The spigot remains open

Interest rates may be inching up - in measured steps but these are still good times for commercial borrowers, says Jack Prescott, president of the northern Nevada market for U.S.

Bank.

Part of that is thanks to the banks themselves.

As Alan Greenspan, chairman of the Federal Reserve Board,works the economy raising the Federal Reserve rate another quarter percent his measured movements up in the stratospheres of global economics drift down to earth in Reno's construction-driven market.

But his effect so far, says Stan Wilmoth, president and chief executive officer of Heritage Bank of Nevada, has been on shortterm rates, not on the long-term rates that feed the large commercial developers building shopping centers, industrial parks and office complexes around the Truckee Meadows.

Those long-term rates, based on 10-year treasury securities, adds Tim Ruffin, senior vice president of Colliers International, are still putting development loans at 4 percent to 4.5 percent on $5 million-plus projects.

That's good for the big developers.

It's the smaller commercial projects whose loans are tied to prime rates that are being watched to see how they respond to Greenspan's measured upward adjustments to interest rates.

The interest increase may be one factor expected to motivate small commercial borrowers to come forward at this time, says Prescott.

But banks themselves are providing their own often more insistent nudge to the commercial end of their market.

But first, the rates.

Says Prescott: Rates are still at historical lows.

Prime rates, now at 6 percent, are up from a low of 4 percent in June, 2003.

And 6 percent prime rates are rare, showing up in 1992, then again after Sept.

11, 2001.

Says Jim DeVolld, president and chief credit officer of First Independent Bank of Nevada: "At 6 percent prime rate, everyone wins." The savers (consumers and retirees) get 3 percent return on their money; at the same time, borrowers can usually afford to pay bank rates of 6 percent interest.

Commercial borrowers begin to grumble about the rates at about 8 percent, says Prescott.

And at the 9 percent mark, though they don't fold up their tents entirely, they begin to hold off on making large equipment purchases and real estate investments.

So far, northern Nevada commercial borrowers are responding to the rising interest rates in a couple of ways.

Some, says DeVolld,"are trying to get in under the wire before rates go up further." In fact, he says, First Independent has seen more velocity in commercial loan requests since it became evident that rate increases are imminent.

"It's like a snake that swallowed a gopher," is DeVolld's description "You can see it moving along in a lump."

Another reaction, adds Prescott, has been a leap out of variable loans into fixed rates.

"It's a great time to lock in rates," he says.

Some of his commercial clients are swapping out half of a variable commercial loan, leaving half at variable rates, fixing the other half.

"We're selling the heck out of that," he says.

Not all bankers are seeing an effect.

Heritage Bank of Nevada reports an uninterrupted flow in its bank business, says Wilmoth.

Other factors may be affecting the market, he adds, factors such as rising oil prices.

But not prime interest rates.Not so far.

Mark Phillips, executive vice president and chief credit officer of Business Bank of Nevada, agrees.

Though there have been a series of slight raises to the Fed rates eight in the last year they haven't had much effect on loans at Business Bank.

Projects that penciled out when prime was 5.75 percent, usually still work when it's 6 percent.

Doug Roberts, a Reno-based partner with Panattoni Development Co., describes the effect of the rate changes as "immaterial" in his end of the business - developing commercial properties.

It's immaterial because of land value appreciation, he adds.

Those same rising land costs that make penciling out a commercial project a challenge, also offer almost-guaranteed equity.And that is, so far, outstripping the effect of rising interest rates for end-users and commercial buyers of his developments.

But then, the banks themselves are affecting the market, says Prescott."The banking market is competitive right now." And why? The proliferation of banks in the market contributes to the competitive market.

Not just Reno, but nationally.

But also, adds Prescott,"There's a push from the top to grow commercial loans."That makes this a good environment for borrowers, as banks are narrowing profit margins to grow the market.

"It's still a bit of playing catch-up from a post 9/11 mini-recession," he says.

U.S.

Bank is putting greater efforts on rebuilding its commercial portfolio, pushing for higher percentages of growth in that segment.

Adds DeVolld,"Job growth drives our economy in northern Nevada."And,with the Economic Development Authority of Western Nevada working to bring in new businesses, the region is in a good position for continued growth.