Self-preservation and a reluctance to
become real estate managers inspire many
of these restructurings. A better measure of
lenders’ willingness to re-engage with borrowers can be gauged from what has now
become the Holy Grail, or ultimate achieve-
land for cash and putting together a plan,
with the intention of trying to get a construction loan in a few months,” he says.
“We know of situations where developers keep 50% of the equity in a deal and
still have difficulty getting a loan,” Kingsley
“We have another 12 to 18 months
before the gap becomes apparent and
lending shuts down again. If
the pricing is reasonable today,
take the money and run.”
CLIFF MENDELSON
Metropolis Capital Finance
ment of real estate finance: new development or construction finance.
Not surprisingly, the Grubb & Ellis trio is
less enthusiastic. “These are still the most
challenging of transactions to get accomplished,” Oelsner points out. “Some developers are inching toward deals by buying
says. “The only situations we see banks willing to talk now are those in which there is
a lease in place.”
A recent $52-million construction
finance deal in Frederick, MD, however,
suggests that lenders are opening up to
these transactions as well—albeit, as
Kingsley noted, with a lease in place.
What is particularly intriguing about the
330,000-square-foot project is that it would
have been challenging to complete even in
a “normal” finance environment and was
deemed all but impossible until recently,
according to one of the developers.
Developed by Matan Cos., the Advanced
Technology Research Facility project is a
specialized research and office development at the 177-acre Riverside Research
Park. The National Cancer Institute will
eventually occupy 62 acres of the park.
The special-use build-out that the facility
would require alone made its financing
difficult, says Dan Milligan, financing director of the Matan Cos. Realizing this, the
company early last year began taking lenders
on tours at a similar facility at Ft. Dietrick.
“There, the government has built a bio-pharm facility and lab within the building we
delivered. From the outside, the building
looks like a standard shell, but inside, it is a
highly specialized research facility.”
Then along came Lehman Bros.’ bankruptcy, which dissipated any cautious interest that had been building among lenders
for the project. That is, until this spring,
Extend and Pretend: This approach—so familiar to borrowers and lenders alike that it hardly needs an explanation—is one of the reasons why the number of distressed assets in the market has not been as high as most observers expected, at least, not yet. Lenders, not usually in the business of managing properties or bankrupting clients, have been extending loans for borrowers that are having difficulty refinancing in the hopes that they can survive long enough to see a more favorable nvironment for refinance. There is a school of thought, though, that this approach is only put- ting off the inevitable. “There could well be the other shoe that every- one is talking about,” says Wes Boatwright, managing director of Jones Lang LaSalle’s Real Estate Investment Banking team. “There is still a lot of concern out there about looming maturity defaults and how these loans will get refinanced.” Sooner or later, lenders will find that extend-and-pretend is no longer a sustainable course of action, especially if the majority of their loans are dubious enough, by current market standards at least, to require such a leap of faith. There are signs that this day of reckoning will be sooner rather than
THREE REASONS TO HOPE; THREE TO DESPAIR
later. Brokers have been busy developing “opinions of value” for lenders over the past several months, according to Charles Kingsley, EVP
in Grubb & Ellis’ capital markets division. These are, as their name suggests, brokers’ best educated guesses of building valuations. “Banks
are gearing up to make decisions to move their assets,” he says. “It is a
sign that they will start disposing of what they have on their books.”
That will finally get the equity capital moving, of course, but at the
expense of current borrowers desperate to stay afloat. “Banks are sitting down with developers on a daily basis,” Kingsley says. “But by next
year, we will see more banks selling properties and notes they’ve taken
back from borrowers.”
In fact, there are plenty of examples today. Jones Lang LaSalle
managing directors Michel Seifer and Noble Carpenter, along with
SVP Rob Hielscher, are currently marketing 188 Spear, a class A office
building in San Francisco’s South Financial District. Sold to Broadway
Partners as part of a portfolio sale in 2007, the property did not throw
off the expected cash flow; Broadway Partners eventually defaulted
and then ceded operational control of the asset to the mezzanine note
holder in a negotiated purchase.
