The Real Deal Miami

Experts: Institutional lenders not budging on tough construction loan requirements

Hedge funds, investment firms filling the void with some South Florida projects

November 12, 2014 09:45AM
By Francisco Alvarado

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Jordan Ray and Daryl Shevin

Jordan Ray and Daryl Shevin

South Florida developers are increasingly in need of large construction loans, but institutional lenders are not loosening up their stringent requirements, leading some developers to look to alternative sources for funds.

With most of this cycle’s luxury condominium construction, lenders are only willing to finance a substantially sold out project with a high level of collected buyer deposits, developers and lenders say. A developer’s track record is also critical in getting banks on board.

“While the perception may be that markets have loosened a bit,” 13th Floor’s chief financial officer Daryl Shevin said, “we find that these three criteria are still a major point of focus for traditional banks.”

The mechanics behind $134 million in construction financing for two new residential projects in Miami’s Brickell neighborhood seem to bear that out. The developer of the SoMa at Brickell apartment project received $58.1 million in financing from Wells Fargo Bank, while Key International and 13th Floor Investments scored a $76 million syndicated loan from Regions Bank, Mercantil Commercebank and Citi National Bank for the 1010 Brickell condo development.

The primary reason the three banks provided financing for 1010 Brickell was a longstanding relationship between Regions and 13th Floor. Regions previously provided a construction loan for 13th Floor’s 400 Sunny Isles luxury condo project, according to Shevin.

“Regions was a natural option to lead the charge for the syndication of the 1010 Brickell construction loan,” Shevin said. “Their backing, coupled with the ongoing success of 400 Sunny Isles, went a long way in getting the other banks comfortable with the proposed loan.”

Messages left with representatives of Regions, Mercantil and Citi National were not returned.

Alice Esposito, executive vice president at Stonegate Bank, says institutional lenders are willing to finance construction for apartment buildings but remain reluctant to loan money to condo builders unless the developer demonstrates a reputation for finishing projects.

“A lot of banks don’t want a lot of condo exposure on their books,” she said. “Our chief credit officer doesn’t like condo deals because of the potential risks.”

Esposito said developers still have to rely on large deposits from buyers to fund most of the construction costs. Or they turn to investment firms that specialize in real estate financing, like Los Angeles-based Canyon Capital Realty, which has financed construction loans for 12 projects in South Florida, including $124 million for Property Market Group’s 57-story Echo Brickell condo tower and $28 million for the 374-unit BrickellHouse by Newgard Development Group.

When the Echo Brickell deal was announced last month, a key element cited was Canyon’s ability to provide non-recourse financing.

Canyon president Jonathan Roth told TRD the Echo Brickell loan covered less than 50 percent of the construction cost, which is typical of these loans, and cited the project’s “top-tier sponsorship,” Brickell Avenue location and presales accounting for 86 percent of the tower’s 180 units.
Property Markets Group representatives did not return phone calls seeking comment.

Greg Freedman, a principal at BH3, the company developing the 160-unit Privé towers in Aventura, said investment firms and hedge funds are filling the financing void with favorable terms.

“They have been ahead of the curve in that their approach is more entrepreneurial and less restrictive than traditional banks,” Freedman said. “They were first in providing low leverage, non-recourse financing and this has been a meaningful source for many developers.”

Echoing Shevin, Freedman said local and national banks are lending only on a limited basis to developers with proven track records and projects that have a significant number of presold units.

Another real estate investment firm extremely active in arranging financing deals is New York-based Mission Capital Advisors. The company recently completed its 15th debt and equity financing deal in South Florida since 2010 with a $21 million loan arranged for Miami Beach hostel Freehand Miami.

“We are doing a ton of financing on the condo side, as well as hotel redevelopment and office projects,” said Jordan Ray, Mission’s managing director for debt and equity finance. “We started in 2010 by doing the renovation of the Blue Moon and Winter Haven hotels in South Beach. We have done a bunch of condo conversions. Back then, it was harder to get construction financing.”

Today, with buyers putting up 50 percent or more on deposits, developers have collateral that Mission can present to debt and hedge funds looking to invest in South Florida real estate, Ray said.

“We have been successful in selling that concept,” he said.

In some instances, Ray said, developers can fund 90 percent of the construction through a combination of deposits, equity and a low leverage loan arranged through Mission.

On larger construction loans of more than $100 million, Mission normally deals with nontraditional lenders, Ray said.

“There is a ton of capital out there,” he said. “But very little of what we are doing is with local and regional banks. They are still being conservative.”

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