By: Justin Laub
Welcome to another addition of what we term “Difficult-But-Doable” Commercial Real Estate Loans! Now, lay readers may already be heading for the exits after reading that line – but for the commercial real estate professionals who decided to stay: sit back, get comfortable, and grab a bucket of popcorn!
I’ve financed a number of for-sale residential projects over the past few years. My most recent one, in a gentrifying urban pocket of Dallas, TX, was particularly tricky. Why? For starters, my developer client had never built a condominium project before. Secondly, the neighborhood had only recently entered a redevelopment upswing and there weren’t good sales comps (specifically in that immediate neighborhood) to fully support the exit price assumptions. Oh, and to top it all off, the sales team was not yet in place and my client did not want pre-sales to be a condition to funding the construction loan. Phew. This, folks, is why our firm gets hired!
How was I able to get this project financed? First of all, the loan required a deep and wide marketing effort. Most lenders in today’s market have limited capacity for new construction, so finding a home for a construction loan inherently difficult. Secondly, I did a thorough underwriting of the project and the sponsorship to create a loan package that I felt would be well received by lenders that have construction lending capacity. The loan that I pitched was at a reasonable leverage level, given the constraints mentioned above. This satisfied my client while at the same time giving the lender comfort that this was a safe bet, with sufficient equity in front of the loan. Finally, I knew the market well and could articulate why the project was worthwhile.
Those, however, were not the only reasons that a lender stepped up to do this deal; the project had some inherently attractive features that I heavily leaned into. It was my task to communicate these clearly, concisely and consistently. The inherent strengths of the deal were: i) a strong financial guarantor for the loan (sufficient for the size of the project) and, ii) that it offered a product that was in high demand. Based on my extensive experience financing urban, for-sale residential projects in Dallas, I was intimately familiar with the market and was able to speak to the project’s competitive advantages.
The development offered residential condominiums at a price that was unmatched in Dallas’ severely supply-constrained residential market. Can you imagine that?! Dallas and “supply-constrained” in the same sentence? Well, that’s actually the case for the supply of new homes in Dallas! The developer was able to offer his units at a particularly attractive price for three main reasons: i) the land in the newly gentrifying neighborhood was slightly less expensive than other urban pockets of Dallas, ii) the condominium units were efficiently laid-out and on the smaller side, which made their price points lower in absolute dollar terms, and, iii) the developer was able to use an existing parking structure on the site to creatively reduce the overall project costs.
It took an intimate understanding of the market to be able to effectively communicate this loan to the lending community. I was ultimately able to find a traditional bank lender with regional presence to do the loan on attractive bank terms, without any pre-sale requirement. The developer already construction permits and was able to move forward on this project immediately.
When it comes to condominium projects, time is of the essence: you want to deliver your product to the market while it is hot. For strategic advice on how to deliver your next development project on time, you can reach Justin Laub, Senior Director, at firstname.lastname@example.org, or visit the Metropolitan Capital Advisors website at http://metcapital.com.
The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.