- change ups
Commercial construction loans picking up
“I think the answer is yes — obviously with a requirement that it is a good quality project with good credit tenants and the proper structure and development team. Those are probably the big qualifiers,” said John Green, a partner with Andy Winkel in Locus Development, about lending having picked up.
Locus completed two major downtown projects during a time when most construction came to a halt as the lending market was largely inactive. One project was Thirty-Eight, a new two-building office and residential project at 38 Commerce Ave. SW. The other was the Flat Iron, a historic renovation of three small structures along Monroe Center into a larger space for office and ground-floor retail.
Green and Winkel began their loan search for Thirty-Eight in 2008 and for the Flat Iron in 2009.
“To give you an example: If you recall, we had a delay with the Flat Iron project. Honestly, the delay was entirely dependent on financing. We had talked to a number of banks and they were very comfortable with the development team. They were very comfortable with the tenants. But they felt tied down and limited in what they could do in terms of making loans to real estate projects that were not owner occupied,” said Green.
Locus Development owned the Flat Iron but didn’t plan to move into the building, as the firm had just relocated from Ottawa Avenue to Thirty-Eight when it began to look for financing. Besides, Locus had a lead on a tenant that was capable of leasing the entire space.
“Even though we had a good project, we had difficulty getting banks comfortable with the deal, especially those banks not headquartered in Grand Rapids,” said Green. “From start to finish, that project took about a year to get financing.”
For contrast, fast forward to today. Green said a local community bank approached his development firm and offered to provide the financial backing for its latest renovation project — a redevelopment of the two-story and decade-long-vacant former Junior Achievement building at South Division Avenue and Fulton Street. The bank that approached Locus was Grand River Bank, the same lender that provided the financing for the Flat Iron project.
“Within three weeks, we had a firm commitment for financing,” said Green. “So Grand River, who came through on the Flat Iron building, also came through with the financing for the J.A. building.”
Green said he and Winkel spoke about the Flat Iron project with a half-dozen lenders, with Grand River near the tail end of those talks.
“On the J.A. building, they came to us and said we’re very interested in financing that project. Within a matter of three weeks, we had a commitment.”
Grand River Bank came into the market in April 2009 when the recession was rolling along, but did so without the bad loans other banks had on the books. Having a blank slate to begin with was an advantageous position, and, unlike other lenders at the time, Grand River Bank was open to making mortgage loans for commercial projects.
“In probably our first year, competition was relatively nonexistent. There were only a few banks that were actively lending in the market because of everything that was happening within the banking industry,” said Mark Martis, Grand River Bank senior vice president and chief lending officer, to the Business Journal in August.
Grand River Bank President and CEO Dave Blossey told the Business Journal in May there were a number of reasons the lender backed the Flat Iron project when others wouldn’t. “One, obviously, we look to deal with quality people and we did our investigating and were excited to work with them. They’ve done some great projects in the past,” he said. “Also is the fact that we’ve been able to help with the redevelopment of a really historic property downtown, and that is a real benefit to the bank.”
Also last May, Grand River Bank Vice President and Commercial Lending Officer Ryan Wolthuis said the tenant for the Flat Iron, local law firm Smith Haughey Rice & Roegge, was another reason the bank chose to finance the project.
“That was a huge plus for us, as you can imagine. Having that cash flow is a key situation for us,” he said.
Green said Locus never has had to get a bank’s approval for a tenant it has lined up for a project, which helps with finding financing. He said lenders trust that the firm has done its due diligence on a tenant, and they know that Locus is underwriting the creditworthiness of its tenants.
“But that’s also a factor in what makes a good developer and a bad developer,” said Green. “Some building owners — whether it’s a developer or a landlord — just want to fill their buildings, and they’ll sign a lease with anybody. That’s shortsighted, unfortunately.”
Locus has built new and restored old, and Green said banks don’t seem to favor one type of construction over another, in regard to urban projects. Of course, most urban projects are restorations of existing structures because those buildings make up a majority of the building stock in a downtown, but also because incentives are available to help with the financing. And lenders appreciate developers who bring some of a project’s financing to the table on their own.
“I know from our perspective, we have not been able to make a pro forma work on new construction when those incentives are not available. However, with certain historic buildings where you can tap into incentives that are not available for new construction, we sometimes can make those numbers work out,” he said.
Locus has tapped into incentives for the J.A. project. Green said he felt the firm would receive the basic historic tax credit, which is 5 percent of its qualified investment, but also is hoping to get the enhanced historic credit, which is worth 20 percent.
“It will be a critical component to our project,” he said.
The Michigan Economic Growth Authority recently approved the firm’s request for brownfield tax-increment financing for the project because of the improvements Locus will make to the site, which will increase the property’s value and taxable value. Also, the Grand Rapids Downtown Development Authority awarded the company grants last month to help fill the areaway and upgrade the façade.
The J.A. building project is a bit contrary to the usual urban lending scenario. Green said his experience has shown him that lenders typically favor downtown renovations that include housing, which the J.A. project doesn’t. Locus is planning office space for the second floor and hopes to have a different “type of restaurant” on the first floor. He said lenders like housing projects, especially those with apartments, because there is a demand for housing downtown and that helps reduce the risk for banks making mortgage loans.
“But it’s not as easy as just saying, ‘There is a demand and let’s just go build it, or let’s just go renovate it,’” said Green. “It comes down to the economics of the deal, and if the economics of the deal are strong, I think the banking community will show a lot of interest.”