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Sunday, 27 October 2013 22:00

Commercial Development Conundrum: Banks say they’re lending, but developers think otherwise

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As the economy has improved, banks have been slow to get back into financing commercial real estate development projects.

Where they are getting back into the market, lenders are focusing on low-risk owner-occupied projects, renovations and expansions — particularly for manufacturers, according to industry professionals.

That’s left many developers struggling to find the capital needed to push projects off the drawing board.  

“If you’re a tool and die shop that wants to build a new building or buy a new press, banks are doing those deals all day long,” said Rick DeKam, principal of Midwest Realty Group LLC. “But the investment real estate sector is gone. That’s my business, that’s what I do for a living. For guys like me, I’m still considered to be a leper by most banks.”

Attorney Pat Lennon said there’s a real dichotomy in the market where deal volume is strong even though developers perceive banks aren’t lending.

“Lenders have capital to put out there for those who can satisfy their strengthened underwriting standards,” said Lennon, partner and practice leader for the industrial and office sectors at the Kalamazoo office of Honigman Miller Schwartz and Cohn LLP. “If you’re the right developer and meet those requirements, then they can move forward with their project at very attractive financing costs.”

Real estate professionals and banks alike are cutting their teeth on new, often complex deal structures necessitated by the current market and underwriting standards. But the end result is a very narrow deal market, one that differs considerably from the pre-recession “wild west” lending environment.

“Before the recession, lenders were shoveling money out the door,” DeKam said. “If you had any intelligence, you could walk into a bank and walk out with as much money as you could carry. It was so competitive, lenders stopped doing their due diligence.”

Those days are over as banks’ appetite for risk swung in the other direction in the last few years. While lending has come back for manufacturing projects or owner-occupied buildings, bankers have held off on speculative deals and investment real estate projects, DeKam and others said.

In DeKam’s firsthand experience, bankers will lend to investment deals with 50 percent or more developer equity and cash flow to match.

“There are lenders out there who are trying to come back to the table, but they’re few and far between,” DeKam said. “It’s kind of like Moses sending the dove to find the olive branch. The problem is with a guy like me, (banks) don’t want too many passive investment deals — they want owner-occupied, solid base hits.”  

For those lenders who are stepping up to the plate, DeKam said it’s the smaller local banks that are willing to work with current customers to refinance projects or help get new developments off the ground.

Michael Sytsma, senior vice president of business banking for The Bank of Holland, said he’s seeing increased activity and demand in the urban residential market, the industrial sector and suburban retail centers.

“Broadly, I think there is more access to capital than there has been in the last several years, which isn’t surprising given where the market was in previous years,” Sytsma said. “Perceived demand and occupancy have improved, which has helped get banks more comfortable with lending.”

In the current development market, most projects require the use of local, state or federal incentives, which can lead to more difficult deal structures, Sytsma said.

“Deals today can be more complicated,” he said.

Another wrinkle: Many of the state and federal incentive programs don’t kick in until a project is complete, Sytsma said. While these incentives can act as sources of equity for a project, it takes some creativity to leverage those funds to the front end of the project with bridge loans. Making sure all the parties in a deal understand the structuring is really important and helps avoid timing issues and other problems that could bog down a project, he said.

That makes a developer’s relationship with his banker even more important. The Bank of Holland is drawn to deals involving incentives and complex financing structures “because it’s not just another loan — there’s a relationship that goes with it,” Sytsma said. “It’s a

chance for us to add support to projects and add value.”

Whether banks finance deals often comes down to the people involved in the project, he added, noting that banks need to be considering the merits of a project and the cash flow.

As lenders are slowly coming back over the next couple of years, DeKam expects that the market for development will normalize as the better balance of supply and demand is reached. With a more balanced market, the opportunity for better deals should open up, he said.

That said, he’s already seeing interest percolating.

“Qualified Fortune 500 companies are in our markets all the time,” he said. “I’m getting anywhere between two and six requests for space every single week from Southwest Michigan First, The Right Place or the (Michigan Economic Development Corporation).”

Honigman’s Lennon agreed that demand is up across West Michigan. Dealmakers are focusing on interest rates, the availability of capital and market strengths, and those fundamentals continue to be favorable for development, he said.

“The market is robust,” Lennon said. “We’re seeing national-type users back looking for sites in Michigan, and we think there will be some significant (market activity) throughout the state for the next year.”

Read 4434 times Last modified on Friday, 25 October 2013 15:13

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