Commercial lenders are banking on the repeal of Dodd-Frank to improve the increasingly tight lending atmosphere in South Florida. While the pace of requests hasn’t slowed down, most lenders The Real Deal spoke to said they are not financing ground-up development at this stage in the real estate
cycle. And they are much more selective these days about which ongoing projects they do give loans to.
A prime example is Privé at Island Estates, a luxury condo project under construction in Aventura. The project has been embroiled in litigation with neighboring homeowners, one of the factors making it difficult for the developers, Gary Cohen and BH3, to secure financing. In late 2015, Maxim Capital, which specializes in short-term lending, provided $25 million for the project. The developers had been seeking an additional $147 million but eventually settled on a $102 million construction loan post-top-off from Maxim and Prophet Capital Asset Management, a Texas-based nontraditional lender.
“There is plenty of liquidity in the market for most projects, though borrowers may find it slightly more expensive and will need to bring a little more equity than in the last couple years,” said Steven Fischler, founder and principal of New Gables Capital. He said that if the presales are there, banks don’t have an issue with extending loans —with caveats. “We’re mostly extending renovation/bridge loans where the end result is a cash-flowing property,” Fischler said.
Outside of condos, some lenders said they’re cautious about the hotel market in South Florida. However, industrial, office and retail all have strong fundamentals, they said. And the Trump administration could give the industry a boost.
For more on the latest challenges and trends affecting commercial real estate lending, we turned to those holding the purse strings.
George Gleason
Chairman and CEO, Bank of the Ozarks
What is your bank’s approach to lending these days? Many lenders tend to move as a herd running into or away from various geographies or product types depending on changing market conditions or headlines. We try to take a much more thoughtful and careful approach, looking at the merits of individual projects.
Have any of your business practices changed in this environment? We’re not underwriting as much growth as we used to. Otherwise, we continue to operate as we have been.
Are you extending credit for developers with outstanding loans, and if so, with what kinds of terms? Bank of the Ozarks is actively engaged in making new loans for projects across the United States, including the South Florida market. As it has always been, our focus is on marquee projects with quality sponsors, at low leverage and with very protective loan structures. We are a very conservative lender, and our terms on commercial real estate credits vary significantly from project to project depending on the unique characteristics of each individual project. As of December 31, 2016, our Real Estate Specialties Group had loans in South Florida with funded and unfunded balances totaling just over $1.3 billion. When all of those loans are fully funded, our weighted average loan-to-cost will be 38.7 percent, and our weighted average loan-to-appraised value will be 32.3 percent, both reflecting our very conservative lending culture. We are the sole senior secured lender on each of these projects.
How competitive is the market among lenders? There is a lot of competition. Developers have gotten into the lending space, and I expect that to continue until such time when asset valuations drop and some of the developers start acquiring again instead of lending.
Eddy Arriola
Chairman and CEO, Apollo Bank
How do you think the new administration will affect lending generally? This administration has a pro-business mantra, but the real signal is that of uncertainty. Uncertainty on trade, taxes, the ability to execute policy changes, and questions about whether the president can stay in power without a major scandal is keeping some businesses from making investments. We still have the tailwinds of low interest rates and the mild recovery to get us through 2017, but the business community needs to be confident that Washington has a plan by the end of this summer if real investments are going to be made that will have a positive impact in 2018 and 2019.
What is the biggest challenge you’re facing at this point in the real estate cycle? The greatest challenge is that many people in business have short memories. I think the next crash — whenever that occurs — will result from a new generation of hotshot investors thinking they’ve figured it all out, even though they don’t have the benefit of having been through past cycles. The good news is that many bankers and borrowers learned many lessons over the past decade; the strongest are the ones that survived, and they are most likely to thrive.
Do you only extend construction loans when a project has reached a certain sales threshold? Presales are one factor, as is a sponsor’s track record of past performance. We want to see proof of concept, confirmation of demand and an ability to close. If a developer budgets to sell a project out at $400 a square foot and they end up blowing things out of the water and getting $750 a square foot, we are thrilled for them. But the commercial banks don’t get any upside — we just want to make sure we get back our principal and the interest promised. We assess risk and make projections based on the information we gather, but we aren’t in the position of speculating.
Has the velocity of requests from developers changed over the past year? There is still significant interest among borrowers, and if anything we are seeing developers become more creative and realistic in setting expectations — the ghosts of the last recession are still clear and not forgotten.
Steven Fischler
Founder and principal, New Gables Capital
What lessons did you learn from the past cycle, and did that have an effect on what loans you have issued this cycle? Looking at condo inventory loans, it’s hard to predict where the market is headed. If there is a drop, how large of a drop, for how long, et cetera. We have seen buildings close their units under contract, and 30 to 40 percent of the units come back to the market as resales, and a good percent of those are willing to take losses to sell. When looking at a condo inventory loan in a building like that, it’s very tough to get comfortable. Last cycle to this one, we’ve stayed away from inexperienced developers and excessive leverage.
What is the current demand and supply for condo inventory loans? This is just starting to come back. There are lots of lenders willing to make these loans. Given the way most of the projects have been financed in this cycle, with low-leverage debt and buyer deposits, there isn’t as much of a need for inventory loans as there was in the last cycle.
Charles Penan
Managing director, Aztec Group
What sectors of commercial real estate lending in South Florida are the strongest? The weakest? The most desired sectors for lending in South Florida today are existing office properties in the central business district, grocery-anchored retail centers, followed by stabilized multifamily projects. The weakest is for-sale product, speculative development of any kind and land.
How do you think the new administration will affect lending? I think the new administration will be great for the real estate sector. Modifications will be made to the Dodd-Frank Act, allowing banks to be more aggressive in their lending capabilities.
Are you extending credit for developers with outstanding loans? With what kinds of terms? Aztec is a mortgage broker, not a lender. With that being said, multiple developers have asked us that same question. Today, lenders have become very conservative, and construction debt is difficult to find. However, Aztec Group has placed several large construction loans for local developers that had a significant equity investment in their projects and strong balance sheets. Construction loan terms range from 55 percent to 65 percent loan-to-cost ratio for pre-leased office, industrial and retail projects. Multifamily construction loans range from 60 percent to 70 percent loan-to-cost ratio. Condo and hotel construction loans are the hardest to secure, while speculative developments and land are rarely being financed today by traditional lenders.
Greg Santin
Chairman, Miami Finance Forum and former vice president at BankUnited
Do you ever work with mezzanine lenders on deals? Banks will accept “preferred equity” in a deal but scrutinize the agreement between the developer and that “preferred equity source.” “Mezzanine lender” remains a bad word among local banks. When on the asset recovery side of our business during the downturn, I foreclosed out mezzanine lenders — none of which stepped up to protect their investment and pay off the senior secured loan ahead of them.
What sectors are most affected by the downturn in lending? Hospitality is the first area; clearly Zika affected our market, as the recent hotel bed tax figures confirmed. It is the most challenging area to find a loan on today, especially a hotel construction loan. But it can be done, and South Florida and Florida in general is a market which remains strong despite a slowdown short-term. Long-term, we are the envy of many in the U.S. market.
What are you seeing in terms of condo inventory loans? I only see a few small banks lending in this space and then debt funds. The issue is, the bank needs to underwrite each condo association when there are a few units in, say, five buildings. The time and headache is not worth the potential yield for that type of loan.
Gary Fitzgerald
Executive vice president of real estate banking, City National Bank
How do you think the new administration will affect lending? Steps by the new administration to generate job growth and stimulate the economy, if successful, should have a positive impact on lending and the banking industry in general.
What are the biggest challenges you’re facing at this point in the cycle? The biggest challenge remains exercising the proper discipline in a competitive market while achieving year-over-year growth objectives.
What lessons did you learn from the past cycle, and did that have an effect on what loans you have issued this cycle? The importance of deleveraging the industry is perhaps the biggest lesson learned from the last cycle. In application during this cycle, the resulting lower leverage will create greater margin and more sustainability during a market correction.
Suzanne Amaducci
Partner and real estate practice group leader, Bilzin Sumberg
What sectors of commercial real estate lending in South Florida are the strongest? The weakest? The most difficult loan to secure right now is a construction loan … Retail-based projects are also difficult right now since certain retailers are suffering from financial difficulties. Multifamily is still relatively stable. The best-positioned deals by far are mature stabilized projects that are seeking to refinance with low leverage.
What are the biggest challenges you’re facing at this point in the cycle? With the new administration, there are still many unknowns, so people are more hesitant to act. People expect a lot of changes, but they just don’t know yet what they are and what the effects will be, so there is a bit of a waiting game at this time. For example, how will changes in the tax code impact REITs? If you are a borrower, the more nimble you are and the more time you have to wait should benefit you.
How else do you think the new administration will affect lending? There is still a lot of uncertainty, but it does look like there will be an easing of regulations that will positively impact money centers and community banks and community lenders, both of which play a very active role in the South Florida commercial lending market. Tax incentives may also benefit real estate investors.
Do you ever work with mezzanine lenders on deals? Yes, mezzanine lenders are still active; they are just expensive and getting more so.
Are any of your business practices changing in this environment? During a downturn, we naturally do more workouts, but we still have a lot of long-term development deals and loan closings right now. Currently, I am doing a mix of sale transaction loans and mixed-use development deals.