Financing in the
A Quick Guide to Alternative
By Joseph Perry, SIOR
Professionals specializing in commercial and industrial development are all too aware of the current economic climate’s impact
on the viability of many otherwise promising new developments.
Commercial lenders are limited by oppressive regulatory
restrictions. Pension funds and insurance companies that were
active in the real estate financing space have modified their investment criteria, and the competition between deals that do underwrite
to today’s criteria is intense.
These dynamics have led progressive developers to identify
non-customary sources of financing, often layering these more
exotic or creative trenches with traditional bank financing.
In the “Good Old Days” (pre-2008), a lot of newly financed
developments were predicated upon imputed values that were
often speculative and sometimes too aggressive. Primary debt was
plentiful and mezzanine debt, as well as equity commitments, were
relatively easy to secure.
The implosion of the financial markets caused a dynamic retraction that swung the pendulum back well beyond vertical. Projects
in dynamic markets that underwrite well with good credit repayment sources and stable sponsors are still not certain to secure
In today’s economic climate, loan-to-value ratios are compressed. Personal guarantees are stringent. Underwriting is analyzed microscopically.
There are many available tools that can make the difference
between a deal that stays in the “colored rendering” mode and
those that actually go vertical. Today’s professional must learn
where to find these financing sources and how to apply them to the
underwriting model in a manner that elevates the project viability.
The following will briefly explain some of the more effective tools:
Municipal Bond Funding
With unemployment at record levels and communities desperate
for new job creation to stabilize local economies, the consideration
of supporting new developments with not only the bonding authority but also the credit enhancements necessary to sell this paper
in the marketplace is becoming more common. Municipalities
can support the financing of a desired project through the issuance
of General Obligation Bonds, Tax Increment Financing Bonds,
Special Assessment Bonds or other tools that the conduit financing community can use to sell the market on the security of the
This risk mitigation is primarily based on some realized or
anticipated benefit to the community such as an increase in real
estate tax base, retail sale tax increment or primary job creation.
The cost of placing this type of financing is very expensive, so the
project cost must be high enough to permit these additional costs,
but often the cost of these funds is lower which counters the additional capital costs, which are almost always imbedded in the debt.