Financing Large Ground-Up Projects
- Jan 06, 2016
Without question, the backbone and starting point of any development project is financing. A large project can be much more complicated financially, as there are multiple factors and changes in circumstances throughout the timeline that can affect cost. Below are some best practices to consider as you begin a large project from the ground up:
Understand Your Market
Before you can convince anyone to support your project, you have to establish you’re working within a viable market. You must know both the demand characteristics, and development pipeline/future supply related to your market in order to effectively estimate costs and approach lenders. In terms of demand, you need to make sure the market you’re in supports an expanding economic area, particularly paying attention to job growth and other employment characteristics. If the city you’re developing in isn’t experiencing any economic growth, how can you expect to consistently lease a project? It’s also essential to know if you’re working in first or second tier markets or within a smaller city market. Have those conversations with lenders from the beginning so you don’t waste time trying to convince a lender who may not have the capacity or the ability to invest in your market in the first place.
Stay on top of trends
Beyond understanding the generalities of your market, you have to keep track of various trends that may affect the viability of your project as you move forward. From the very beginning, you must stay aware that your plans are subject to change, and you need to determine what changes should be incorporated or left out of future plans. You must work in tandem with your leasing and property management teams as you’re going through the construction and leasing process to gain feedback from your target market. Balancing that feedback with what’s feasible financially is key to making sure your project remains competitive and will see increased rents throughout lease-up. At the end of the day, you want the project to be something better than what you started with.
Expect change, and be ready to adapt
While you want to make sure you’re setting the most accurate pricing possible at the beginning of your project, you have to make room for market changes which are sure to come. At the beginning, you and your lenders are mostly working with carefully determined estimates, but once you reach the middle of a project, you can expect the market leasing characteristics to take an effect. When you begin pre-leasing your project, you move to a phase in the project where it becomes clearer if the model you set forth is achievable in terms of leasing and rent, as well as if it will meet the absorption rates you projected.
Keep all parties informed
Development is shifting to multi-use projects, which means more factors than ever before affect the financial attractiveness of your project. Keeping all parties informed is the best way to maintain good relationships with your lenders and reach a successful conclusion. A recent example from The Beach Company is The Boulevard, a mixed-use development in Mount Pleasant, South Carolina. As a post-recession project unlike any other that had been previously developed in the greater Charleston market, it became a challenge to get lenders on board with some of the concepts. There were many different factors on the debt and equity sides, and we made sure our lenders/partners understood and supported each aspect throughout the process. The construction portion went smoothly, and the market proved the concept viable. To be successful, it’s not enough to secure financing up front; you must also build and maintain trust with your lenders/partners as the project moves forward.
Stick to your principles
Gaining financial support and completing a project successfully means being able to stick to your principles despite any challenges. It’s very easy to fall into the idea of following what everyone else is doing, or that you’ve gotten so far along in underwriting a development and invested so much on front end costs that you continue instead of not moving forward with the project. But if you do move forward and run into issues, you could be in an even worse position. Careful due diligence on the front end will help to avoid future pitfalls. This business requires you to be incredibly disciplined and make sure each project is meeting your own internal requirements. Do you stand behind it and recommend it to your partners? At the end of the day, financing your project depends on your ability to believe in what you’re doing and prove why.
Darryl Reyna joined The Beach Company in 1994. Prior to joining the company’s executive team, he served as a development partner and chief financial officer in the Mid-South Division of Trammell Crow Residential, one of the country’s largest real estate development firms. Preceding his time with Trammell Crow, Reyna specialized in the audits of real estate companies and financial institutions in both the public and private sectors for Arthur Andersen & Co.