With Minneapolis Mayor R.T. Ryback and city council members on hand, Village Green Cos. CEO and chairman Jonathan Holtzman joined other members of a development team to break ground late last month on Mill District City Apartments, a 175-unit, mixed-use, market-rate rental community targeted for completion and lease up in early 2011. The $33 million dollar project will follow the National Association of Home Builders (NAHB) National Green Building Standard, will feature a 3,500 square foot specialty market anchoring ground-floor retail , and is within walking distance of downtown cultural amenities. Minneapolis-based US Bank provided construction lending to the project, its third construction loan to Village Green over the past six years.
“The banks are open for business for the right borrower with the right project in the right submarket,” Holtzman says, adding that construction lending was also issued at the bank's right price, one that reflects current economic conditions and realities in both the lending and multifamily markets. “Of course, I would have liked to have gotten the terms and conditions that I got three years ago, but US Bank issued a construction loan that was no doubt favorable to Village Green. It wasn’t as high a loan-to-value (LTV) as what we would have liked, but it was favorable in this environment.”
While Holtzman did not reveal further terms of the lending, he did say that land owners for the project—including the City of Minneapolis and Brighton Development (which was unsuccessful in putting condominiums on the site)—were integral to the capital stack, deferring payment, and interest on the land for a two-year period that helped Village Green bridge finance between the US Bank construction debt and equity provided by an individual private investor. The payment float adds approximately $3 million to the total project budget.
“Historically, we would have turned to a mezzanine lender or another bank, but that [bridge financing] does not exist in the market,” Holtzman says. “We were fortunate the land sellers essentially acted as the bank in that regard, receiving interest and collateral to secure their interest in the deal. They were a critical part of the capital stack.”
Minneapolis multifamily market fundamentals also played a key role in the project getting underway. According to Holtzman, the market has very little shadow rental, no apartments currently under construction, and average occupancy in the low 90 percentile with no rent concessions. “Development right now may seem difficult, but we are okay with being contrarian. We are going to be delivering apartments as this country’s economy and employment bounces back,” Holtzman says.
Village Green isn’t completely contrarian to the multifamily apartment development sector: Chicago-based multifamily owner/operator RMK Management broke ground this fall on a 221-unit Windy City luxury apartment building and has two additional projects slated to break ground in the first half of 2011, according to company executive vice president Diana Pittro. Likewise, Irvine, Calif.-based Western National Property Management just broke ground on a 315-unit apartment community in the South Jordan, Utah, submarket outside of Salt Lake City with construction financing provided by a local bank. “We are putting utilities in and hoping to deliver units within 14 months,” says company president Thomas Shelton.
Current multifamily starts by regional operators will likely hit the market just ahead of stock getting ready to be developed by some of the industry’s major real estate investment trusts (REITs), who are seeking similar opportunities in delivering product to supply-constrained markets on the upside of economic recovery.
“Development starts in the second half of 2010,” says Highlands Ranch, Colo.-based UDR chairman and CEO Tom Toomey. “We will look at our pipeline of opportunities and challenge ourselves to start them because they are three years out before they are leasing into supply-constrained markets. Anyone who has the financial wherewithal to start building today is going to face a great environment when they deliver that asset two or three years down the road.”
Houston-based REIT Camden Property Trust is also looking at the possibility of deploying some dry powder capital into development near the second half of 2010. “It will be very difficult for us to make the numbers work from a development perspective in the first half of 2010 but not necessarily in the second half,” says the REIT’s chairman and CEO Ric Campo. “We have three different projects in Washington, D.C., and if I started them in mid-2010, I would deliver at the end of 2011, beginning of 2012. Those could be pretty nice markets then.”