The Housing Chronicles Blog: A Spring Thaw for Development Finance?

Sunday, May 16, 2010

A Spring Thaw for Development Finance?

As the building industry continues to slowly recover from its most prolonged downturn since The Great Depression, the good news is that it appears a minor thaw may be finally beginning in the credit and equity markets. The bad news is that the rules of the game have changed so profoundly that not all players will be able to adjust accordingly.

In order to prepare for this new environment, MetroIntelligence is now partnering with George Smith Partners (GSP), a leading real estate investment bank which regularly taps its vast network of sources for customized equity and debt on residential and commercial properties throughout the U.S.

Whether the assignment is finding an equity partner to buy land or refinancing a stabilized apartment property, MetroIntelligence is now able to provide objective reviews of a sponsor’s assumptions in order to bring appropriate opportunities to GSP -- as well as to ensure that builders and developers are fully aware of their options.

According to GSP Vice President Jonathan Lee, who focuses largely on the residential sector, although the thaw in lending has unofficially begun, it won’t really matter until banks have re-set the land on their books to current values.

In the interim, Lee is seeing lenders reaching out to established builders as either fee builders or as JV partners to protect their investments by maintaining entitlements and building out what’s already been started. And yet the Catch-22 here is builders don’t want to JV unless land values are re-set to current value, but lenders aren’t strong enough yet to do so.

As for buying new land, assuming a private builder can out-bid a public company, the terms for leverage are going to be strict, with hard-money interest rates and 50% loan-to-value (LTV) ratios.

Not surprisingly, GSP’s Lee says that most of the projects getting financing today are infill projects closer to employment centers, stressing that broken developments in tertiary markets with high rates of foreclosures will take much longer to rebound.

For builders looking to dip their toes into construction financing for new projects, Lee says that as opposed to the one or two banks actively lending six months ago, today there are closer to four or five banks plus half a dozen hard-money lenders. Nonetheless, both of these types of lenders would want to chop up larger projects into phases to minimize their exposure.

But for builders looking to revive dormant projects, the view is cloudier, with a delicate dance involving a builder with deep enough pockets to buy back his note at a discount with new recourse money that ultimately protects the lender. Of course that assumes we’re talking about a single-family project, as financing for new condominiums is virtually nonexistent.

However, Lee does offer up an intriguing idea in which a multi-family project could conceivably be financed based on apartment underwriting standards but with the appropriate release clauses and a caveat that -- under the right conditions and assuming available mortgage financing – the units could eventually be sold as condos.

As for traditional apartments, with the worst of the downturn likely behind us, lenders are starting to wade back in with the right operators in the best markets but still with extremely conservative LTV ratios.

Certainly, any return to the days of easier credit will be long and arduous, especially given that total outstanding AD&C loans were reportedly down by 23% year-over-year in the fourth quarter of 2009.

Yet for those builders and developers who can adapt to the new environment and partner with the right sources for capital, a greater share of both the market and its future spoils await.

Want to see if the financing quotes you're getting for your projects are competitive? Interested in rolling over maturing debt for land, apartments or other commercial uses?

Contact MetroIntelligence at 818-584-1848 for more information!

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