Developers and Lenders: The Key to Stimulate the Economy
Jan 19, 2011
There are a number of inside jokes between real estate developers who have gone through the ups and downs of economic cycles that only developers themselves would appreciate. "Dear God, give me one more chance at a up cycle and I will not blow it this time." Or, "A dollar borrowed is a dollar earned". The truth of the matter is that being a developer is not a joke but a very serious game of risk and reward.
Developers today are facing serious challenges to survive and this country will not get out of any economic downturn until developers are allowed to develop. Developers are the key to the start of any recovery; they are an integral part of growth in business in both the public and private sectors. Developers jump-start all aspects of the real estate industry that supports contractors, architects, attorneys, real estate brokers and all of the service providers that support the end user in development projects. In one word Developers create "jobs". Yet when government discusses ways to stimulate our economy, we hear about public works projects but we don't hear about ways to stimulate "brick and mortar" projects to get developers back on their feet.
So what is stopping developers from developing? The simple answer is that there is no money for development projects. Lenders today will not lend to developers unless their projects are absolutely super-conservative no-risk with high equity input. Development is all about risks and more importantly requires a long timeline cycle before a project can start and be completed. What better time to develop than when you are in a down cycle so that by the time the project is complete, it is in a better position to be in a up cycle.
Lenders today are so adverse to risk that any commercial projects that are pre-leased are not being funded. Lenders will not consider funding any project that does not involve AAA type corporate tenants. If your tenant mix includes independent operators who have good track records but lack deep financials, lenders will reject it. An example is a project in San Diego. A 40 million dollar development project hangs in the balance based on a local developer getting a lender to fund a project that is based upon a long-term lease with a very successful local grocery store operator. This operator only has one current store. However, the operator has a long track record of success running and eventually creating grocery store chains that were sold for huge numbers. This project sits on an abandoned site with boarded up buildings near a major freeway. This is the type of development that will help upgrade an area, provide new services to a large neighborhood and create both short term and long term jobs. Lenders continue to say no because the tenant is not strong enough.
So why are lenders being so conservative? They have to be; the federal government is demanding it. A key part of our economy is being held up by the feds creating unrealistic guidelines for lenders today and must change now. Yes, there is risk but the rewards are so much greater. Our so-called recovery is not deep and certainly cannot be sustained without a boost from construction. The Obama Administration needs to move now to free up credit for developers.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 26 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email email@example.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.