Incentives The Loan Changer

July 13, 2007
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GRAND RAPIDS — Debt coverage ratio, loan to value, credit worthiness and an analysis of the property to be purchased are a handful of the standard criteria commercial lenders expect from developers who are seeking financing for a project.

But whether a developer is granted a loan can also depend on another factor that may not be listed in those guidelines — namely, the property’s location. It can often be harder for a developer to get an urban project financed because property costs may be higher in a downtown sector and it can cost more to build there than in a suburban field.

Environmental surveys, remediation costs and demolition expenses increase an urban project’s price tag and the income needed to make a downtown project successful. So an urban developer often has to show a lender more financial data than a suburban one.

In most cases, the best news an urban developer can give his banker is that the project has been approved for public incentives. Getting a property designated as a brownfield, having a project that is allowed to capture tax dollars from the improvements it will make to a site, being located in a tax-free zone, and being able to collect business tax credits all can impress a lender and improve an urban developer’s chance of getting the needed financing.

“Absolutely,” said Jack Buchanan, CEO of development firm Blue Bridge Ventures LLC.

Buchanan has received financing for a number of urban projects, including the former Lear Corp. plant in Walker that he and his father, Jack Buchanan Sr., are currently redeveloping. He has gotten incentives from the city and the state for that project. Without those, he said, it would have cost him more to renovate than he could have earned in lease payments, and a bank would have turned his project down.

“Somewhere along the line you need incentives, because otherwise you’re upside down — you’re guaranteed to lose money. The bank would say, ‘Why would you do this project and why would we bother to lend to this project if your numbers don’t work?’” he said.

“So what is key for both a developer and a bank, then, is the incentives to make a deal that otherwise would be impossible to make it happen.”

For instance, let’s say a developer would need $25 a square foot in rent, on a triple net basis, to build a new, top-notch office structure downtown. But the market currently pays a maximum of $18 a square foot for office space, with the average rent going for $15 a square foot. So the market can’t — or won’t — pay that amount without an enticement, and lenders won’t — or can’t — finance that project. That’s where the incentives come in.

Getting a property designated as a brownfield returns a portion of the construction costs to a developer and reduces the income needed to make a project profitable. So does having the site included in a nearly tax-free zone, as does being able to capture taxes from improvements made to the site or getting business tax credits. Having two of the four can almost guarantee that an urban project will be financed.

“That’s where the incentives are key. You bring the incentives in and it gets that (rent) number down to the point where it gets to the $15, $16, $17 a square foot range. So if you built a new building, somebody could say they could afford to spend $17 a square foot, triple net, for an efficient new building,” said Buchanan.

Buchanan said another factor in receiving financing for a project is showing a lender that at least 40 percent of the space is already leased before construction starts. But that could be a tougher number for an urban developer to reach than a suburban one because downtown parcels are usually smaller and projects have to be built higher to recoup construction costs than those in the outlying areas.

“They’re going to want to know that you’ve got a product that the market considers acceptable. If you want to build a building in an urban setting, that’s what the norm is,” he said.

“If you want to go on a green site out in Kentwood or Cascade or Walker, then normally you don’t have the same issues you’ve got in an urban setting, and so a lot of times you don’t need tenants.

“If you’re dealing with an urban-type development, you run into all kinds of headaches and hassles, and that’s where incentives become key.”

One of those headaches a bank will expect an urban developer to clear up before a lender grants a loan is having enough parking for the project.

“If you don’t have parking, you can almost forget it,” said Buchanan. “Often you cannot afford to build parking into an urban project.”

Moch International knows that. The Parking Commission rejected the firm’s request a few months ago to lease 70 spaces for 20 years in the city’s North Monroe parking lot. The company wanted the spaces for the 118-room hotel it wants to build on

Bond Avenue
and
Trowbridge Street
, a block east of the lot.

Moch International said it wouldn’t get the financing it needed to build the $16 million hotel without the parking, and the firm couldn’t afford to build the spaces into the project. The site isn’t large enough for a hotel and a surface lot. Building a deck in the lower level of the hotel would run from $20,000 to $25,000 a space and cost from $1.4 million to $1.75 million for 70 parking spaces.

But city commissioners overruled the Parking Commission decision last month and granted the company the lease that will cost less than $68,500 a year, roughly the cost of building 2.5 deck spaces. Hotel construction is set to get underway within months.

“We’re happy,” said Joseph A. Moch, who is building the project with his father, Joseph W. Moch. “This was one of the big hurdles we had to overcome.”    

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