I know this is less of an issue than it was a year or two ago, but the phrase “There’s no debt available, even for good deals.” is one of my all time favorites. As the market slowed in 2007 and through 2008, the biggest impact was to the development industry, an industry that had turned itself into high gear in the 2002-2007 time frame. All types of space were becoming overbuilt.
So when the debt markets froze up it was common to hear people say my favorite phrase from above. But here’s the news flash. Your deal is not a good one. It’s just adding more space to an already overbuilt market. Here’s another news flash. If your deal only works on 100% financing (like an interest reserve that’s part of the construction loan) then you should probably rework the pro forma and see if it works with less leverage. That’s the rub though right? It doesn’t work anymore. And if it doesn’t work at a lower LTV, it doesn’t work for the lender if they have to foreclose.
In 2008 I sat and listed to someone talk about needing financing to grade a portion of a master-plan community and how that financing wasn’t available. The two options that were floated: a) find an equity investor to put up the money for grading, and b) get hard money financing for the grading. That was the point in the meeting where I started to look around the room for signs of drug consumption.
Like attorneys, lenders can be a valuable resource in the development and investment process even if they’re not telling you exactly what you want to hear. If you can’t find a lender to finance your deal, it might be an indicator that it’s not as good as you think. It’s sort of like how nobody thinks their own baby is ugly. It’s impossible to be objective about something when it’s your own.
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