In instances where tax-exempt bonds are applicable, the investors
yield demand can be met with a lower than market interest rate on
the debt. Floating rates are extremely low and Credit Swaps and
Rate Caps can be purchased as a hedge to rate sensitivity.
The programming of this type of financing is very cumbersome
and almost always requires lengthy municipal entitlement processes, but for a project that meets the criteria for bond financing,
this tool can be extremely valuable and sometimes make the difference in the financing of a development.
A community’s bond rating and general economic health are
critical to the consideration of the ability to sell this paper, but
assuming the basic underwriting criteria are met and the municipality is progressive enough to support such a development, this funding can provide a relatively high-leveraged, low-recourse financing
Government Financing Programs (U.S. Small
Business Administration 504) Funding
Another source for financing that has been around for many years but
had been forgotten by many is U.S. Small Business Administration
(SBA) financing. The SBA504 provides up to 40 percent of the total
project cost, including equipment, as a subordinate loan behind a
conventional 50 percent bank loan. The borrower must provide 10
percent as equity, which today is approximately one-third of what
is required in a standard commercial real estate financing structure.
The first mortgage is at prevailing market rates and terms but the
SBA portion is fixed at below market rates for a twenty-year term.
These loans are also transferable to future buyers of the real estate
who meet the credit review of the SBA, which can provide intrinsic
value in an exodus plan.
Borrowers must occupy at least 50 percent of the real estate
financed. SBA504 loan limits are $5.5 million, so a project with a
total cost of $13.75 million can enjoy up to the 40 percent leverage.
Certified regional originators will work with a borrower and the
first mortgage lender to package the application and commitments
can be received usually within 30 days with closings in another
30-60 days. The program can be used for acquisition of existing
facilities or new construction.
The SBA also administers the 7a Program, which provides debt
sources for machinery, equipment, material, supplies and long-term
Other State Incentives
Most, if not all States have financial incentive programs that provide grant funds, or low-interest loans that finance industries based
on job creation. Most of these programs will have little impact on
the funding stack other than the preservation of working capital that
would ordinarily be used for burdens like new workforce training.
In most instances these programs only create value in the funding
stack if the job creation is significant.
"...the successful commercial
real estate practitioner is
going to have to get more
creative about how to get
Credit Enhancement Joint Ventures with General
One way to secure financing for projects that need a boost is to
enter a joint venture with a qualified general contractor. Our firm
has participated in several developments since the economic downturn by leveraging relationships with general contractors who are
large enough to enhance the financing. The participation by a general contractor who has significant credit and wealth can be through
a letter of credit or a limited guarantee that burns off as the development stabilizes and “seasons.” The environment for commercial
general contractors is directly related to the availability of debt and
capital and there are many large national contracting firms that will
perform their own underwriting of a project to ensure the viability and then “trade” the credit enhancement for ordinary overhead,
profit and general conditions. To further induce participation in a
joint venture, the borrower may be required to allow participation
in the equity ownership of the asset as security against the investment, and this participation may potentially be reduced as the guarantee peels off over time.
Of course, this scenario requires a progressive general contractor with a healthy balance sheet, strong credit and a trust in their
partner and the project, but if you look around hard enough, they
are out there. Since 2008, our development company has financed
over $62 million in new construction by leveraging this type of
These are only a few of the concepts that are out there for creative funding in the commercial/industrial real estate marketplace.
The bottom line is that for the foreseeable future, the ability to
finance commercial real estate will remain restricted from conventional sources, and the successful commercial real estate practitioner is going to have to get more creative about how to get deals