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Wanna borrow money from a bank to open a strip club?

shadowcat

Atlanta suburb

Strip clubs are a lucrative business that most banks try to avoid.

The adult entertainment industry appears to be booming. The nation's nearly 4,000 strip clubs earned $1.3 billion last year on $6.6 billion in revenue, according to data compiled by IbisWorld. Revenue grew by a 1.8% annual rate from 2012 to 2017, fueled by an increases in disposable income.

At first glance, that would seem like fertile ground for banks on the hunt for good loans, while clubs’ cash-intensive business model could be a nice source of low-cost deposits.

Still, strip clubs remain largely off-limits for banks. Though legal, they are often viewed as unsavory, and they could create the need for greater scrutiny in areas such as anti-money-laundering compliance.


"It would not surprise me to learn banks shy away from strip clubs,” said William Isaac, a bank consultant and former chairman of the Federal Deposit Insurance Corp., noting that the Office of the Comptroller of the Currency includes reputational risk among the factors its examiners should consider.

"I have no difficulty believing examiners would frown on loans to strip clubs," Isaac said. "After all, the OCC and FDIC identified loans to payday lenders as fraught with reputational risk a few years ago.”

Of course, there are exceptions.

Home BancShares in Conway, Ark., recently made a 10-year, $81 million loan deal to RCI Hospitality, a Houston company that operates nearly 40 strip clubs. The relationship may have gone largely unnoticed, except that RCI, the only publicly traded club operator, disclosed the relationship with the $15 billion-asset Home after refinancing its long-term debt late last year.

The loan appears to be a lucrative deal for Home. The loan is expected to generate nearly $10 million in interest income for the lender in 2018 and 2019 and nearly $7 million in subsequent years, RCI said in its disclosures.

Home and RCI declined additional comment.

Several other banks, including Northern Trust, JPMorgan Chase and Wells Fargo, have financial stakes in RCI, according to Naqdaq. But buying a block of shares is a far cry from lending $81 million.

Home’s relationship with RCI began in 2015, when the club operator obtained a $15.3 million loan to buy Tootsies' Caberet in Miami. Roughly a fifth of the $81 million in refinanced debt was tied to Home-originated loans; the rest came from other lenders.

While RCI has had no trouble obtaining credit, smaller strip club operators still struggle to attract attention from banks.

“They have a very difficult time receiving funding," said Angelina Spencer-Crisp, executive director of the Association of Club Executives. "And if you’re new to the business, most banks will say 'no thank you’ even if you have strong credit. … Banks are a little bit skittish.”

“Do a lot of banks engage in lending to gentlemen’s clubs?" said George Blackburne III, owner of Blackburne & Sons Realty Capital, a firm that has made loans to several strip clubs. "The answer is no, no, a thousand times no.

It is challenging to get bankers to discuss lending to adult entertainment business.

A spokesman for a large bank who asked not to be identified said his employer would “never knowingly lend” to any company in the adult entertainment industry. Several other banks did not respond to requests for comment.

Regulatory oversight could be a factor.

Some banks ended lengthy relationships with club operators after the Justice Department cracked down on financial institutions that worked with companies believed to be at a higher risk for fraud and money laundering, Spencer-Crisp said.

JPMorgan Chase in 2014 closed the accounts of individuals and businesses associated with the adult entertainment industry, according to published reports at the time. In one case, the adult film actress Teagan Presley posted on her Twitter account a copy of an alleged letter from Chase saying her account would be closed.

Links between strip clubs and money laundering are longstanding, and the issue continues to bedevil the industry. In 2016, for instance, a Myrtle Beach, S.C., club owner received a 40-month prison term for laundering more than $2.3 million.

Banks haven’t always viewed strip clubs in such a harsh light, said Spencer-Crisp, who owned a club in Cleveland from 1993 to 2004. Spencer-Crisp said she had a good relationship with her bank, which had also financed the purchase of her home.

“I could get credit,” Spencer-Crisp said. “I could walk in and do a $50,000 signature loan. Today, I don’t think that’s possible.”

While there is always a risk of reputational backlash, lending to strip clubs is not nearly as controversial as banking medical marijuana businesses, said banking consultant Bert Ely. Indeed, RCI’s status as a legal, publicly traded company ensures lenders won’t have any difficulty foreclosing on property or taking other collections actions, he added.

“A lot of times, reputational risk is in the eye of the beholder,” Ely said. “It ought to be left up to the judgment of the individual bank.”

And the reputational risk posed by involvement with a strip club is limited, said Steven Reider, CEO of Bancography, a Birmingham, Ala., firm that helps banks address branding issues. "You'd be hard-pressed to find people who know the other clients a bank serves."

“There’s no level of risk that can’t be mitigated by sound credit policy,” Reider added.

Those who work with strip clubs argue that the business is worth a second look.

“I think I’d rather finance a gentlemen’s club than just about any other type of property,” Blackburne said. “You know what the biggest problem is? Those borrowers make so much money that they keep doubling up and tripling up on their payments. They pay me off. I’m not a bridge lender. I want my money to stay outstanding.”


club owners “tend to be a good risk,” Spencer-Crisp said. “It’s not like The Sopranos. They’re trying to run legitimate businesses.”

Isaac, who works now as senior managing director at FTI Consulting in Sarasota, Fla., said banks should be left alone to decide what types of loans they wanted to make.

“I personally believe that bank shareholders, boards of directors and management — not regulators —should be the guardians of a bank’s image and reputation. I am deeply troubled by unelected bank regulators establishing moral standards for our nation,” he said.

Go here for graph of club earnings.

https://www.americanbanker.com/news/shou…