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Commercial Financing a Tricky Business
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Commercial Financing a Tricky Business Experts provide tips at ICSC alliance seminar When developing any type of commercial project one of the most important aspects of the plan is the financing. Obtaining financing can be tricky, however. Recently, the International Council of Shopping Centers (ICSC) and the New Jersey League of Municipalities presented an alliance program that featured programs on developing and redeveloping the downtowns of New Jersey’s cities and towns. Attended by more than 75 developers, brokers and municipal officials, the attendees heard from mayors, retailers and financing directors on the pros and cons of developing and redeveloping New Jersey’s downtowns. Evaporating Capital First, the bad news: Richard Lechtman, assistant vice president of Nomura Asset Capital Corp.(212-667-1648), told the group that his company is not currently lending money right now because of a downturn in the securitization market. "Right now, we are in a state of flux," Lechtman said. Describing his company, Lechtman said that typically Nomura provides loans in the $1 million to $20 million range for B and C grade properties. Eighty percent loan to value deals are possible as well. The company, which operates as a conduit, takes individual loans, packages them and then securitizes them as bonds. Usually, institutions purchase these loans as investments. However, at the moment the company has too many loans on its books needing securitization and has stopped lending money until the current loans are securitized. "Basically, capital has dried up," Lechtman said. "My advice to you is to get a good mortgage banker to help you seek the best financing strategy," he added. Other panelists agreed. Noted Edward Brown, Principal with Devon Realty Capital, Inc. (610-975-4444), "Underwriting has tightened up. You need to be careful." Brown added, "Within six months we should know if we are in a lender’s market."Brown’s company works with Prudential which has created the Pru-Express Program that allows Prudential to get into small commercial mortgage lending. "We have money and are still on the market," he said. The Pru-Express Program provides loans in the $3 million to $20 million range. Loans are non-recourse/standard covenant and can be closed within 90 days. Borrowers can lock into a rate up front and forward funding up to 24 months is available. Loans are available for retail, office, industrial and multi-family users. Credit Tenants a Plus On the retail end, the company prefers to lend money for anchored shopping centers, power centers or freestanding facilities all having credit tenants. Preferred anchors of shopping centers are supermarkets. The average loan size ranges from $3 million to $10 million. During 1997, the company provided $2.6 billion in loans nationwide. Brown’s company represents the Delaware, New Jersey, Pennsylvania and western New York markets and in 1997 provided $150 million in loans. During 1998, the company was expecting to lend more than $200 million. Before lending money, the company looks at the location, including the traffic, demographics and proximity to other retail uses. An appraisal is performed and a review of the property’s leases is performed. Also helping to paint the current financing situation picture was Catherine Garrity (732-220-3263), senior vice president-municipal financing department for PNC Bank. Garrity provided insight into the current lending picture through an in-house memo at PNC. In the memo, it was noted that real estate markets nationwide are stable, but a near-term slowing of the economy was foreseen which would dampen the demand for real estate. New development was also predicted to shrink. She also noted that the company needs to move on loan securitization, that non-bank financing is getting harder to get (see Nomura), and that cap rates will be rising. Using a stoplight analogy, Garrity said that retail lending is in the amber to red phase. "Short-term leases are particularly troublesome," she noted. Garrity said that her bank is relationship-oriented and that the bank will support its existing clients. She also noted that her bank focuses on construction lending and can underwrite bonds. "In the past we have done spec lending, but got burned," she said. "We prefer to develop a relationship with a client." Garrity also noted that the company also keeps a close eye on consumer confidence. Tax-Free Possibilities Caren Franzini, executive director of the NJ Economic Development Authority (609-777-4471), outlined ways to access capital for projects. The NJEDA is a self-supporting organization and charges fees for its services, but provides developers with other financing options. The NJEDA is a lender for small to medium borrowers and prefers to work with banks. However, on occasion, the authority will develop property on its own. "As a borrower, your first priority to obtain financing should be a bank. The NJEDA should be second," Franzini said, adding, "sometimes you need to do some creative financing and there is a lot of tax-free sources available." One example of tax-free financing is bond financing which can be accessed through tax-exempt means. Franzini noted that current interest rates range between four and six percent. Illustrating an example, Franzini said that the proposed Jersey Gardens project, which will be developed by Glimcher Realty Trust on a 200-acre former landfill site near Elizabeth, is a $360 million project that also needs $150 million in infrastructure improvements. The NJEDA issued $140 million worth of bonds to the city of Elizabeth that are guaranteed by Glimcher. The bonds are tax exempt. "Junk bond level," Franzini said. Taxable bond financing is another way to go. "Taxable bond financing can be issued for all types of projects," Franzini noted. "This is a good source of financing when times are tough." Providing more examples, Franzini said that the NJEDA issued $1.4 million worth of taxable bonds for Labor Plaza and $1.5 million for Pathmark Center in Camden. In addition, Franzini said that other types of funding for development are available, such as the Hazardous Discharge Site Remediation Fund, which provides money to clean up hazardous sites to be used again, and the NJ Urban Site Acquisition Fund which provides financing for cities and towns. Summing up the financing picture, Jeffrey Newman, Esq., ICSC NJ State Government Relations Committee Chairman and Chairman of the Real Estate Department of Sills Cummis, P.C. (973-643-5788), and moderator of the session, said, "the bloom is off the rose, which is not necessarily bad. Downtowns may be the place to go because there is less risk. Probably less malls will be built for awhile. It is the downtowns’ turn."
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