Note: This is an expanded version of the article that appeared in the November 2007 issue of MULTIFAMILY EXECUTIVE
For the past several years, all development plans have been indefinitely on hold for Gainesville, Fla.-based Collier Enterprises and Paradigm Properties, a developer of B-plus, garden-style apartments and student housing across Florida, Georgia, and Oklahoma. Until 2007, most of Collier's customers were headed towards homeownership, courtesy of easy subprime access to credit. And the condo and townhome builders catering to those buyers? They were paying land prices with which the for-rent developer could ill afford to compete.
But new home sales aren't what they used to be. And the subsequent rush back to rentals means multifamily apartment projects are enjoying an overdue renaissance in business economics, particularly when it comes to the banker's penchant for issuing construction lending. "Sure, there is a crisis in the permanent lending markets, but I don't see that in the construction loan arena," says Collier COO Andy Hogshead. "Good sponsors with well-conceived products that have the track record and the discipline to manage the process still get almost historically attractive financing."
Collier is responding by cranking up the heat on their acquisition and development activity, and they are not alone. Despite tighter credit markets and tougher underwriting across virtually all loan types, apartment developers are finding easy access to financing for new construction. According to observers, as long as you've got solid sponsorship, demonstrated experience, and creative (but not crazy) product, players from coast to coast are cashing in on some of the largest construction loans in multifamily history.
FLURRY OF ACTIVITY
Morrison Condominiums in Miami is one of several projects advanced by leveraging larger-than-normal construction loans.
Consider River Place II, Silverstein Properties' second phase of a 2.3 million square foot development project in midtown Manhattan that will include two 58-story towers containing 1,359 rental units and a 13,000 square foot amenity center and health club.
Financing the project is a $700 million construction loan arranged for the developer by New York-based real estate investment banking firm Cushman & Wakefield Sonnenblick Goldman in August. The deal is believed to be the largest residential construction loan in U.S. history. "River Place II will be an outstanding success, which can be attributed to its high quality design, outstanding amenities, and the strong Silverstein sponsorship," Arthur Sonnenblick, senior managing director of Cushman & Wakefield Sonnenblick Goldman, noted in announcing the deal.
Though smaller in size, Collier's $44.8 million construction loan as importan?it is the largest in the developer's history and represents a push to triple or even quadruple the size of the company's portfolio in the next couple of years. "We're using it for a new luxury community and our largest project ever," Hogshead says. "It's 412 units on 5 acres of property. I don't anticipate another project being that large for awhile, but overall, we plan to go from these 412 units to an additional 1,200 that will probably be underway by late next year."QUALIFY WITH QUALITY
Across the country, Hogshead's enthusiasm is shared by other multifamily developers and (somewhat surprisingly) by lenders, too. "We purposely have had a strategy to go after construction lending over the past 24 months," says Marie Head, a managing director at Prudential Mortgage Capital, who adds that Prudential has launched marketing campaigns and tweaked loan parameters to go after more multifamily rentals. "In general accounts, we are seeing 60 percent to 75 percent [loan to value ratios]," Head says. "Qualifying also still depends a lot on the confidence in the market and the ability of the borrower to deliver and get the loan to the finish line."
Part of the apparent resurgence in construction lending lies in the stricter underwriting of the loans?which are tied to the value of the land as well as to a project's pro forma. And despite the traditional short terms of construction loans ( typically refinanced after a two- to three-year period), lenders are also showing preference for projects that show longevity. In Miami, an $85 million loan is advancing a 395-unit mixed-use development by mFm Construction and Canyon-Johnson Urban Fund. "We use construction loans on all of our projects, and this is the biggest one," says Eli Dreszer, a partner at mFm. "Definitely the underwriting is as tight as any other product?lenders are looking for deals that make sense: traditional real estate projects with good backing."
And on the rare occasion today, that still includes condos. In Boca Raton, Fla., Akerman Senterfitt has closed on a $137 million construction loan for an affiliate of the Blackstone Group to develop luxury condos in a market that was thought to be bereft of any condo action. Several things propelled the loan forward, says Ackerman shareholder Anthony Casareale. "In Blackstone, you have a parent who is obviously one of the largest real estate players in the country and has a great reputation for performing. The units started at $2.7 million and went to $14 million, and we pre-sold half of them before closing," Casareale explains. "But these [big construction] loans aren't for general consumption. Wells Fargo issued the loan because of the sponsors, because of the presale, and because of the uniqueness of the project."CHANGING TIDES
Not for general consumption, indeed. Last May, in California, CBRE|Melody landed a $171 million construction and mezzanine loan for Central Park West, a 240-unit luxury Class A condo community in Irvine being developed by Lennar Homes and Intergulf Development Group. Yet CBRE|Melody principal Craig Mueller isn't sure he'd still be able to secure that type of loan for for-sale product today.
"The market has shifted dramatically from where we were six months ago to where we are today," Mueller says. "We have seen a lot more conservatism on the part of lenders. For borrowers securing construction finance on high-end condos, leverage is dialed back, and the loans are not going to be as common unless you have a sponsor willing to put in significant equity and you are in a top-tier market where there is still strong demand."
Project requirements aren't nearly as stringent for developers of rental projects, who feel like the tables have finally turned in acquisition and development after several years of tough condo competition. "The rental market is firming up everywhere you look," says Kent Conine, president of Dallas-based multifamily builder Conine Residential Group and former president of the National Association of Homebuilders. "The rank-and-file depository financial institutions are still in the game and still doing projects as long as they make sense."
And increasingly, those projects are trending towards apartment developers. "About nine months ago, land prices were finally low enough that the rental economics made sense," says Phillip Carroll, who originates multifamily construction loans as southeast regional manager for KeyBank Real Estate Capital. "We started with a big $100 million project last year of luxury, high-end rentals and since then, we have done seven or eight rental deals." Even in particularly high-barrier markets, Carroll sees the migration to apartments continuing, and is seeing borrowers who were pro forming condos coming back to the table with rentals. "Those [high-barrier market] land prices have not settled down yet," Carroll adds. "But I see that coming very soon."
When it does, expect to see plenty more multifamily apartment players with their cranes in the sky.
- Dare to be different. Unique projects that address a niche market like workforce housing, affordable housing, or ultra-luxury customers are likely to get a second look over commodity product.
- Sales tip the scales. Presale and pre-lease your project as much as possible to provide lenders with documented revenue and operating income.
- Drop some names. Quality sponsorship wins the day, and lenders admit that it's usually the first thing they consider during the process of issuing a construction loan. The bigger the name and brand reputation, the better your chances will be for getting the check.
- Spell it out. Have a well crafted and documented business plan prepared for your lender. Pay particular attention to documenting your repayment or refinancing strategy once your project is completed.