By: Justin Laub
Remember when condos were getting built all around the country and we had overzealous banks, liar loans and no down payments? That was a long time ago. So what type of condo projects are getting financed these days? Surprisingly, quite a few and they’re not just the marquee projects located in New York, Miami and San Francisco. The capital markets are robust for condominium developments throughout the US, in strong secondary markets and cities where there is a movement toward urban infill living and a lack of available housing.
One of the hurdles to getting condominium projects financed is (was) the fact that the project would need a certain amount of sales in order for the remainder of the units to qualify for FHA financing. That was a hurdle a few years ago, but the bank lending market for single-family residences has grown immensely and there are now local and regional banks that will make on-book loans on condominium units, some with the intent to sell the loans to the GSAs at a later point.
Knowing that, commercial banks have become more open to lending on condominium projects and institutional equity investors are more keen on the sector. A couple of the condo deals that I financed recently highlight this change in the market. These deals were both in a major Texas metro area and were located in infill urban locations.
On the debt side, I was able to source a non-recourse construction loan for the first of my client’s projects. That’s right: a non-recourse construction loan from a traditional bank with all the other terms you would expect from a bank, not a hard money lender. How was I able to do this? For one, my client was a strong sponsor, both in terms of track record and financially speaking. Additionally, the project was located in a popular, rapidly developing urban neighborhood within a metro area featuring just a 2-month supply of for-sale housing. All that being said, it took a deep marketing effort to find the lenders that were willing to provide a non-recourse construction loan that had high enough leverage to be acceptable to my client. A big part of the sale to the banks was the back-end LTV on the loan, which took some in-depth discussions with the appraiser to justify.
On the second deal, I sourced both the debt and equity for the project. On the debt side, my clients wanted higher leverage. I was able to get them 75% LTC with only partial recourse, again in part due to the various factors mentioned above. I also brought in the JV equity partner, a cross-border investment fund that specifically targets condominium investments and understands that condo investments generate high IRRs, but relatively low equity multiples. The JV partner was able to close before all the building permits were in place, with the understanding that the permits would be issued within a 2-month timeframe.
One of the major keys to success in condo projects is to deliver the units while the market is hot. If a developer takes too long sourcing capital, drawing up plans, etc., for his/her project, then he/she runs a substantial risk of missing the market. Don’t miss the market because you are having trouble finding the right capital for your deal.
The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.