This Is How To Fund Development In A Challenging Financial Environment
Municipal utility districts, Chapter 380 agreements, public utility districts: You name it, NewQuest Properties has used it to get a development off the ground amid high construction and borrowing costs, partner Dean Lane said at Bisnow's Houston State of the Market event Tuesday.
Keeping projects moving is all about finding money in unexpected places — public entities, syndicators, maybe even your tenants — and rolling with the punches, panelists said at the event, held at Chasewood Technology Center.
Creative financing is a must, Lane said, which usually requires working with consultants and understanding the political world of the city you develop in.
“We’ve always been extremely friendly to the cities where we develop,” he said. “That’s where we are getting our financing.”
NewQuest’s development in Kyle — a $250M, 100-acre project with plans for big-box retail, restaurants, multifamily and more — was made possible by a partnership with the city, he said.
“This has never occurred in my 40 years of development: The city came to our closing on the land with $5.5M,” Lane said. “They actually bought our right of way at the closing. That’s a very creative way to get a deal done.”
One possibility is getting tenants to foot some of the bill, said Travis Overall, Brookfield Properties executive vice president and Texas region head. Tenants are willing to put in more of their own money to build out spaces in exchange for a lower rent, rather than accepting tenant improvement allowances and concessions from landlords, Overall said.
“I haven’t seen that before in my career. Usually they’re trying to extract as much as they can from the landlord,” Overall said. “So that’s a little bit different, but it seems to be gaining a little bit of traction, at least within our portfolio.”
Developers also have to be ready to make quick pivots to get financing. Earlier this year, after providing a full loan term sheet just a month prior, a bank told AOG Living that it needed to syndicate half of the loan for a project in Austin, Managing Director Gabe Lerner said.
“And we had to go syndicate it for them,” he said. “So it was just grouping relationships together that we've had for many years, to syndicate and trust us. And it worked out.”
Sometimes even creativity isn’t going to cut it. Nonrecourse construction financing is virtually nonexistent right now, Provident Realty Advisors development partner Christen Vestal said.
“If you're one of these development companies where you don't have a warm body, it's pretty hard for you to get lending right now,” Vestal said.
Indeed, development is down significantly across all asset classes in Houston.
A “supply hit” is coming to the multifamily market, as it has been difficult to get deals moving for the past two years, Lerner said. There is miscommunication between equity and developers because developers know they can’t produce the returns equity is looking for right now, even though new housing is desperately needed, Lerner said.
“There’s still a housing crisis. It never went away,” he said.
Developers that time their projects to deliver amid the slump will likely be “sitting pretty” in a couple of years, Lerner said.
Houston’s industrial sector has also seen a stark drop in construction. CBRE tracked about 12.2M SF of industrial product underway at the end of the first quarter, a 57% drop year-over-year.
About 1M SF of this year's industrial deliveries will come from Port 99, Provident Realty Advisors’ development near Port Houston.
Being “well fueled” and having a track record helps get projects the financing they need, Vestal said, adding that Provident's private owner supporting its projects helps in that regard. But some extreme measures were still required for Port 99, she said.
The 100-acre site in Baytown was originally half-covered by a sandpit.
“We backfilled a million cubic yards of dirt to get it back to 100 acres of usable land,” Vestal said, adding it was one of the biggest dirt work jobs in Texas.
