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Sunday, 27 October 2013 22:00

Financing options, but at what cost?

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Having more money available to spur commercial real estate projects is a plus, even if those financing options aren’t for everyone.

As new funding options come online in Michigan over the next few months to bridge a so-called “financing gap” in commercial real estate development, developers and industry insiders wonder who will be taking advantage of them.

That’s because they think much of the mezzanine financing being proposed might be too expensive for many projects.

As MiBiz previously reported, groups such as Michigan State Housing Development Authority and Great Lakes Capital Fund plan to launch new mezzanine funds that could inject up to $220 million into commercial real estate development. The general idea is that mezzanine debt acts more like equity in deals, allowing real estate developers to potentially leverage more cash to the front end of project.

While it might have value for some projects such as a hotel development that could potentially repay the debt quicker, developer John Wheeler of Orion Construction said the terms of mezzanine debt — which could carry a more than 30 percent interest rate in some cases — can be too onerous for many developers.

“I could more easily go back to one of my investor buddies and say, ‘I’ll give you 12 percent preferred interest’ and be done with it,’” Wheeler said. “On top of that, I know the guy and we can work together.”

And if a deal’s that risky in the first place, most investors and lenders would probably have to think twice anyway, sources said.

Attorney Jared Belka of Warner Norcross & Judd LLP said developers with the right projects can often find other financing avenues before resorting to mezzanine funds.

“Right now, most deals that require that type of money are going to require some money that a bank can probably bridge for cheaper,” Belka said.  

But both Wheeler and Belka admit it’s best to reserve judgment on new funding options until they’re being used in the marketplace.

It can take developers, banks and others in the industry some time to warm up to the new programs, Belka said, one prime example being the Community Revitalization Program from the Michigan Economic Development Corp. Banks are now comfortable with the program and the MEDC is finding new ways to help encourage new developments, he said.

“Until you use it, you don’t know what it can support,” Belka said.

Read 3627 times Last modified on Friday, 25 October 2013 15:09

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