Category

New Construction

Multifamily Housing Supply Unfavorable to Lower-Income Renters

By | Commercial mortgages, Commercial Real Estate, Multifamily housing, New Construction

Lower-income households that are looking for affordable multifamily rental housing are faced with significant challenges. With little new stock affordable to them, many lower-income households are renting apartments that are beyond their financial means, leaving them less money for food, healthcare, transportation to work, and other necessities.

If changes to the stock of multifamily housing in the U.S., broken down by tenure, affordability, and assisted rental housing status. The results show that lower-income renters have lost ground recently. The average monthly rent of a unit lost from stock was $600 while the average monthly rent of a unit added was $1,000. In addition, while the number of units lost has decreased, lower-income renters experienced a disproportionate amount of those lost units, and that units added were affordable to higher-income renters. Only one-quarter of the units added (approximately 38,000 annually) were affordable to Very Low Income renters, further highlighting renter affordability challenges.

The results of this analysis show that both units added to and units lost from the multifamily housing stock experienced a slowdown between 2005 and 2013. In both cases, lower-income renters lost ground. Most of the multifamily rental stock lost was affordable to lower-income renters, with a median monthly rent of $600 in 2011 for these lost units compared with a $750 median rent for units remaining in the stock. By contrast, little of the new stock added was affordable to lower-income renters, with a median rent of $1,000 in 2013 for these new units compared with a median rent of $780 for units remaining in the stock. These trends show the challenge facing lower-income households that are looking for affordable multifamily rental housing.

Read the full report here

Six steps to keep your next commercial project out of trouble

By | Commercial Real Estate, Construction financing, New Construction

Community banks are ever monitoring and reviewing their commercial mortgage portfolios. These loans are typically their larger loans within the bank and as such get closer scrutiny from banking regulators. When local real estate markets run into trouble, the banks servicing commercial mortgages will be looking closely at each one for any signs of trouble. In addition, bank examiners will be looking closely at them as well.

So what are the signs that banks are looking for? How can you ensure that your commercial property associated commercial mortgage won’t end up as a troubled loan on the bank’s watch list? Well, sometimes there’s not much you can do when adverse economic developments tank the economy and cash flows on your property decline. However, here are some things you can do.

First, before you even invest in new construction, take a close look at the local commercial market. Ask yourself, is the market overbuilt? That is one of the first signs of future trouble for your project. Timing is important—sounds too simple, but it gets overlooked when everything in the economy is moving strong and fast. Even bankers get caught up in the euphoria.

Second, be sure you have done your homework on the project. Is there a market for the property? Is the project the right fit for the location? Is it the highest and best use for the location? Not having a sound feasibility study or analysis can lead to substantial problems later on.

Third, keep any selling or leasing concessions to a minimum. If concessions are being made to sell units or get lease commitments for a new project, it could be a sign of trouble if those concessions cause the cash flows to come in below the projected cash flows.

Four, stick to your plan if you did your homework. Making significant changes during the project’s construction can be very problematic. For example, if the project changes from a condominium to an apartment project.

Five, make sure you have adequate time to complete the project. Be realistic in scheduling enough time for each phase and make sure subcontractors are held to the schedule. In addition, be sure you have accurate cost estimates for each phase of the project. Construction delays or cost overruns can lead to renegotiated loan terms, something lenders look closely at as sign of trouble in the project.

Six, related to the previous step, make sure your construction draws are in line with your budget submitted to the lender. Periodic construction draws which exceed the amount needed to cover construction costs and related overhead expenses is a sign a project could be troubled.

Following these general steps will help your next project be a success. Lenders like to work with people who have sound plans for their project and are accurate with their cost estimates and market potential. Anything you can do to assure the lender that you have thought through and prepared sound plans will go a long way in obtaining financing for your new commercial property. We would enjoy discussing the financing for your next commercial real estate project. There is no cost or obligation until we find a committed lender will and able to finance your project.

How to get your construction loan approved.

By | Commercial Real Estate, Construction financing, New Construction

Before the financial crisis of 2008, community banks loved to hand out commercial construction loans. It was their core lending product. However, when developers had no good way of paying these loans back, banks suffered and it has since become harder to secure a commercial construction loan. Don’t get me wrong, banks love making these profitable loans because 1) they are short-term loans in which they can quickly get their funds back to lend out again, 2) credit unions are less able to make commercial loans due to restrictive regulations and 3) banks get points up-front on the entire loan amount—which typically acts as a line of credit, so the balance starts out small. But as I said earlier, if the economy turns south and the developer cannot arrange long term financing or otherwise pay off the construction loan, the bank is left with a loan that is not performing, or in other words, not being paid. Thus, the biggest source of strength the bank is looking for is a developer’s equity in the project at a minimum of 20 percent! Banks call this having skin in the game.

Most developers will call a bank first to apply for a commercial construction loan, and if they are turned down they’ll likely call a mortgage broker next. However, if you’ve been turned down as a developer, there are some things you can do to increase your equity in the project (because that is most likely why you were turned down in the first place, right?). So be sure to consider including the following when approaching a bank:

  1. Your cash down payment to purchase the land.
  2. If you used a land loan to purchase the land, do not include any principle and interest paid on that loan, because in theory the bank analysis will only treat the land as a cash purchase.
  3. All expenses paid-to-date into the project: architects fees, engineering fees, legal fees, etc. These should be included in the equity you are bringing to the table on the project.
  4. Any increase in land value since you purchased it.
  5. Any increase in the land value due to a zoning change.
  6. Any increase in value due to assemblage—from buying adjacent properties and combining them into one.
  7. Don’t break ground until you have been approved!

Remember, within this list are very valid non-cash items that add equity to the project! Don’t forget these because banks will first look for the 20 percent equity that you bring to the table before considering what you hope to do with the project.

Finally, remember that banks love to know that they are going to be paid back on time. The better that is communicated, the easier it is for them to approve the loan request. One advantage of working with a commercial broker to find the construction loan is that the bank also knows the commercial broker can find a more permanent commercial mortgage to take out the construction loan when the building is completed. In other words, you are more likely to be approved for your construction loan when you are working with a commercial broker because they will also find a permanent mortgage (and that makes the bank happy!). And when the bank’s happy, you’re happy and can spend more time to overseeing your construction project.

Site selection and community development

By | Commercial Real Estate, New Construction, Site selection

When looking for your next commercial real estate (CRE) project, location is typically a very integral part of the planning phase. One way to help find that location, once you have narrowed down the areas, is to do a community needs type of assessment. What is meant by such an assessment? Well, there are a few things to consider such as the community’s assets and liabilities—the balance sheet, but what does the community offer and what is holding the community back. Once you begin to look at the community in this way it can really assist you in site selection and determining which location would create the most value in the commercial project. So what are some things to look for?

Community assets would be anything that can be used to improve the quality of community life. Such things as:

  • People
  • Businesses
  • Economic opportunities—jobs, business development, tax incentives
  • Community services- police/fire, hospitals, educational institutions, community services for old and young, day-cares, senior care, food banks, etc.
  • Recreational activities
  • Community statistics and demographics
  • Traffic patterns and transportation corridors
  • Libraries
  • Churches
  • Geographic features of the area
  • Schools and education
  • Green space and open space
  • Tax base
  • Economic development regulations and laws and the community’s views on such activity in the area
  • Annual or regional events
  • Unique buildings or structures
  • Annual weather conditions
  • Water resources—drinking water supply, lakes, streams and wetlands
  • Air and environmental quality
  • Waste generation and reduction options
  • Agricultural availability

Where as community liabilities are such things as:

  • Brownfields—abandoned or under-utilized properties
  • Water, air and environmental quality issues
  • Safety concerns
  • Traffic congestion and noise issues
  • Poor transportation corridors
  • Lack of community services, education, health, day-care, community centers, police/fire
  • Lack of green and open spaces
  • Lack of available agricultural products
  • Low residential values
  • Lack of adequate jobs
  • Lack of business development and economic opportunities
  • Poor city design for residential and business users
  • Poor zoning ordinances

By looking at a community in these ways, commercial property owners, CRE investors, commercial CRE developers, can begin to work more closely with the community and economic development leaders to determine the right fit for a commercial property in a community. And also uncover new opportunities and ideas for other projects that may have not been thought of or considered.  Improve and complement assets.

Lenders consider these things when they look at loan requests. So it is important to understand and communicate how your commercial project will become a community asset too. Because it will add value not only to you and your property, but also to the community. Knowing this will give the lender peace of mind knowing that their collateral for the loan will more likely appreciate and add to the local community. You want the community to see your project as an asset that they too can take pride in.

This post is certainly not comprehensive. There are whole books out there on the subject of community development and master planning for communities which would provide a greater understanding and ideas for conducting an assessment.

One book on the subject is Utopian Designing – Developing a Community Strategic Plan for You and Future … By Chmm Nancy Zikmanis

http://www.amazon.com/gp/search?index=books&linkCode=qs&keywords=9781628574074

 

Commercial Real Estate Outlook Improves with Increase in Demand for Commercial Lease Space

By | Commercial Real Estate, Economy, Leasing, New Construction

The National Association of Realtors quarterly commercial real estate forecast suggests U.S. economic growth is strong enough to keep commercial real estate demand increasing. Lawrence Yun, NAR chief economist, expects commercial real estate activity to hold steady heading into the spring. “The demand for leases and new construction projects is expected to slowly climb as businesses add to their payrolls and consumers reap the benefits of cheaper gas and any accompanying wage growth from a tighter labor market,” he said. “Furthermore, multifamily housing continues to be the top-performing sector with current rental demand exceeding supply – leading to rent growth that is easily outpacing inflation in many metro areas throughout the country.”

Read the NAR’s quarterly report here.