Shoppers hoping to buy a home aren’t the only ones finding real estate financing a challenge these days. Even big fish in the property game struggled to get funds.
Tustin-based Bridgeport Investments recently financed four Southern California deals worth $40 million. We asked Bridgeport founder Randy Bramel to give us an update on the local climate for corporate real estate financing.
Us: How tough is it the traditional lending environment for home developers and commercial real estate in Southern California these days?
Randy: Construction financing has just begun to become available for homebuilding and commercial/industrial properties in Southern California. Construction financing for homebuilding is being provided for larger, very well-capitalized homebuilders by the major banks, often in the form of a dedicated line of credit. For small- or medium-size builders, construction loans for specific projects are beginning to be done by banks — provided the builder has substantial homebuilding experience, good net worth and liquidity, no legacy projects carrying over from the boom days, and the number of homes being built on a speculative basis are small. The market focus for most of these lenders is infill or close-in locations. Construction financing for commercial/industrial properties has generally only been available on a build-to-suit basis up to this time. We are beginning to see some lenders offer construction financing for un-leased properties in strong markets and where the developer has strong experience in the product type being built, net worth, and liquidity. As we progress into 2011, the amount of permanent financing for quality commercial/industrial properties is growing to the point of being adequate. Properties with cash flow are generally able to attract debt: vacant buildings, for sale or lease, have very limited debt options today.
Us: How innovative must one get?
Randy: We have overcome some of these financing hurdles on behalf of our clients recently by negotiating debt financing provided by the seller; purchased property on all-cash basis until the property was leased; in other cases, financed the purchase of loans in default on an all cash basis; and, in some cases, used debt from non-traditional sources where the interest cost was more expensive.
Us: Obviously, part of the issue is the quality of the collateral. What’s your view about the current health of the local home development business and land values?
Randy: New home sales in strong locations, such as the Irvine Ranch, have done surprisingly well over the last year. However, in general, until the overhang of foreclosed homes is liquidated by lenders, the broad-based home development market will not be able to strengthen significantly. Many in the homebuilding industry do not expect the general market to strengthen significantly until sometime in 2013, and this assumes the local and national economy continues to grow. During mid-2010 residential land values in strong markets began a good increase, fueled by public homebuilders purchasing land. Since then, those land values have declined some after the excessive exuberance experienced, during mid-2010. Generally speaking, land values will probably not begin to improve again until new home demand becomes more vibrant.
Us: Same question, but for commercial real estate in Southern California?
Randy: The majority of distressed commercial real estate or loans have not yet disposed of by lenders or owners. It will take a number of years for this real estate and loans to be recycled. Over the last year, quality commercial properties with cash flow have sold at values significantly higher than previously anticipated due to strong investor demand and available debt and equity financing. Values for vacant buildings have been relatively static due to shortage of debt financing and the inherent risk in the marketplace. Construction of commercial properties has generally been limited to preleased buildings. Developers are beginning to look at building industrial projects, while office and retail markets continue to be oversupplied. Land values for commercial properties have begun recovering over the last year.
Us: Any idea when we’ll finally look back at these markets and say “That was the bottom?” …
Randy: Generally speaking, in most product types we have already hit bottom. However, should the economy enter a double-dip, all bets are off! And in the area of housing, many experts believe there is still some more downside exposure to home values.