Sacramento Business Journal Archives

October 5, 2023

3 Prudent Practices for Nonprofits in Today’s Uncertain World

By Rebecca Fabisch Miller, Executive Vice President and Commercial Banking Director, River City Bank

Anyone who has worked with a nonprofit knows they can be particularly vulnerable to economic conditions and unforeseeable events. Today’s environment presents both of these challenges.

California nonprofit boards and their teams are facing not only an increased demand for services in the face of stubborn inflation, but they must also carefully manage their cash like never before.

This is precisely where your banker can be a vital and trusted adviser. Indeed, many organizations are flush with cash these days, and with increasingly attractive interest rates, that money must be put to work by their boards. But not all nonprofit boards and their executive teams have the time and expertise to research the most lucrative cash strategies, best practices in fraud protection, or ways to maximize their banking relationships.

As a banker and a nonprofit board member, I find these issues hit close to home. In addition to providing vital resources to our community, the nonprofit sector is the fourth-largest employer in California, paying $74 billion in annual wages, according to the Impact Foundry. Such prudent financial management is also important to our local economy.

Here are three areas that demand attention from nonprofit boards and executive teams.

1. Cash and investment strategy

It’s always surprising to me just how few nonprofit organizations have written financial management policies. This is troubling because board members have a fiduciary responsibility to ensure that the organization’s funds are both maximized and handled in a safe and secure manner. That’s why it’s so important to get an investment policy in place if you don’t have one, or if it is not included in your bylaws.

These days and in this inflationary cycle, cash is king. Designing an investment plan for your money is vital to developing a strategy for putting your funds to the best use. But safety must come first. We all know that individual deposit accounts are insured up to $250,000 in banks that are members of the Federal Deposit Insurance Corp. But by talking with the right banking partner, nonprofits can safeguard considerably more than that. For example, at River City Bank, one of our special programs allows you to safely invest as much as $150 million in our bank with full FDIC insurance.

Money market accounts and certificates of deposit are now delivering interest rates that can generate sizeable interest income for an organization. Nonprofits should take the time to forecast how much of their reserves can be invested, for how long, and in what products to maximize returns.

To assist with this, we’re proud to provide the products and services that these clients need and want. As Kenn Altine, CEO of the Sacramento SPCA, told me: “River City Bank found a way to help us earn more money on the money we have, which our former, national bank never offered. Now, even money in our checking account is earning a rate that helps us maximize our dollars. We don't want to take risks with that money, but we also want to maximize our ability to increase that money.”

2. Fraud Protection

Every organization, whether it’s a foundation or a for-profit organization, is at risk of fraud. In fact, the median loss due to fraud at a charitable group in 2022 was $78,000, according to Occupational Fraud 2022: A Report to the Nations. No one wants that on their watch. Make sure your organization takes advantage of fraud protection tools such as check and ACH positive pay, uses dual control when initiating payments, and has strong audit standards, including a bifurcated review of statements.

Cybersecurity training is also essential. It’s important that all your employees and board members are kept up to date with knowledge about how to spot common cyber scams. Nonprofits are often targeted by cybercriminals who want your data, or money, or both. Hackers are now looking, not just for personal or financial data, but to lock down your entire computer system and hold it for ransom. And these criminals are clever. In fact, as a nonprofit treasurer, I received a phishing email earlier this year that appeared to come from the group’s chairman. I didn’t click on any links and phoned the so-called sender to verify my hunch. It was, indeed, fraud. Your board and staff need a similar sensitivity.

3. Your banking relationship

As a 30-year banker, I can tell you that we are often an underused asset at nonprofits. Not all bankers are community-focused, but many are – or certainly should be. By bringing their experience and expertise, bankers can be valuable members of committees and boards, while encouraging their colleagues to volunteer.

At River City Bank, we strive hard to make this a reality throughout our communities. It is why we are so proud to have donated almost $10 million in local grants in association with the Kelly Foundation, created by the family of the bank’s founder. And through these efforts, we believe we are succeeding in helping improve the lives of our neighbors and our employees.

“From a relationship management perspective, River City Bank truly cares about their clients and the people that they work with,” said Leah Miller, president and CEO, Habitat for Humanity of Greater Sacramento. “I see that from not just a client perspective, but also in the ways that they invest their time and their energy as volunteers and supporting our various efforts.”

To learn more about our commitment to nonprofit organizations in our communities, or to inquire how we might provide services that support your mission, please visit us here or contact one of our relationship managers at (916) 567-2899.

With assets of over $4.3 billion, River City Bank is the largest independent and locally owned and managed bank in the Sacramento region. With a 50-year track record of success, eight branches, an office in San Francisco, and a presence in Southern California, the bank is rated as one of the strongest in the country.

MEMBER FDIC

Rebecca Fabisch Miller has spent her 30-year commercial banking career in Sacramento, working as a relationship manager and regional director at several major banks. She earned her MBA from the University of California, Davis and has an undergraduate degree in international business and marketing from California State University, Sacramento. She is the treasurer for the California Forest Foundation and has been involved with many local charities.

December 2, 2022

Supply-and-Demand Imbalance Creates Industrial Real Estate Frenzy

By Dan Franklin, Director of Commercial Real Estate, River City Bank

Often operating in the background, the industrial real estate sector is in the midst of monumental shifts.

The pandemic radically changed the way consumers receive goods and services. Increased online ordering and an explosion in data streaming have resulted in increased demand for warehouse space fulfilling retail orders direct to consumers and data storage centers to support streaming services.

At the same time, warehousing and production operations, which for many years functioned based on “just-in-time” delivery models, have shifted toward much larger supply inventories to function in the unpredictable supply chain environment revealed by the pandemic. And logistics providers now need more distribution centers to move goods around. All of this has contributed to a tight industrial real estate market and record-setting growth in rental rates.

Just ask Chuckie Lyons, owner of El Segundo-based real estate development and management company Lyons and Lyons Properties, which manages approximately 70 industrial properties spanning more than 800,000 square feet, all in the Los Angeles region. Although Lyons has been in business for decades, he’s still surprised by the strength of the industrial real estate sector today, particularly in his region, where the aforementioned trends are the most pronounced.

“I’ve never seen rental growth like this,” he told me recently. “I see it as population and internet-driven retail demand, coupled with a limited supply of industrial-zoned land due to decades of cities downzoning their industrial-zoned land to retail and residential.”

Just how hot is this industrial real estate market? Consider that vacancy rates are the lowest in the nation at close to zero, and rents and sale prices have seen double-digit increases over the past several years. Research shows a 19.1% increase in price per square foot year-over-year in Los Angeles County alone, according to a report from CoStar Group.

Properties close to the major West Coast ports like Oakland, Los Angeles, and Long Beach have been primary beneficiaries and have seen the biggest gains. But there are spillover effects for industrial properties outside these core markets, too.

Unprecedented Tight Supply

Lyons established his firm in 1979, right after the 1976 passage of California Proposition 13. He remembers the property tax rate in the city of Los Angeles being 2.7% in the mid-1970s. Prop. 13 cut that rate to 1% – a huge cut to the government property tax base – plus it drastically limited future increases in California property taxes. That led to cities forming redevelopment agencies to incentivize developers to build more retail and residential to increase those cities’ retail sales tax to replace the lost property tax revenue. Since 1976, Lyons estimates there is 25% less industrial-zoned land left in the greater LA/Orange County/Inland Empire area cities, and yet the population there has more than doubled.

This situation isn’t likely to improve anytime soon. In general, new development takes a year or two before it’s ready for occupancy, and given the demand dynamics, any new construction is quickly absorbed. Desirable areas like Southern California lack land that could be developed for industrial use, given zoning laws. And because of the specific physical requirements that industrial tenants have, like necessary space for loading and unloading, it’s hard to retrofit older buildings to meet those demands.

Developers are working hard to increase supply where they can, but most of those new development sites are in the outlying areas such as the eastern Inland Empire. Very few are in the more populated and port-adjacent coastal California areas where there is the most demand.

Insatiable Demand for Space

Demand for industrial real estate started to outpace the available supply well before the pandemic. Call it the “Amazon effect.” The shift toward e-commerce has meant that companies need more warehouse space to accommodate more goods being shipped. COVID-19 accelerated that trend beyond expectations. In the first quarter of 2021, e-commerce sales jumped 46.7% over the year prior and have continued to grow from these elevated levels.

From an industrial real estate standpoint, that means the economy needs more industrial spaces to support this additional online activity, everything from warehouses to distribution centers to data storage, and even flex spaces that can accommodate a range of activities. At the moment, there just isn’t enough supply to meet this surge in demand.

An Overheated Rental Market

Naturally, the tight supply of industrial real estate coupled with huge demand means that rents are rising rapidly, creating an unusual rental market.

“There are last-mile area industrial properties in LA with lease contracts now expiring that were written five years ago. Those leases typically called for fixed rent increases of 3% a year. The current market lease rate in most of those buildings is close to double over the last month’s contract rent of those five-year deals,” Lyons said.

Tenants have responded in a number of ways. For example, some tenants are trying to make commitments to lease space earlier in the process, or they might be leasing more space than they need today as a cushion against future supply constraints. “I’ve also seen current tenants attempting to lock in leases as long as possible well in advance of the expiration of their current leases,” Lyons mentioned.

Landlords have responded with strategies of their own. For example, some are moving away from the industry practice of pre-leasing space that is coming available. Instead, they might try to wait until a building is almost ready for occupancy before setting rental rates in case market rates are higher at the time of delivery.

Lyons also uses different incentives to get tenants to renew leases early. “We sometimes do that to increase our borrowing capacity so that we generate capital to do new deals,” he explained.

But not all landlords are in a position to pass on inflated asset prices to tenants. When purchasing an occupied industrial building, current tenants are already locked into existing leases, typically three to five years, and they may not have the same relationship with tenants to get them to renew early. In those instances, property owners might have to wait until those leases roll over to institute rental rate increases. Will these tenants be willing to pay such elevated rents as their leases roll over, or will they consider moving to smaller markets where they can rent for less?

Near-Perfect Conditions for Appreciation

Rapid rental growth fueled by lack of new supply and incredible demand – coupled with tremendous liquidity remaining in the markets following the enormous federal stimulus during the pandemic – has caused market cap rates in this region to fall 23% over the past year to just 4.15% based on current market rent, according to reports from CoStar Group. And what makes this trend even more impressive is that it occurred during a time when the 10-year Treasury yield essentially doubled from ~1.5% to ~3%. This would normally cause cap rates to rise to allow CRE investors to maintain the same equity risk return premium. The fact that it went the opposite direction suggests industrial real estate investors see minimal downside and a lot of upside potential in industrial rents.

“Everybody is seeing how quickly industrial rents are going up, and there is no vacant industrial land, so they’re betting on that and buying up existing buildings,” Lyons told me.

Other Industrial Markets Also Performing Well

Photo of Lyons & Lyons Properties signage

For developers like Lyons who’ve been in the business for many years, the past few years have been very good. The investments they made several decades ago are paying off with higher rents as tenants have fewer choices. Lyons is close to 100% leased for his properties. But it’s a different story for those looking to add to their portfolios. Finding properties that aren’t environmentally challenged or overvalued has become a Herculean task.

As prices continue to soar in preeminent areas of Southern California, smaller markets are starting to see an uptick in demand. The Inland Empire, near Los Angeles County, has been a primary beneficiary. But so, too, have other Western locations like Phoenix and Salt Lake City, which are farther from ports but have more affordable spaces.

Not surprisingly, prices have increased. In the Inland Empire, where absorption rates are low because of a dearth of supply, asking rents more than doubled over the past year and rose 13.7% in the second quarter alone. In Salt Lake City, average asking rents were up 25.5% since the start of the pandemic as of this year’s second quarter as total vacancies dropped and are now hovering at just more than 2%.

Proceed with Caution

The market dynamics driving the frenzy in industrial real estate show no signs of letting up, and industrial investors should have no problem leasing space in the near term.

But a career banker would be remiss to not also call out the risks. The future is always uncertain and trends can reverse, sometimes abruptly and dramatically. A recession induced by inflationary concerns could slow down or reverse these trends, and rising interest rates could materially increase cap rates and, therefore, deflate values.

Many industrial properties being purchased today already have negative operating leverage whereby the cap rate is lower than the interest rate on the debt. Without rental rate growth, this type of investment is destined to be a dog in the portfolio.

Buyers should tread carefully. They’d be prudent to be selective in their tenant mix and build in appropriate rent increases to cover these elevated prices. And when it comes to debt, it’s key to avoid overleveraging in this unique market and consider mitigating interest rate increases, perhaps by financing assets with long-term, fixed-rate debt.

Dan Franklin manages all of River City Bank’s commercial real estate origination activity throughout California and the western United States. Since joining the bank in 2008, Dan has served in various commercial banking roles, including years as Commercial Banking Director, Business Development Officer, and Relationship Manager. A recipient of the Chartered Financial Analyst designation, Dan received his undergraduate and MBA degrees from the University of California at Davis.

October 12, 2022

Healthcare and Banking: A Prescription for Success

By Pat Lewis, EVP, Chief Operating Officer, at River City Bank.

The healthcare industry, once relatively predictable and staid, underwent wrenching changes during the pandemic. As elective surgeries were canceled and many medical offices closed, healthcare practices of all kinds had to adapt to a new reality of virtual appointments, revenue pressures, staffing shortages, and unexpected expenses for personal protective equipment and technology.

As the Sacramento area emerges from the darkest days of the pandemic, and the local economy once again finds its footing, new opportunities in the sector abound. Medical practices are seeing patients return for checkups and elective surgeries. Veterinarian practices are swamped with handling the medical needs of pets adopted during the pandemic. Dentists and physical therapists are busy with appointments that had to be rescheduled. Some practices are expanding.

“Healthcare executives must now lead their institutions, designed for methodical and slow change, in a way that reinvents their business with the speed of the market,” McKinsey & Co. wrote in an article about healthcare business building in the wake of the pandemic.

The pandemic challenges lead to new opportunities

I couldn’t agree more. In my 20 years at River City Bank, I’ve met dozens of owners of healthcare businesses, many of whom had kept to the same formula for years. The pandemic changed that overnight. Practices had to immediately pivot to telehealth, even if they weren’t quite ready. They had to navigate government grants for help. And owners of small to medium-size medical practices must now embrace a new way of strategic thinking to stay competitive in the years ahead.

River City Bank’s Riley Gardner with Randy Paragary

Many medical practices experienced shrinking revenue as appointments were delayed and partners forewent monetary distributions to ensure that sufficient capital remained on the books. With these practices often collecting roughly 30% of billings – after adjusting for insurance discounts and other unpaid services, the financial implications were significant. For surgery centers, whose cash flow tends to be higher, adjustments were needed as elective procedures decreased.

One key to navigating the uncertainty was having a relationship with a local lender with healthcare expertise that could provide guidance on cash management and financing needs. River City Bank’s healthcare clients relied on us during the pandemic, and they’re turning to us now for financial guidance on how to grow.

As a financial partner to our clients, it’s critical that we understand the complex economics of medical billing, insurance reimbursements, and cash flow, and we are working together with independent medical practices to take advantage of the new environment.

Providers are opening up new facilities in new geographic areas, and they’re also enhancing and upgrading their facilities and bringing those back into play. To facilitate this growth, many healthcare practices are turning to local community banks, where they know a relationship banker can prioritize their needs and help walk them through the myriad of loans, financing, and credit lines they can access now and in the future.

Four key ways that financial partnerships promote growth

In particular, here are four ways that lenders can provide medical groups with the tools they need to help them prosper in the post-Covid environment:

1. Equipment financing

The pandemic ushered in a new wave of technology for healthcare practices as they were forced to quickly get up to speed on ways to deliver care virtually. To stay competitive with hospital-owned groups and other larger practices, independent physician groups often need to invest in more sophisticated equipment, from the front desk to the treatment room. As the pandemic eases, elective surgeries and regular screening have increased the volume at outpatient surgical centers. Local lenders can provide term loans and working capital lines of credit for equipment financing, sometimes at 100 percent.

2. Facilities remodeling

With new technology advancing the capabilities of healthcare and the rise of remote telehealth options, medical practices are rapidly rethinking their traditional model. Medical experts say the telehealth trend is here to stay. One large physician practice in San Diego expects that 15-30% of its patient encounters in 2023 will remain remote. Ryan Companies, a large commercial real estate development firm, advises medical practices to redesign to make their physical spaces “safe, adaptable, flexible and effective.” Waiting rooms, for example, need to be reconfigured so patients are seated at a comfortable distance from one another. Many practices might need to add conference rooms for private remote conversations. We’ve already seen this firsthand, as River City Bank helped one longtime surgical center client obtain financing to remodel several of its surgical centers.

patient in videocall with doctor on a tablet.

3. Cash flow and liquidity management

River City Bank’s clients in healthcare span from the central coast to Northern California and the Sacramento region. Despite the geographic differences, each of the practices confronts similar challenges, from billing and reimbursement pressures to balancing cash flow and expenditures. Many have current expansion plans, while others are finally returning to other business strategies they were forced to put on hold.

4. Expansion capabilities

The Sacramento area, and other suburban and exurban regions around the state’s population centers, benefited from an influx of people fleeing city downtowns during the pandemic. Thanks to virtual and hybrid work, many of those new residents are staying. Even smaller independent physician groups are contemplating an increase in their facilities. Local lenders that understand medical financing can help medical practices expand when and where they want. Some growing practices might be increasing the number of locations to better serve an expanding clientele. Medical practice loans can cover the costs of both construction and renovation, as well as the new equipment needed to open another office.

How healthcare practices can be well positioned for the future

Medical practices that want to thrive in the years ahead will need to address a growing list of challenges, including capital financing for new equipment, funds needed to remodel facilities to maintain high-quality services, cash flow management to ensure liquidity, and access to funding for expansion to keep up with increasing demand.

Practices have choices to make when considering financing. Community banks with dedicated healthcare experts can give them guidance and innovative solutions they can’t get elsewhere.

With over 25 years of financial-services experience, Pat Lewis ensures compliance with policies and procedures while overseeing the premier level of client services upon which River City Bank has established its reputation. Pat has almost 20 years of experience with River City Bank holding positions including Senior Vice President, Commercial Banking Director, and Cash Management Director.

September 4, 2020

River City Bank President and CEO Steve Fleming named one of Sacramento’s Most Admired CEOs

This inaugural, peer-nominated award recognizes CEOs from the Sacramento region who have made a positive impact both within their respective businesses and the community as a whole. Steve Fleming is one of 25 recipients of the 2020 Most Admired CEOs award from Sacramento Business Journal.

Sacramento, CA – Steve Fleming, President and CEO of River City Bank, has been named one of Sacramento’s top leaders as a member of the inaugural class of Most Admired CEOs from the Sacramento Business Journal. The first annual event recognizes Sacramento CEOs who have made a positive impact through their dedication and leadership both within their business and in the local community as a whole. Recipients of this award were nominated for the distinction by their peers in the Sacramento business community.

“Since stepping in as President and CEO of River City Bank in 2008, Steve has evolved the way we do business and enhanced our community-focused initiatives throughout the Sacramento region while also expanding our footprint into promising nearby markets,” said Shawn Devlin, chairman of the board at River City Bank. “His leadership has made the difference between success and failure for many of our community’s important businesses, particularly during the difficult times we’ve faced due to the COVID-19 pandemic. I am pleased to congratulate Steve for this first-of-its-kind distinction, on behalf of the board of directors and the entire River City Bank team.”

In addition to driving strategy and execution at River City Bank, Fleming serves as a leader in various philanthropic and economic organizations, and he spearheads community-focused initiatives throughout the Sacramento region. He is President of the board for the Capital Region Family Business Center, President of the Sacramento chapter of Lambda Alpha International, and a member of the Sacramento Host Committee. He is also on the Board of Directors of the Kelly Foundation and the Greater Sacramento Area Economic Council.

Fleming has more than 35 years of banking experience, including more than 20 years with Bank of America in Sacramento and London, England. Immediately prior to joining River City Bank, he was the Founder and CEO of Presidio Bank in San Francisco. He was also the President and CEO of National Bank of the Redwoods in Santa Rosa. Under Fleming’s leadership, River City Bank has quadrupled in size from $800 million to $3.2 billion in total assets.