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Where's the money coming from? The financial spigot is not completely turned off for Indiana developers.

Where's the Money Coming From?

Around our table the consensus was, "Might as well do a Rip Van Winkle until the middle of '91 before you start looking for construction money again."

Three hundred Indiana rea-estate "players" gathered lated last year at The Westin Hotel Indianapolis at the invitation of Jeffrey D. Fisher, who runs the Center of Real Estate Studies at Indiana University. A generally subdued crowd of real-estate developers attended this Fifth Annual Real Estate Conference. The attitude was gloomy and doomy. All were afflicted with the same malaise--credit cramps. The sluggish economy and savings and loan crisis were making it difficult--sometimes nearly impossible--to get the financing they needed for their developments. Some attendees evidently wished they were practitioners in another trade, maybe funeral directors, tax accountants or bankruptcy lawyers.

Things may not be so bad in Indiana, however, according to the experts. Some developers are getting cash, and others have reason to hope that the money will be back. But when and where?

One of the experts at the November conference was Ernest M. Miller, president and COO of Florida-based developer Arvida Co., and he answered the "when": If not now, then soon. People in real estate, according to Miller, tend to forget they are working in a cyclical industry. "In goodtimes, we are the smartest people in the world, and there is no end in sight. When the bad times occur, it is never going to get worse. It's the end of the world as we know it, and everybody is rushing to find rusty razor blades." Miller says the industry needs to direct its energies toward finding solutions to problems and ways to seize the opportunities that are available. "This is just a different phase. We need to stop wallowing in self-pity and stop talking about how bad it is."

What about the "where?" Like other developers, Arvida has turned to different sources of funding. The new pot of gold, Miller hopes, will consist of money from "institutions, pension funds and offshore capital." That represents a switch in protocol. In the pre-slump days, the local S&Ls and banks were the sugar daddies that came up with the first seed cash.

As Fisher from the IU real-estate center explains, "That first loan takes the project through to completion and rented up to a certain level." Then, the permanent or end loan kicks in, he says. The end loan, which pays off the construction loan, traditionally has come from big national or regional banks, credit unions, pension funds or insurance companies. "You usually can't get a construction loan until you've got an agreement from somebody to pick up the permanent loan," notes Fisher. In effect, then, the developer has to negotiate two loans at the same time.

Right now, it's not easy to negotiate even one loan. All of the money people are "nervous and holding back," claimed one expert at the real-estte conference. Another said: "I think there is so much scar tissue developing on the part of many lenders that it is going to be some time before they aggressively lend in the real-estate market again."

Sure, it's tought to float a loan, but it can be done. Indianapolis-based Melvin Simon & Associates Inc., for example, last October melded six sources, including overseas banks, to collect a $625 million pool for the 4.2 million-square-foot Mall of America in Bloomington, Minn., which is slated for occupancy in fall 1992. The consortium included the Teachers Insurance and Annuity Association of America, Mitsubishi Bank Ltd., Mitsui Trust and Banking Co. Ltd. and the Chuo Trust and Banking Co. Ltd. The project is a partnership with Triple Five Corp. Ltd., which built the immensely successful and massive Edmonton Mall in Alberta, Canada.

This may give you an idea about how this tight-money situation may shake out. Overseas investors are interested. Adrian Brown, senior vice president of Simon subsidiary Simon Development Co., explains why. "Real estate is still the best place to put large chunks of money. It is an irresplaceable asset." While you hear a lot of talk about all the investment money that's going to Europe, the ghing that makes the United States attractive is stable government, Brown points out. "We're still one place where you can come in and make an investment and take your profits back home. You go to some places, Europe being one, and it's not so easy to make money and bring it back out."

Overseas money also is helping get the $150 million River Pointe riverfront project in Jeffersonville off the ground. DeMars-HAKA Development of Indianapolis is working on the project, which is expected to be a major shot in the arm for southern Indiana with its condominiums, hotel, restaurants, marina and retail space. As David Carley, vice president of DeMars-HAKA, points out, obtaining overseas money is a natural for his company because it has its own overseas connection. HAKA is the largest construction and development company in Finland, and it is giving the Jeffersonville project a boost. "It is being financed by banks in Finland," Carley says.

Though credit problems have slowed development in some places, with the help of the Finnish banks there's plenty of activity at River Pointe. "the first building will be completed in March 1992, and we have already started with an apartment tower," Carley says. "The banks are providing the construction company, Geupel-DeMars, with the construction money and the permanent loan."

While Simon successfully found some of its Mall of America funding overseas, it still is actively seeking financing in a number of other areas to construct the giant Circle Centre Mall planned for downtown Indianapolis. The mall is a joint venture between Simon and the city of Indianapolis, and the lack of a financing arrangement is one sore spot that has given some city officials the jitters.

"We are talking to more non-traditional sources, such as insurance companies, pension funds, those types of people," says Mike Murphy, public relations manager for Simon & Associates. "In this case we are talking as well to what you might call civic-minded corporations. These partners would look to the long term and not necessarily at quarterly profits or quarterly return.

"The general idea is to attract enough equity up front so the need for conventional construction financing is as small as possible and comes in as late in the project as possible," Murphy continues. "As we envision it, the permanent financing would come from the same sources."

The situation is a new one for Melvin Simon & Associates, one of the country's leading names in retail development. "We used to be able to build a mall and borrow money on our name," Murphy laments. "We used to start building malls without financing because we knew we were going to get it. That just doesn't happen anymore for anybody. The regulators of the banks are forcing them to be so careful about what they do that a lot of conditions they put on planning packages are, from our point of view, not acceptable."

"Some of the requirements are so tight that it is difficult for us to comply," agrees Joe Donnell, CFO of Northill Corp. in Fort Wayne. "The average apartment house costs $12 million to build, and it used to be that you could borrow the $12 million and sell it and make money. Now they're saying 'We'll let you borrow $10 million, but you have to put in $2 million.' The average developer doesn't have that kind of liquidity."

Still, Northill has been able to find the money it needs, sometimes using the type of civic-minded philosophy that Simon hopes will boost Circle Centre. "Where we get the money is the ultimate question, and the best place that we've found is to go to a regional bank that cares about the area and knows the area and the market," Donnell says. And finding new markets is one way Northill keeps business moving along. "We do offices, but there is no market for that in Fort Wayne. We're looking at sites in Charleston and Columbia, S.C. We do demographic studies for cites that are the right size for the right type of projects."

"We're still building, but it is a lot harder to get money, there is no question about that," says Eugene Zink, a partner who handles financing for Indianapolis' Duke Associates. "We do a lot of business with our local banks, INB and Bank One. And we deal with foreign banks such as Fuji, Mitsubishi and Bank of Montreal. They're still coming in one the first loan and still lending, but not as actively as they once did."

Later in the lending stage when it replaces construction debt with permanent debt, Duke turns to some other sources, Zink says. "On the permanent side we are doing business with the insurance companies and pension funds, like New York Life, Prudential and Metropolitan. We're closing a giant loan with Teachers Insurance Co."

Similar arrangements are pursued by another Indianapolis firm, Browning Investments, says Alan Burns, vice president of finance. "We're still getting our money for construction from the banks, Merchants and Huntington. We get our end loans from life companies and pension funds. Our most recent permanent financing we got from Nationwide Life Insurance through their local mortgage correspondent, Mortgage Company of Indiana." Real-estate slump or not, Browning is building. It has an office building currently under construction on the north side of Indianapolis.

So--there are some deep pockets out there to tap into, if you frame the right deal. One way to sweeten the terms is to get the construction company to take an equity position in the project. The experts recommend about a 20 percent slice of the pie. "It is not uncommon to see the builder with 25 percent equity in a situation, notes Kurt Meyer, vice president and partner in Citimark Development Co. in Indianapolis. "The days when you could overfinance a building are certainly long gone."

Things do seem to be looking up a bit. The Federal Reserve board, for example, dropped its discount rate to help stimulate the economy. It also reduced the reserves it requires banks to have, which, it said, should give them added incentive to "lend to creditworthy borrowers." Robert Clark, U.S. Comptroller of the Currency and the self-acknowledged "regulator from hell," also has been under fire lately to cool his brimstone punishment of the U.S. fiscal system. So--there is some edging toward a less-repressive credit situation and a warming sense of optimism.

"From everyting that we're hearing, it appears that opportunities for financing a building are going to improve over the next 30 to 90 days," says Meyer of Citimark. "The latter part of last year, everybody was in a 'wait and see' kind of mode.

"There are a few permanent lenders who are interested in getting back into real estate," Meyer continues, "but I can't tell you today who is going to give us a 30-year mortgage. These are the insurance companies and the pension funds, the traditional sources who kind of shut the spigot off several months ago."

David Goodrich, president of the commercial real-estate division of F.C. Tucker Co. Inc. in Indianapolis, claims there are good reasons for Hoosiers to cheer up. For one thing, there has not been the rampant speculation and overbuilding in Indiana that there has been in other parts of the country. Nor have Indiana and the Midwest gotten all that much attention from the Japanese and the Europeans. "We're not very flashy, but the basics are here. We are conservative by nature. So we are better off in these times. The market here is very healthy and the outlook is favorable,c Goodrich maintains.

Meyer agrees that those companies that have operated on an economically sound basis are well-prepared for today's market. When the money flow picks up again, those with the conservative track records typical of Hoosier developers should fare well. "We have always looked at every project we do on a very sound economic principle. We had some assurance of demand, a demonstrated market." And that's what lenders are looking for.

Indiana has other things going for it besides its attitude. "We have strong resources," Goodrich says. In this decade, water is going to be one of the Midwest's biggest assets, he forecasts, while in the Southeast and Southwest, it will be a factor that will limit continued population growth. He also makes reference to the Midwest's pool of skilled labor that's available for manufacturing. "I think there will be a resurgence of manufacturing, and we are well-positioned to take advantage of that."

When will the market turn? Many experts expect that in the current recession, the overall contraction will be about half of the average post-World War II recessions, relatively mild and short by historical standards. The optimistic experts expect things to be looking up sometime in the second quarter of this year.
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Author:Johnson, J. Douglas
Publication:Indiana Business Magazine
Date:Feb 1, 1991
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