High-yield lenders play role toward adaptive reuses.

Continuing low vacancy rates and a lack of raw land for new construction have primed commercial real estate markets throughout the northeast for a surge in adaptive reuse projects. And while savvy developers recognize the outstanding potential for obsolete sites in strong locations, they are often faced with a significant hurdle when it comes to securing financing.

Because the best properties for adaptive reuse often involve older industrial sites with vacant buildings and/or environmentally tainted land, traditional lending institutions will not generally grant financing for acquisition and initial site work. These types of projects do not "fit" a traditional model for determining value.

How, then, can today's real estate innovators take advantage of purchase opportunities? Often, the answer can be found with a quality high-yield lender. These companies provide short-term commercial mortgage loans when conventional financing is not an option.

Ultimately, high-yield financing can enable borrowers to move their projects forward to the point of qualifying for conventional financing, often closing within a week or two. And while interest rates are higher than average, the service and long-term benefits are almost always worthwhile.

For example, SWH Funding awarded a $5.5 million loan to Pilot Woerd Avenue LLC, for acquisition and remediation of a vacant, 126,000-square-foot former manufacturing facility in Waltham, Mass. Previously used as an aircraft parts manufacturing facility by Parker-Hannifin Corporation, the 12.2-acre, commercially zoned site overlooks the Charles River and benefits from an outstanding location within the tight Waltham office market.

Waltham has approximately 6 million square feet of Class A inventory, with a vacancy rate of less than 10% and rental rates topping $30 per square foot. Purchasing and converting the building to price-competitive, Class B office space presented a prime opportunity. However, Pilot Woerd Avenue faced the challenge of securing financing for a speculative project needing a significant amount of site work before a marketing effort could be launched.

The SWH Funding loan allowed the firm to demolish and clean the interior, perform environmental remediation, and complete engineering and architectural plans, along with significant marketing of the property. Within six months, Sightpath Inc., an engineering and software firm that produces video communication products for large corporate networks, pre-leased 69,000 square feet.

With site work completed and the building 100% leased, Pilot Woerd Avenue received a conventional loan to fund construction for building and tenant improvement work. In less than a year, the SWH Funding loan had been satisfied.

One of the most appealing aspects of working with a private lender is a unique ability to work "outside the box." Companies like SWH Funding analyze the merits of a project in its entirety, considering market factors, along with the involvement, capabilities and character of the principals.

For example, SWH Funding and Spectrum Origination LLC, a high-yield investor based in Manhattan, co-financed a $5.4 million first mortgage loan to an entity controlled by Joel S. Meisel. The proceeds were used to acquire 1-3 East 35th Street in Manhattan and to develop building plans and specifications for a limited service hotel to be constructed as-of-right on the site.

The 5,000-square-foot property is located in the commercial and residential section of Midtown Manhattan known as Murray Hill. It is planned, zoned and approved for a 74,000-square-foot, 29-story limited service hotel. Currently, a vacant five-story office building occupies the site and will be demolished.

Interstate Hotel Corporation, one of the world's leading hospitality management companies, has signed a management contract for the hotel and will purchase up to 20 percent of the equity. The borrower now plans to execute a franchise agreement, complete construction documents, and secure construction and mezzanine loans to develop the hotel.

Because the property is currently vacant and the borrower desired a loan for 100 percent of the purchase price, traditional institutions could not have made the loan. Yet Manhattan's lodging market continues to prosper from a thriving economy and a high level of consumer confidence. This, along with the property's outstanding location, the borrower's strong professional track record, and the involvement of Interstate Hotel Corporation, made it an ideal investment opportunity for us.

A unique aspect of the high-yield real estate loan involves the lender's goal of helping its borrowers establish a solid exit strategy. At SWH Funding, we aim to have our borrowers in and out of the loan as quickly as possible. We analyze each transaction during the due diligence process to be sure that a property can be repositioned in terms of real estate or lending within one year.

As an example, SWH Funding provided $2,040,000 in financing for the acquisition and renovation of a unique residential restoration project in Hoboken, New Jersey. The redevelopment project involved four multi-family buildings that were totally renovated by a New Jersey partnership headed by Thomas L. Feeley.

The buildings, all originally constructed in the late 1800s, include 100 and 102 Jefferson Street, and 64 and 125 Monroe Street. The reconstruction program upgraded the buildings to target young and upwardly mobile tenants. Within the vibrant Hoboken market, the properties were well located to reach this population. After close evaluation of the proposed project, and based on the extraordinary references and character of the partnership, SWH Funding could see the potential of both the developer and the property.

Today, the buildings include 1 6 luxury apartments with more than 15,000 square feet of living space. In addition to financing the project, SWH Funding also provided free value-added advice and consulting services to the partnership, helping to organize and structure its finances for this project and to qualify for conventional financing. With this assistance, the partnership had satisfied its debt to SWH Funding in less than 12 months.

The trend towards adaptive reuse spans a variety of usages, from office and high-tech, to hotel and residential, and will likely continue for years to come. Developers looking to significantly grow their portfolios in this market can find a wealth of opportunities in older buildings.

Clearly, seeing future value in retrofit projects requires a more flexible approach than when analyzing existing cash-flow properties. However, private, high-yield lending organizations will often invest the time and resources necessary to truly understand the vision of a developer. And by taking the "big picture" into consideration from the plans, budget, approvals, legal and zoning. issues, to the character and credibility of the people involved - companies in this lending niche can help dreams become reality for today's real estate innovators.