National and regional banks are slowly starting to provide construction debt again, but the next generation of balance-sheet loans will have a different flavor.
While the Federal Housing Administration (FHA) remains the most prolific source of construction debt, national banks such as U.S. Bank, JPMorgan Chase, PNC, Wells Fargo, and Bank of America are dipping their toes back in the water again. These lenders are targeting only the best-in-class sponsors with whom they have long-term relationships.
“We’re starting to see the traditional lenders coming back into the market,” says Mike Kavanau, senior managing director at Holliday Fenoglio Fowler's Chicago office. “If it was six months ago, even if the best in class sponsor applied, the bank would probably say no. But access to debt capital has clearly opened up.”
Bank pricing is being quoted these days at LIBOR plus as low as 300 basis points (bps) and as high as 500 bps, resulting in all-in rates between 5 percent and 6 percent.
But the next generation of construction debt will be largely relationship-based. Balance-sheet lenders are already requiring a significant amount of “cross-selling.” That is, they want borrowers to do all their banking with them before they’ll make a balance sheet loan.
New World Order
“Chasing a loan-only relationship, like what occurred in ’05, ’06 and ’07, is not going to the way of the new world order,” says Clay Sublett, national production manager for Cleveland-based KeyBank Real Estate Capital. “Now, the overall relationship is key, and if you have that, you’re going to get a return phone call.”
And it’s not just about deposits. Banks are taking a longer view of development now, to include permanent takeouts as a consideration in the construction loan process. A construction lender that also has Fannie Mae, Freddie Mac, and FHA executions would expect you to use them when it came time for a takeout.
“We have an array of permanent loans, but if somebody wants to use another agency lender, they’re not going to get my balance sheet,” Sublett says. “It all rolls into the return that you’re getting, the profitability of the relationship.”
Camden Property Trust typically funds its development through a line of credit provided by several banks. But recently, some of those banks have approached the REIT to tell them that their balance sheet is open for business. “A couple of our banks recently came to us and said that they’re ready to start lending again,” says Dennis Steen, CFO of the Houston-based REIT. “It’s very preliminary, but it would be LIBOR plus a little over 300 basis points.”
Keep it Small
But even the nation’s biggest banks are drawing the line on large loans. Anything above $25 million would probably be syndicated among a few lenders. Recourse is a de-facto standard now, and 75 percent loan-to-cost (LTC) is the max. “For every dollar below 75 percent, you probably make a better friend with the bank,” Kavanau says.
Earlier this year, HFF secured a $12 million construction loan for Wood Parnters' 154-unit Alta at Indian Woods Apartments near Boston through local bank Wainwright Bank and Trust Co. HFF is now working on finding 75 percent loan-to-cost debt for a 48-unit deal in downtown Los Angeles. And that Los Angeles deal has seen declining prices. The first bank quote HFF received was sized to a high underwriting floor, but other banks are beginning to undercut the price. “Recently a couple of other sources have come in, one with a 6 percent floor, and one with a 5.5 percent floor,” he says.
While those are good rates, the FHA’s Sec. 221(d)(4) program can offer rates in the mid-5 percent range as well, with some major differences: higher LTCs, and a blended permanent loan that amortizes over 40 years.
But as the FHA taking longer and longer to process loans, and as more (d)(4) applications get rejected, many developers are chomping at the bit to get some conventional financing. And the fact that some banks are lending again to the biggest developers means at least that the gates are open, and that it’s just a matter of time before they let others in. That is, as long as there’s a relationship involved.