Real Estate Journal — Financial Digest —October 13 - 26, 2017 — 7A
www.marejournal.com
M id A tlantic
F inancial D igest
By Brendan Coleman, Walker & Dunlop A Changing Money Game for New Construction - The Rise of the Capital Stack
A
Payments of this nature add up quickly and can build up quickly once a project is com- pleted, when properties are still building both their occupancy and the resulting income. Because developers are in- cented to pay off equity funding sources as soon as possible, bridge loan financing has be- come an increasingly attractive option. This solution allows pre- payment options as well as the ability to convert to permanent debt once the project achieves a certain level of occupancy. The Bottom-Line Increasing numbers of de-
velopers are now coming to the conclusion that they need full-service partners with the contacts, expertise, and creativ- ity to navigate this increasingly complicated process. These ex- perts bring a team with access to multiple funding sources to lock down the best bank loans for initial construction, then leverage their contacts to identify and connect with the right equity partner to close the “funding gap.” Overall, in the Mid-Atlantic and nationwide, the funding cycle has become much more complex for developers. There
cross the Mid-Atlantic, the multifamily mar- ket continues to ex-
are challenges at each step, from construction funding and stabilization to ultimately se- curing a permanent loan. All of this change has made the composition of the capital stack more important than ever in development and new construction. It is now impera- tive to work with a commercial real estate finance company that has full-service expertise and can be a ”true consultant” and help developers make the right choice at every stage. Partnering with such a skilled firm to develop a streamlined strategy ensures a leg-up on
the competition, ultimately leading to more returns and success. About the Author Brendan Coleman is a managing director and the head of Walker & Dun- lop’s Combined Origination teams based in Bethesda, MD. He is primarily respon- sible for new loan origination and specializes in Fannie Mae and Freddie Mac multifamily products, while also developing other lending relationships for the company’s Mid-Atlantic Debt and Structured Finance Group. n
pand, but the money game is shifting for new construc- tion projects. Be caus e o f these shifts, the region’s d e v e l o p e r s mu s t ha v e
Brendan Coleman
new strategies to successfully finance their projects and maxi- mize profits. The Financing Shift From 2010 to 2015, banks were the largest source of con- struction financing, typically providing loans for near-total construction costs at a rela- tively cheap rate of 2.50% on top of LIBOR. Now, due to changes in regulations, the previous 75-80% leverage has dropped to about 65%, and developers are paying almost twice the interest rate due to rising spreads and increase to the LIBOR index. The new, more conservative approach to bank financing has caused loans to become smaller and more expensive than before. This, paired with rising construction costs, has created a “funding gap”, forc- ing multifamily developers to seek alternative approaches to finance their visions. The Quest for Equity in Construction Funding Because bank financing sim- ply does not stretch as far as it once did, developers face the challenge of funding total construction costs while also ensuring future returns. Most employ one of two options: • Take the funds out of their own pockets; or • Find additional equity partners. Neither choice is ideal; fund- ing a project in-house dimin- ishes returns and increases risk – not an attractive combination. On the other hand, develop- ers who choose not to self-fund must find additional capital to get the project built, which requires navigating a segment of the market where they may not be well-versed. Moreover, developers who choose institu- tional or preferred equity part- ners to provide funds often find that these relationships come with trade-offs such as: higher rates than traditional bank financings, in the range of 12- 15%; or a required ownership stake with balance accrual.
Delivering the deal.
Understandingwhat’s important.
At M&T Realty Capital Corporation, we understand that speed and certainty of closing complicated transactions is important for commercial real estate clients. We have more than 160 years of experience building relationships, providing seamless execution, and tailoring financing solutions to meet your unique needs. With $3.4 billion in commercial and multifamily loans closed in 2016 alone, M&T Realty Capital Corporation offers the know-how and experience you need to close deals with confidence. To find out how we can deliver for you, call 1-800-737-2344 or visit learnmore.mandtrcc.com.
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