To raise $100 million in an initial public stock offering, Falcon Financial first had to calm investors' fears that dealerships are danger zones.
It meant creating a comfort zone for prospective backers who didn't know the dynamics of the dealership business, says Vernon Schwartz, CEO of Falcon, a Stamford, CT-based firm specializing in loans to dealers for acquiring, building and renovating dealerships.
“Most people perceive dealerships as risky businesses,” he says. “The reality is that very few dealers go out of business. A light goes on when you start explaining that part of it to investors.”
Launched in December, the IPO lets Falcon expand a product line that had been limited to a 15-year fixed rate loan. Falcon has added two. The trio better suits dealers' various needs and wants, says Schwartz.
New is a variable-rate franchise loan of an amount beyond 90% of a dealership's real estate value. It's to raise money to acquire a new dealership, buy out a partner or recapitalize an existing dealership, but at a rate that's not locked in.
Also new is an enhanced commercial mortgage loan of up to 90% of dealership real estate value at fixed or variable interest rates. “It's suited to a dealer who's looking to improve his facility or buy real estate, and doesn't need anything beyond 90% of the real estate,” says Schwartz.
“Until now, we had to say, ‘This is what we have, you have to fit into our box,’” he says. “Now we can really fit into dealers' boxes.”
Some dealers feared getting trapped in the 15-year fixed rate, a dreadfulness that Schwartz calls more perceived than real.
He says, “They were looking for more flexibility. They were saying, ‘Not only am I tied up for 15 years, I have to take a fixed rate. Can't you do a variable rate?’ Now we can.”
The fixed rate is predictable, going no higher or lower during the term of the loan. The variable rate can change monthly.
“To a degree, it depends on the dealer's sense of where rates are going as well as his or her propensity for risk,” says Schwartz.
Falcon requires dealers who opt for a variable rate to buy a cap of about 12%.
“Even if the dealer is willing to take the risk that rates will not go to 20%, we're not,” says Schwartz.
He and David Karp, both of mortgage backgrounds, founded Falcon in 1997, taking note of the dealership consolidation movement.
Recalls Schwartz, “We didn't know much about the dealership business. But we saw significant changes taking place in the industry. You had the emergence of the publicly owned dealership groups promoting the idea that there were economies of scale to be garnered by amassing dealerships.
“But for the independent dealer interested in acquiring more dealerships, there was no where to go for more capital. Traditional lenders would lend on real estate, but nothing more. We saw a significant opening for a creative approach to provide financing not only on the real estate but on Blue Sky franchise value as well.
“Unfortunately, we had a limited product. That limited our attractiveness. Now we're hoping to get a real kick in the demand.”
Falcon has done about $120 million a year in loans with the 15-year fixed-rate loan. The firm has made 110 separate loans in excess of $640 million. Schwartz expects a “healthy increase” from the additional products.
Driving dealer demand for capital these days are the number of auto makers (“virtually all of them,” says Schwartz) urging their dealers to improve facilities. That ranges from creating separate showrooms (often requiring new construction) to adopting auto makers' blueprints for a common design (often requiring just renovations).
Schwartz says that, during Falcon's infancy, partner Ron Greenspan, a former San Francisco dealer, “showed us the ropes and validated our initial positive thoughts about the business.”
Schwartz says he developed an early appreciation of dealers' financial savvy.
He explains, “The biggest mistake you can make is underestimating their sophistication when it comes to financing. They may articulate it differently than a finance person. But when it comes to the essence, dealers are as sharp at financing as at running their businesses.
“That's what motivated us to offer new products, that these guys think through their long-term plans. They're sophisticated, have an intuitive sense of risk and know what they want.”
