Constructing our building was a trial by fire. Our tormentors took many forms, and one of the worst was the bank.
When we began searching for property at the end of 1997 Berlin's big building boom was just winding down. Generous tax credits aimed at rebuilding East Germany had made Berlin Europe's largest building site. The post Wall rush had filled the city with an oversupply of new offices, apartments, and cineplexes.
Our search for a suitable site took us a year and a half. During that time we experienced several close calls, where deals fell through for one reason or another. Before we found three banks willing to back our final project, we had had conversations with over fifty banks.
Most of the banks had been burned by speculation during the boom years – sometimes by their own speculation. For example we met with a manager at the Württemberger Hypo in their offices in an otherwise empty building by Kleihus at Checkpoint Charlie. To soften the blow when he refused us financing he explained to us some of their own mistakes in Berlin, and how they had moved into one of their financing failures, to minimize the damage. Later this bank became part of Germany's biggest-ever failed bank.
At the time the European Central Bank (ECB) was aggressively lowering interest rates, and all banks were being criticized by the media for refusing to pass the savings on to their customers.
The HypoVereinsbank was one of the only banks that was lowering rates. We liked the manager we met there. He was from Nürnberg, having just moved to Berlin from thebank's main office. He took an immediate liking to us, and the project, and rapidly made us an offer we could not refuse. Being new in Berlin, he could see what a great location the site was. Most Berliners worked on an outdated mental map of Berlin, which pegged our street, a stone's throw from the Berlin Wall, as the end of the world. It amazed me how strong this mental map was, even ten years after the Wall had come down.
Our manager had just returned from a weekend workshop on derivatives in Frankfurt, Germany's banking capitol. He convinced us to buy an interest rate swap to insure that when we started building in a year's time, we would be guaranteed the same excellent interest rate that we had obtained for the earlier loan we used to buy the property.
What he didn't tell us (we hope this was due to lack of knowledge) was that the rate we were ensuring for ourselves wasn't the rate for a ten year mortgage, but an Euribor rate. The Euribor rate is always significantly lower than the rate of a ten year fixed rate mortgage. We thought we were buying insurance to provide a ten year loan at 4.9%, when in fact the insurance only secured us if the mortgage rates exceeded 8%, much higher than the going market rate of 5,5%.
The swap came to maturity during the negotiations to finance our first construction phase. I was preparing to cash it in, reaping the rewards of my foresight, when the bank informed me, with a smile, that it was worthless.
Fortunately for us our manager had given us some calculations that supported our interpretation of the meaning of the interest rate we had purchased. After heated discussions with the Berlin regional manager we reached a settlement with them, on conditions that we are not allowed to disclose; however, we had to swallow a significant portion of the loss.
After this our trust in the bank began to crumble. The two loans we had with them were set up around a capital life insurance policy. This financing model means that the capital on the mortgage is repaid when the insurance policy reaches maturity (in our case thirty years in the future) until then interest is paid on the entire sum of the loan.
The calculations the banker showed us to convince us of this model were based on overly optimistic projections of the fund's profit expectations. In fact most of the value increase was based on a hidden clause that increased the monthly payments by 5% every year, which would more than quadruple the monthly payments by the end of the policy. He did not explain this to us.
In fact, before signing the second contract I asked the insurance representative specifically if this policy included a 5% annual increase clause. He assured me it did not, which was a bald faced lie.
The beginning of the end
By the time we started building the new building in 2004 we were fed up with our bank, but could see no way to switch to a better bank.
In spite of the high interest rate, the financing of the new building proceeded well until it was one month from completion. We discovered that our contractors were not being paid. Our investigations showed that although we still had half-a-million of the original 1.13 million euro loan outstanding, the bank had stopped paying the builder's invoices sent to them. My increasingly angry telephone calls got me nowhere. Everyone I could talk to at the bank, including the regional manager, claimed not to know why this was happening, or who was responsible for the non-payment.
The bank finally reacted to a faxed ultimatum, informing me that we had been transferred to the 'special division', and they would not pay any more bills unless we provided them with half a million in additional securities, securities that they knew we didn't have.
This was a major shock – we had thought we were at the end of the tunnel: The building was on schedule, under budget, and fully rented. Any delays in construction at this stage would have been fatal.
This shock reminded me of something that had struck me ten months earlier when we signed the loan. The contract contained a list of nasty punishments to be rendered upon us if we did not keep our side of the bargain. Not once was there a mention of what would happen to the bank if they didn't live up to their obligations to us! At the time if felt unjust, but I ignored this twinge, reassuring myself with the simple thought that no bank would ever stoop that low. I could not have been more wrong!
I spoke to several lawyers, and managers at other banks, none of whom could believe what was happening. Their advice was consistently the same: “You would win if you took it to court, but by the time you get there, you'll be bankrupt – you have to cut a deal.”
I tried in vain to find another bank, but none would make any firm commitments in the short time we had before the builders would lay down their tools and leave the site.
In hindsight we realized that at this time, our bank, the HypoVereinsbank, must have been in serious trouble because a few months later they were taken over by a large Italian bank. Someone high up in the hierarchy must have given orders that branches search their current accounts for anyone who could be squeezed.
Basically securities for a bank are as good as cash. They shore up a bank's balance sheet, and the more securities they have, the more money they can borrow. If they were able to squeeze half a million out of us, they could probably use that to cover up several million euros worth of holes. Doing this systematically across many customers would make the bank substantially more attractive during any takeover negotiations.
There was no way we were going to give our bank any of the few securities we had left. We were able to cut a deal in which they reduced their commitment by 175 thousand, but continued to supply the remaining 325 thousand euro credit. To make ends meet, we secured a loan from another (very friendly) bank for 125 thousand euros, which was all that we needed since we were 50 thousand euros under budget.
Fortunately this was happening during the European Cup: The only time mymind escaped the stress was while watching the football matches.
The end of the end
Fast forward to the credit crunch. In September 2008 as the banking world wascrashing and burning, our loan officer called me up to tell me that the HypoVereinsbank would not renew our loan, due for renegotiation in June 2009.
The one upside was they said they would sweeten the pot for us: if we could find another bank, they would let us out of the other loans (which were expiring 3 and 5 years later respectively) without charge.
If we couldn't find another bank, they were legally obliged to renew our loan, but they would only do it at a variable rate, which would be at least 7.5%, almost twice what we were paying for the first 10 year fixed rate loan.
We began calling up banks less than a week later, just as Lehman Brothers declared bankruptcy. Consequently, for many months no one would touch us. Fortunately the crisisbegan to thaw, and in the spring of 2009 we found one bank that was willing to back us.
We are very happy with our new home at the Berliner Volksbank.