By Gabe Gonzalez

It seems like construction cranes are part of everyone’s skyline these days.  Even secondary markets such as Waco, Lubbock, and El Paso are getting their fair share of attention.   The capital provider side of the business is not only seeking development opportunities as a way to drive investment returns but it will also consider secondary markets to further enhance returns.  MCA has been active in financing developments in secondary markets as our entrepreneurial clients seek higher yields, which are typically found outside the major MSAs.  For example, MCA recently closed a development loan for a retail center in a secondary market in Central Texas.  But, before we dive into it, let’s look at some of the factors driving this new development surge.

The ongoing demand is fueled by strong market fundamentals that show no signs of slowing.  From June 2013 to June 2014, Texas added 370,300 non-agricultural jobs, an annual growth rate of 3.3% compared to the 1.9% nationwide rate.  The unemployment rate is currently 5.1%, down from 6.4% one year prior.  All industries have shown growth year-over-year, including mining, logging, transportation, and warehousing.  With this comes the need for housing.  Home sale activity has increased 40% since 2010!  Single family developers have been struggling to keep up with demand, which has led to a housing inventory of only 3.6 months (a healthy market inventory is 6 mos.)  Dallas specifically has 2.6 months of inventory.  This constraint has increased the median home price in Texas by 25% over the past three years.  The state has also benefited from the influx of international citizens.  RECON recently reported that international homebuyers contributed over $11 billion to the state’s economy.

texas commercial real estateAll these new rooftops have catapulted developments for all asset types.  MCA’s recent assignments have mirrored the state of the economy.  As of 3Q 14, MCA has closed approximately $83 million in land acquisition and development transactions ranging from retail and restaurants to assisted living facilities and pure land development.

MCA recently closed on a $13.5 MM development loan in a secondary market in Central Texas.  The transaction was a phased development that began in 2013.  While the site was well-positioned, there was significant work required, which included demolishing a vacant building with asbestos and getting TXDOT approval for a deceleration lane.  The developer knew that the project would garner significantly more interest from national retailers if they could show a “pad-ready” development.  With a limited amount of equity available, MCA was tasked to get the highest leverage possible at an attractive rate with maximum flexibility to sell pads to users/buyers.  Since most of the value would be created once the land was shovel-ready with several signed leases, we elected to do a two-phased approach – an initial funding to acquire and develop the site followed by the second funding to go vertical.

The initial funding was considered “spec” as our client had no “preleased” tenants; however, fast forward nine months and the client had executed our initial strategy, had several executed leases, and was ready to build.  There was inherent value created from the improved land in addition to having several executed leases.  While the Loan-to-Value metric worked, the existing lender felt uncomfortable with respect to the Loan-to-Cost ratio.  We knew that it would take an aggressive community bank who understood the specific market to finish this development.  MCA reached out to a myriad of local lenders to procure the most aggressive structure possible.  MCA also knew the importance of proving the developer’s existing cost basis.  MCA huddled up with the client to reconcile all the acquisition and development draws that had been incurred to date along with the additional equity that was reinvested from a previous pad sale to a hotelier.  Our detailed analysis made the new lender feel comfortable that the client had “skin in the game.”

The anchor tenant was performing a reverse build-to-suit and had already begun development.  The tenant was expecting to issue its first draw in 30 days.  Since time was of the essence, obtaining lien waivers from each contractor would have proved time-consuming.  MCA recommended that the new lender merely purchase the note from the existing lender in order to circumvent the release of the lien.  The note purchase added another layer of closing issues that required an experienced financier to execute the closing in a timely fashion.  MCA successfully structured, marketed, placed, and closed this complex transaction without a capital call in less than 30 days with aggressive pricing:

  • 82% Loan-to-Cost / 75% Loan-to-Value
  • 5.0% Fixed for 3 Years
  • 25-Year Amortization
  • 2 Years Interest-Only
  • Flexible Release Price
  • Burn down of Personal Guaranty – Down to 25% recourse upon meeting DSCR thresholds.

Metropolitan Capital Advisors continues to be active in every market in Texas and does not shy away from challenging transactions that require structure in a timely fashion.  MCA has the experience and wherewithal to go into any market and procure favorable terms.  To further discuss your CRE capital requirements, please contact any of our Senior Directors or visit our website at