The changes to the commercial banking system regulatory framework over the past couple of years are now being keenly felt in the commercial real estate development finance vertical. Developers and issuers are finding it very hard to obtain construction loans, much less construction loans with LTV ratios above 65%. The reality that is playing out is a huge window of opportunity that has been created for preferred equity and mezzanine loan funding participants in the market, as they have cashed-in to fill the void created by many commercial institutions exiting the market for new construction loans for all but their well-heeled customers. The initial profit-taking bonanza this created for alternative lenders is starting to unwind and that creates real opportunities for developers and issuers to utilize these tools in the way they were really intended – short-term fixes for a small part in a much bigger undertaking. The art of the capital stack structure is the key to making this all work for the developer who, heretofore, was able to command funding attention and demand terms to their liking (and get them).
The issues remain the same on the developer’s checklist of danger signals that could kill a funding proposal right out of the gate:
- Transactions with extended pre-construction periods. If your deal has a pre-construction period remaining of greater than 6 months, then you have to have a doggone good explanation as to why that additional time is required.
- Transactions with extended construction periods. Same as above – if your proposed build-out has a schedule block-out that well exceeds the expected average construction stream for your asset class and build-out size, there had better be a good explanation provided in the plan.
- Unrealistic exit values. Exit values based upon capitalization rates that are below the market average for the asset class are the hidden deal killer as there are not many people to be found in the CRE vertical who think capitalization rates are going to remain the same or go lower.
- Unrealistic total schedule. If your schedule to build, launch and stabilize the property takes longer than three (3) years, you better be doing a skyscraper as most underwriters will automatically kick the deal as having way too much risk exposure.
- Risk management negligence. If you don’t focus on demonstrating superior execution risk management program support and documentation available to back it up, you probably will be heading for the bottom of the stack.
Think about the entirety of the finance food chain and maybe there will be something better in it for you tomorrow.
Be The One…