Developers Obtain Guidance on Alternative Funding Sources, Business Strategies
- Dec 03, 2008
By Keat Foong, Executive EditorWashington, D.C.—Chapter 11 may not be such a bad thing after all. It can provide the borrower leverage in negotiating with the lender on project loans. That was among the suggestions made by experts at a recent teleseminar sponsored by the National Association of Home Builders entitled “Alternative Funding Sources: Ideas and Perspectives to Keep Your Business on Track.” “Banks know what their rights are. You need to know what your rights are,” said Harley Riedel of Sticher Riedel, Blain & Prossner, P.A., Tampa, Fla. Riedel has served as counsel for the debtor in possession in many of the largest bankruptcy cases in Florida. He said that Chapter 11 is a “tool” for the borrower.“If you wait too long” to consider Chapter 11, it may be “too late,” he said. Although developers may want to avoid Chapter 11, that “doesn’t mean you don’t talk to your lawyer about it,” he advised. The filing of Chapter 11 allows the debtor to “create money,” said Riedel. The new money that comes in to fund the project under Chapter 11 can be senior to the existing lender’s debt. The “mere threat” of this arrangement may result in the lender being more flexible in negotiations. Another tool the borrower can use to his advantage under Chapter 11 is turning the term loan in effect into a revolving loan. Chapter 11 treats the sale of some assets as cash collateral. The proceeds of the sale can be used for purposes other than paying off the creditor. Troy Taylor, of the Atlanta-based Algon Group, provides real estate and financial advisory services including raising capital, litigation support and monetizing unique and illiquid assets. Taylor said it is very difficult to obtain bank financing for new projects today unless it is a local community bank the developer knows very well. “Traditional financing is extremely difficult in the near-term,” he said. Taylor suggested there may still be plenty of capital available for “great, great, great” home construction projects, but the terms may be onerous. He said capital from private sources and hedge funds is expensive, and 20-30 percent investment hurdles from some investors render 95 percent of projects not economical. Wall Street capital likes bigger projects, he said, and these need to be packaged extremely well. The developer needs to hire advisors who have credibility with these investors. These institutions are obtaining hundreds of applications and the applicant would be competing with applicants from the entire country, he said. Developers would need “friends and families” types of capital, or capital from local entrepreneurs, to bridge them, he said. Tom Stephani, of Stephani Enterprises Inc. and Custom Construction Concepts Inc. in Crystal Lake, Ill., develops commercial and residential land and builds custom homes. He said the developer’s first source of funding is his own equity. “If you do not have blood in the deal, no one wants to look at it.” He said that developers can also go to landowners as a source of financing. The land can be subordinated to the bank loan. And an LLC can be formed with the landowner’s interest in it based on the land cost’s percentage of the total development cost. He also suggested that friends and family capital not be underestimated. A lot of people pulled money out of the stock market and may be looking for a place to put their money, he noted. Contractors are another potential source of financing, Stephani pointed out. Contractors may want work, and take a piece of the project’s upside based on the value of what they put into the deal. Ron Robichard, of Robichaud Financial Servies based in Loconia, N.H., moderated the session.