“We’re like pretty much everybody else right now”: LA’s developers confront a new reality

Chris Rising is the type of customer banks ordinarily like to keep happy.

His company Rising Realty controls roughly $1.5 billion worth of prime real estate across Southern California. The firm has built a reputation by transforming shabby, historic properties into creative offices that command top-dollar rents from tenants, all with an eco-friendly bend. And because they take on numerous projects at once, Rising needs to put money to work. Lots of it. So when he calls, bankers pick up the phone.

But like thousands of other small business owners hoping to score a federally backed Paycheck Protection Program loan before the tap ran dry, Rising couldn’t even get Wells Fargo, the nation’s fourth-largest bank, to answer his call.

“At the end of the day, they just weren’t there,” Rising said of his attempts to reach out to Wells Fargo’s loan application office, a series of aggravations the developer chronicled on Twitter.

Because Wells Fargo, his company’s lender of many years, left him out in the cold, Rising scrambled to find other lenders who could help him pay his 34 employees. He found them in First Choice Bank and CalPrivate Bank, a pair of small regional banks.

Rising’s frustration with Wells Fargo — which issued just $120 million in loans as part of the $349 billion program and is already facing lawsuits for shuffling its feet — underscores a larger, very unwelcome change in job description for developers across the country.

The coronavirus pandemic has changed developers’ lifestyle overnight. Just weeks ago, their days were filled with power lunches at Spago, private meetings with city officials, and exclusive networking events with architects, general contractors and investors only too happy to make their acquaintance.

In the age of corona, developers are in their home offices grinding out rent negotiations with hard-up tenants and trying to catch a break on their mortgages with unsympathetic, sometimes-absent lenders. Those still hunting for opportunities can’t find willing sellers. And even if they could, good luck getting a bank to issue debt on a new project.

“We’re pretty much like everybody else right now,” said Charles Quarles, of residential developer Bedford Group. “Sitting and waiting.”

Banks to the left of me, tenants to the right

Developers tend to be either villainized as wreaking havoc on unsuspecting communities (think “It’s a Wonderful Life” or “Poltergeist”) or lionized as the creators of great American cities.

In both instances, they are people with the power to impose their will, a view perhaps shared by the Los Angeles City Council, which has sought to curb their clout.

But amid the pandemic, developers are just another small business at the mercy of larger economic forces and frightened banks. They’re nowhere near the top of the food chain.

The Real Deal interviewed about a dozen Los Angeles-based developers to get a sense of how they’re navigating the crisis, what their discussions with lenders and tenants look like, and how the numbers are penciling out across various asset classes.

The landlords told TRD that they’ve seen a decline in April residential rents of between 6 percent and 12 percent, and a slide in commercial rents of 10 percent to 20 percent. The starkest declines are retail and restaurant rents.

“We just kind of have to put up with them,” Shopoff Realty Investments president Bill Shopoff said of such tenants, which include an office supply firm, an apparel store and a national chain restaurant.

Shopoff said he and his employees spend their days re-negotiating lease terms with tenants at his various shopping centers across California, Nevada and Texas. Every deal is individual, and they all test Shopoff Realty’s business model and ingenuity. “Light-speed decision making” is the name of the game these days, he said.

On the residential side, developers said there exists a loose formula: 60 percent of rental income to pay the landlord’s mortgage, 30 percent toward operating expenses such as building maintenance, and 10 percent kept as profit.

A building that collects 90 percent of its rental income, then, is breaking even, and when rent payments drop beyond that, landlords must draw from reserves or renegotiate loans. (Government regulations stipulate that tenants cannot be evicted during the coronavirus pandemic, and even if they could be booted, it’s not clear who would move in.)

Neil Shekhter, who owns 2,000 apartment units across Los Angeles and Santa Monica, said he’s at the point of roughly breaking even on revenues and expenses.

The federal government has offered mortgage payment deferral for loans guaranteed by Fannie Mae and Freddie Mac, and Gov. Gavin Newsom struck a deal in late March with individual banks to provide a 90-day grace period for mortgage payments.

Developers, though, say they mostly have not used these relief programs, fearful of incurring the long-term wrath of financial institutions.

“A lot of people seem to think there’s no cost to mandating deferred rent payments, because lenders are forbearing,” said Moses Kagan, residential developer and landlord at Adaptive Realty. “But I expect lenders will remember who paid and who didn’t.”

An ice-cold market

The developers TRD spoke with kept matters in perspective — they have their health, their jobs, and are hardly the most acute victims of the pandemic.

Some, like Paul Julian, principal at Irvine-headquartered multifamily developer Advanced Real Estate services, said business is chugging along thanks to construction being, more or less, an “essential” industry. “We’ve been able to continue our renovations because of the residential construction exemption,” said Julian, who owns apartment units in Los Angeles, Orange and Riverside counties.

In fact, Julian says he’s in a position to keep doing deals and thought the crisis could present a juicy buyer’s market. He soon learned otherwise.

“Of course, we would love to find acquisition opportunities,” Julian said. “But we’re just in such a tight market and there’s a lot of capital on the sidelines.”

“What we’re finding is that the sellers are indecisive. We have offers, but we haven’t heard back,” the developer added.

Ideal Capital Group’s Kevin Conway said that the lack of activity is not all bad, since it means property owners aren’t panicking. “Owners are not over-leveraged and thus do not need to sell,” he said.

Still, developers expressed frustration and restlessness with a dormant market.

One issue is that while developers influence local politics — industry lawyers and lobbyists are fixtures at City Hall — they are relegated to bit players when Congress and the White House hammer out trillions of dollars in relief to various industries.

Some property owners say they haven’t gotten the relief of either other industries or the tenants who pay them rent, prompting residential developers and landlord trade groups to write to Congress earlier this month with a laundry list of requests.

“I think that the federal government needs to make some type of rule that you cannot help one group by hurting another,” Shekhter said.

Aiding the airlines, restaurants, and cruise lines is all well and good, Shekhter added, but landlords who provide places to live deserve greater attention.

Others, like Rising, are more optimistic about federal help.

“I think the government is flooding the market with money,” Rising said. “It’s pretty hard to see winners and losers” from the stimulus.

Landlords, for example, benefit if businesses and individuals use their stimulus checks to pay rent.

No government action is more eagerly anticipated than Newsom and local officials relaxing unprecedented “shelter-in-place” orders, which would enable developers to network, visit sites, and cut deals in person.

“I think the chorus is starting to build,” Rising said. “There is a big push to get back out there.”

But developers may have to keep patient. Newsom said at a news conference last week that it could be weeks if not months before business as usual returns in California. Noted the governor, “We’re not out of the woods yet.”