a tool that helps us in agricultural lending.

A hammer’s primary use will always be to pound nails, and do some occasional pounding of other items. But, you wouldn’t use a hammer to drive in a screw, and you certainly wouldn’t use a hammer to cut down a tree. And yet, I see people using hammers to accomplish these tasks. Why? I think the issue is our tools are not tangible. It is hard to envision an analysis technique as a tool, and then be trained as to when it makes sense to use this tool and when it makes sense to get a different tool.

Are you using the wrong tool for the job? Often, people try to put real estate loans into spreading software, like Suntell or WebEquity. Spreading software is a screwdriver, but remember for CRE, we need a hammer! Is there special real estate software that exists? Yes, there is! But it may not be worth the expense until you have very large CRE portfolios (say over $250 million).

And, in the same fashion, people will try to calculate leverage and liquidity ratios for real estate. Again, you are using a screwdriver when you actually need a hammer. You should rather be focusing on loan-to-value (LTV) and rental markets or leases when it comes to real estate.

I see these issues arise all the time, and I think I’ve seen almost every tool used incorrectly, when a different one was called for. Saws instead of hammers, hammers instead of saws, and a screwdriver used for everything but a screwdriver! At the end of the day, you need to make sure you have a good person teaching you how and when to use the tools in your toolbox, because a training program that simply gives you the tools is not enough!