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Financing Real Estate Deals

March 17, 2008

Daily Business Report

March 16, 2008

FINANCING REAL ESTATE DEALS

Panelists at an Urban Land Institute San Diego/Tijuana District Council's capital markets presentation last week agreed that ramifications of the subprime lending meltdown are making it harder to finance all types of real estate deals, but that opportunities can still be found if developers know where to look and are willing to restructure their approach.

“Even in a bad market, there are always opportunities,” said panelist Steven Layton, principal and co-founder of LBA, a real estate investment and management company, recommending that developers identify opportunities often overlooked by others.

Layton added that he sees opportunity in corporate 's excess real estate assets. Many large companies are choosing to shed their real estate assets and may not be motivated the same way by market cycles as other real estate owners.

Fellow panelist Timothy Hennessey, principal with Prudential Real Estate Investors, says he sees opportunity in buying B-Notes (subordinate interest in a first mortgage or deed of trust) and other mezzanine debt from capital providers who may feel overleveraged.

Hennessey cited two primary challenges for developers that he noticed through the dealings of his company, explaining that less experienced developers had not worked through a real estate market downturn before and took optimistic risks that didn't pay off, but that they weren't the only ones to make mistakes. “Some developers had been aggressively taking land positions up and down the coast for vertical development projects and they can't re-trade,” he said, referring to the gap in the developer's financial projections used to secure financing for the land and the current value of the land based upon slower consumer demand for real estate.

Layton and Hennessey agreed that developers who have finished buildings, especially in the office sector, are turning their attention to leasing up their vacant space.

“Some markets will fare well, including west Los Angeles, Silicon Valley and Del Mar Heights,” said Hennessey. “But in Orange County , especially Irvine , the subprime meltdown opened up a lot of space and they have a lot of new product.”

Layton cautioned building owners that they should do what they can to lease buildings now rather than waiting until later in the year when lease rates might be forced lower.

The panelists agreed that office developers will have a harder time financing new projects, as pro formas that anticipate robust rent growth will invite scrutiny from funding sources. “Illiquidity in the debt markets is high, and it's like pulling teeth to get $50 million in loans,” said Hennessey.

Layton added that developers' ability to get loans later in the year will be worse. “Now rates are favorable and you can still find money,” he said. “Basically, if you can get the loans, they are good.”

When moderator Reid McGlamery, a v.p. at Jones Lang LaSalle in Los Angeles, asked how to bring liquidity back to the debt markets, Layton said the change won't start with traditional lenders. “Someone is going to do it,” said Layton . “Those who aren't lenders now will be, which will cause current and former lenders to come back.”