A handful of well-capitalized property developers say they are being contacted to form joint ventures with struggling smaller developers.
The changing lending climate has left some small developers stranded in the middle of projects that have had financing terms altered or haven’t gotten financing at all.
For larger developers, it makes sense to try to buy into a deal that’s already been through the acquisition phase. In some cases, the financial stakes are high for developers to try to establish themselves as “go-to” firms for these types of deals. While developers did not name specific joint ventures, several said their phones are ringing.
Daren Hornig, managing partner of SAXA, a real estate development firm, said he anticipates completing three deals by the end of the quarter involving equity partnering with smaller developers in order to complete their New York City projects.
“We’re being approached by a lot of developers who just can’t get their own financing because of cash issues and/or they don’t have the credibility so that banks will lend to them at the construction phase, even though the project may make good sense,” Hornig said.
Hornig said typically, smaller developers are seeking assistance once they’ve received acquisition financing to purchase land, which they are carrying, but they now cannot obtain a construction loan in the cautious lending climate.
Louis Dubin, president and CEO of the Athena Group, a private real estate investment and development company, said his firm is considering joint ventures in other parts of the country.
“We’re looking at a potential joint venture in Las Vegas with two very talented young developers who have some great opportunities but need the capital and some more infrastructure behind them,” he said. “We’re also looking at a prospective joint venture in Los Angeles.”
Dubin said opportunities to help smaller developers are not just occurring on residential projects, but also office, retail and mixed-use projects. “Because of the credit crunch, this applies to everybody,” he said, referring to residential and commercial developers throughout the country. “Everyone’s having problems getting credit for projects.”
But other large developers, financiers and lenders said they hadn’t seen an increase in joint ventures as a result of the credit crisis.
“I’ve sat with two significant groups that have a lot of capacity and are eagerly
looking for good deals that they can now
find their way into,” said Scott Singer, executive vice president at the Singer & Bassuk Organization.
“I think a pervasive sentiment among the very strong private owners is that the opportunities they expect to see have not presented themselves yet,” he said.
Rick Lavrich, a senior vice president at Helaba Landesbank Hessen-Thüringen, a German bank, also said he has not seen an escalation in partnerships. “Where we’re seeing joint ventures is when somebody owns the land to be developed, but that’s been happening all along,” Lavrich said. “Perhaps it’s happening a little more because sites are getting harder and harder to find.”
Also, sometimes smaller developers will approach larger developers to get them to guarantee completion of the project, said Steven Kohn, president and principal of Cushman & Wakefield Sonnenblick Goldman. “Even in good market conditions, that was happening,” Kohn said.
He said he has seen no instances of joint ventures being formed as a result of the credit crisis.
While the Kibel Company recently transferred a site at 305-309 East 33rd Street to a joint venture with the development behemoth Toll Brothers, that deal was not a result of the credit crisis, said David Von Spreckelsen, a senior vice president with Toll Brothers.
The problem for smaller developers who approach larger developers is that often, the larger developer essentially buys out the project, Kohn said.
“You may see a smaller developer who had already invested in a site and can’t get financing, who in effect almost needs to sell it to a larger developer,” he said. “Maybe they’ll keep a residual interest. But at the end of the day, if the initial developer is not contributing much equity and is certainly not going to control the development if they’re bringing in a larger developer, then is that really a joint venture?”
What may be more likely to happen is that lenders might urge their struggling
developer clients to form partnerships to carry out a development deal. Hornig said he believes lenders are also reaching out to seasoned developers.
“These construction lenders — or sometimes acquisition lenders, be it mezzanine or senior debt — they’re starting to call to feel us out as to our appetite for stepping into troubled situations,” he said.
Hornig said it makes sense for a large developer to look for opportunities to form joint ventures later in a development cycle. “Why buy a raw piece of land that will take you three years to develop when you can come in later and joint venture a piece of land that’s already been through a development cycle, and you don’t have to do acquisition financing?”
Adam Rose, president of Rose Associates, which has done many joint ventures with other developers in good and bad markets, said he has not yet seen smaller developers approach larger developers.
“Is it likely that some smaller firms will bring deals to us in the next 12 to 18 months? Yes, it’s very likely,” Rose said. “Do I have one I can point to? No, I don’t.”
Rose said he has, however, spoken with lenders about possibly assisting on some floundering projects.
“We’ve had some very preliminary conversations with a couple of money sources who said, ‘I don’t think my guy’s going to deliver,’ or, ‘The project has stalled,’ or, ‘They don’t have the credibility or depth’ or whatever, ‘Would you be interested in coming in?'” he said. “The answer is, ‘Of course we would.'”
Andrew Gerringer, executive vice president of the development marketing group at Prudential Douglas Elliman, said he is working with one developer who has been approached with buyout offers.
“Because they’re a very strong developer, property owners who can’t get financing have been coming to them to present opportunities to buy their properties,” he said. Gerringer also said he’s seeing more nontraditional sources of capital.
“Teaming developers up would make sense, but there may be some foreign banks that are starting to step into the picture to pick up some of these pieces,” he said. “That’s what I’m hearing now.”
Shaun Osher, CEO and founder of CORE Group Marketing, which does development consulting, said he is seeing developers without the clout or capital seek out sources of financing that traditionally have not loaned on real estate such as smaller venture capital funds and high-net-worth individuals.
Kohn agreed that the list of unorthodox sources of capital to help out struggling developers is growing to include private equity funds, hedge funds, opportunity funds, pension funds, insurance companies, offshore investors and community banks, among others. Some larger developers are even providing financing on some deals.
“There are even some larger developers — well-capitalized developers — who are providing what I would call ‘mezzanine debt capital’ for others,” he said, “though I see that happening more on existing assets than new developments.”
Singer said urging their struggling developer clients to form a joint venture, as opposed to defaulting on a loan, is a constructive way for lenders to work with borrowers. But worries about a takeover may induce borrowers to resist forming a partnership.
“The question becomes, is that big developer willing to work constructively with the small developer, or are they really just trying to take over and push them out?” Singer said. “I think some of each is very likely to happen.”