Industry insight: Laurie Andrews talks lending
Andrews is COO at Cotton & Company, a leading real estate sales and marketing firm that has represented more than 1,600 communities over the past 27 years.
How has the current lending environment affected your clients’ ability to obtain financing?
Development financing reached a standstill over the past several years with the capital markets frozen. Both domestic and international developers are undertaking a global approach. They now seek out international investment resources from stronger capital markets, including Asia and South America. With a glut of new-home inventory in the market, developers and investors have focused on buying up distressed properties rather than beginning new projects from raw land.
What kinds of strategies are your clients using to secure funding for projects? Have they used any unique or creative approaches that have proved successful?
The conservative appraisal approach—it requires development teams to invest more of their personal capital to get the project off the ground. Development teams must have the experience to deliver a successful project from initial planning through final marketing and sales. Lenders want to see a comprehensive business plan from a consolidated source.
For recent projects, what kinds of financing hurdles had to be overcome?
Land holdings have been valued near zero due to the discounting of pricing in the marketplace to move standing inventory. With a zero land value and the higher cost of construction, new-home projects find it nearly impossible to compete with standing inventory at drastically reduced pricing. As the inventory is absorbed and pricing begins to appreciate, development proformas will fall into line.
Based on your experiences, where do you see the market for financing heading? Is there anything builders and developers should be doing now to prepare?
There are a lot of new challenges to face when obtaining project financing. Many people seeking to invest are looking for stable, healthy levels of recovery before investing. Most lenders are looking for the developer to have “skin in the game,” and they do not want to take on the project alone. Multiple investment partners allow lenders to limit their risk and disperse their capital investment over a broader scope of investments. As the inventory clears, developers are once again beginning to look at prime locations for development opportunities. Business plans need to reflect accurate and current market data—details matter and comprehensive plans must be realistic.
Anything else you would like to add?
The development team and capital stack are now a strong part of the marketing message to the end user. Buyers are now more aware of the risk involved with an unfinished project, and they are requiring more information before making a commitment to purchase. For a strong developer, an educated consumer will be his best customer.