By Luis Flores, Arnstein & Lehr
Today’s lending environment for condo construction financing is quite different compared to 18 months ago. The evolution of the condo market is constantly presenting new challenges and demanding development teams to be creative and resourceful.
Now that construction lenders have had an opportunity to familiarize themselves with the new business model of condo developments, construction financing has begun, and continues, to flow into our market. By that, I mean the lenders understand and have confidence in the new capital structure, which is made up of (i) a developer’s equity, (ii) the purchaser deposits (typically up to 50 percent of the purchase price), and (iii) the construction loan. When the great recession ended several lenders were not entirely comfortable with the new purchaser deposit structure, but as developments began and purchasers posted their deposits at the agreed upon benchmarks, i.e. upon signing, then upon groundbreaking and then upon building top-off or floor completion, the lenders confidence grew.
But developers now face a new set of tests when trying to secure construction financing, in part, due to the growing number of condos being planned in the region. South Florida has nearly 40,000 condos recently completed, under construction or in the planning stages. The main challenge is distinguishing your project from the rest so that a lender, which probably has a limited number of projects it may green-light in South Florida, chooses your project over another. With nearly 200 condo towers approved or proposed in South Florida, Developers must come up with very unique designs and a flawless business plan in order to capture a lender’s attention in today’s competitive market. The competition for construction financing is, in part, giving way to some of the most luxurious and sophisticated condo developments in the history of South Florida. Good examples include the Porsche Design Tower by our client Dezer Development and Muse by our client Property Markets Group, in partnership with S2 Development.
Another challenge is doing business with the right lender. Developers must reach out to lenders that are intimately familiar with the nuances of the South Florida real estate market, otherwise they must invest a lot of time educating the lender about the idiosyncrasies of our market. Our market is uniquely different to any other condo market in the country. A lender must understand, among other things, our deposit structure, the buyer demographic and the importance of a strong sales team. In many instances new lenders to our market may impose unnecessary conditions on a project’s development, whereas a lender with experience in Miami or Fort Lauderdale understands that seasoned South Florida developers may be given flexibility and freedom to run the construction and development of a project with minimal interference.
Many of our clients have overcome those challenges and closed some of the region’s largest construction loans. For example, in March 2015, we represented J. Milton & Associates in closing a $136.5 million loan for the construction of the Parque Towers project in Sunny Isles. The lender is Wells Fargo. In December 2014, we represented PMG-S2 Sunny Isles LLC in obtaining a $167 million construction loan from Guggenheim Commercial Real Estate Finance to build the Muse project. In November 2014, we represented PMG Downtown Developers LLC in acquiring 300 Biscayne Blvd. for a purchase price of $80 million, which included a $48 million acquisition loan from Fortress Credit Co LLC. In October 2014, we represented PMG Brickell LLC in obtaining a $123 million construction loan from Canyon Capital Real Estate Advisors LLC to build the Echo Brickell project.
Based upon the volume of transactions our firm handles, we have identified an interesting trend among financial institutions. Lenders making acquisition loans for developable land are, from time to time, including provisions in their loan documents which grant them either (a) the right to first offer a construction loan on the project, or (b) the right to match any term sheet received by borrower for a construction loan on the development. This is a smart strategy. If a lender agrees to make an acquisition loan it is because the lender trusts the developer and believes in its vision for the site. Therefore, when it is time to develop the property, that lender may want to play a role in turning that vision into reality. Lenders are looking to do business with highly experienced developers; so, this is a way to guarantee they will have a foot in the door when the borrower is prepared to commence construction and go vertical.
South Florida is increasingly becoming home to less traditional lenders of construction financing. The differences between a non-conventional lender and traditional financial institution are several. If a non-traditional lender also has equity investments, it is more likely that it will be willing to accept alternative investment structures on the development side. This is because a lender with equity partners in its own projects understands that investors in today’s market may want other returns in lieu of capital, i.e. the right to acquire portions of the project, or the right to convert their investment into a real estate interest. On the other hand, a traditional financial institution will be more guarded in those types of circumstances.
One thing traditional and non-conventional lenders have in common is that they want to see developers join forces with a very experienced team of professionals, including architect, general contractor, sales team and legal counsel, among others. A seasoned development team gives them confidence that it will be able to mitigate risks and successfully complete the development.
Overall, the growing number of luxury condo high-rises going up, unlike in the last cycle, won’t end in a correction. Why? Because there will be a further boost of confidence to the market once the latest batch of condominium buildings receive certificates of occupancy, and the contract purchasers of those condominium units close on their units. In addition, the influx of new lenders to the market indicates additional projects will be built over the next 24 months.
Luis Flores is a partner in the Arnstein & Lehr’s Miami office and chair of the firm’s Florida Commercial Practice Group. Flores focuses his practice in the areas of real estate, banking and transactional law. He represents developers in the acquisition, construction, development, leasing, refinancing and sale of vacant land, condominium projects, multifamily housing apartment complexes, hotels, commercial shopping centers, and commercial office buildings in Florida, Pennsylvania, Tennessee, Alabama, Georgia, Louisiana and Texas. Arnstein & Lehr LLP, with offices in Illinois and Florida, is one of the country’s oldest and most respected law firms. Since its founding in 1893, the firm has served clients of all sizes throughout the U.S. and abroad. It is a full-service firm with attorneys practicing in five main practice areas – business, litigation, local government, tax and estate planning services and real estate.