From Last Piece Of The Puzzle To Part Of The Process
A new perspective on the role of capital providers in urban redevelopment.
Tracy B. Edgers

Securing financing can be the deciding factor in whether a large-scale urban renewal project goes forward or sits in limbo for years, depriving communities of both the social and tax-revenue benefits these projects can bring. Today, educated capital providers are becoming more involved in the earlier stages of community revival projects, rather than stepping in at the end of the process, once the other puzzle pieces are in place. This earlier involvement has resulted in smoother sailing for complex community revival efforts; when lenders have participated in the planning process, the plans presented for financing inevitably experience fewer surprises on either side of the borrower/lender equation.

Getting Shovels Into the Ground

How many times are grand plans laid before planning commissions, then left unrealized because they don’t make sense financially? This is avoidable. When lenders join the process before developers reach the point of formally seeking financing, those providers of capital can provide insight as land uses are identified and designs take shape. Educated lenders are becoming involved in the process increasingly early on, and the effects on urban real estate developments are positive — for the financial institutions, the developers, and the communities.

Whether a site is destined to host a big box super center or a sophisticated mixed-use retail/multifamily housing tower, its uses and business plan must align with the expectations of the financial institutions that ultimately give the go-ahead to build. The process of transforming eyesores into profitable, eye-popping real estate is much smoother when the financial perspective is brought in as early as possible in the process.

With this understanding in mind, lenders are contributing to the community revival process — often led by rooftops and truly invigorated by retail – in some very quantifiable ways.

Reinforcing developer credibility to municipalities. On a very practical level, a provider of capital can lend credibility to developers appearing before municipal planning boards, either by writing letters of reference or vouching for previous experience. Lenders can also provide a document stating an intention to finance a project of the nature of the proposed project in that location. While these letters do not signify a commitment from the lender, they can propel the municipal approval process forward, lending financial credibility to the proposed project.

Perspective during the planning process. On a less tangible level, lending professionals are increasing their awareness of local master-planning processes. By attending community events and municipal planning meetings on a regular basis, the lender has a full understanding of a site’s history, value and potential pitfalls. In this manner, the lender can lend a financial perspective early in the debate over any given land parcel — particularly if the planning appears to be going in a direction that would be challenging to finance. For the lender, this involvement provides opportunity to increase the quantity and quality of opportunities to provide financing for projects of this nature.

Increasing developer motivation. Capital providers can motivate developers to move forward on revitalization and renewal projects by assuring developers that, if underwriting criteria are met, there are sources of senior debt that will be available to them. This lowers developer risk, and gives municipalities higher comfort levels during zoning hearings and other approval processes. Full-service capital providers that can advise and provide interim, mezzanine and permanent financing, are best equipped to contribute to the urban renewal process in this manner.

Problem solving beyond the buildings. Full-service capital providers regularly work with their middle market commercial banking peers, to extend tenant lines of credit and other services that help make projects happen, through methods other than pure real estate lending, when all underwriting and due diligence criteria are met. This is particularly effective when commercial banking and real estate finance are operationally linked, and synergies can be fully leveraged.

Educating constituents on reduced rooftop risk. Developers and lenders know that infill projects carry reduced ‘rooftop risk.’ Infill locations offer quantifiable, real-world demographic data for potential tenants, rather than the projections used in typical suburban expansion retail development. Lenders can articulate the advantages of this, educate developers and brokers, and use that data to facilitate the underwriting process.

Small loans — big difference. Many infill projects are small, limited in size by the surrounding structures, and thus are thought not to capture the interest of national lenders. However, many powerful providers of capital are interested in underwriting smaller loans, particularly for retail projects in underserved communities. For example, KeyBank Real Estate Capital regularly provides capital for retail projects in the $5 million to $25 million range. Often these loans build relationships that lead to larger transactions, or additional transaction volume in that area. For banks that lend in the markets in which they are located, the community impact is a critical consideration. For example, in Hollywood, California, KeyBank Real Estate Capital closed on a $4.88 million construction loan for Bond Capital and Canyon Johnson Urban Fund in the summer of 2003. The loan launched the construction of an 18,275-square-foot neighborhood retail center at Sunset Boulevard and St. Andrews Place, playing an important role in the redevelopment of that neighborhood.

Investor relationships make larger loans possible. For larger projects, relationships with investors can make the difference. KeyBank Real Estate Capital regularly partners with the Canyon Johnson Urban Fund (CJUF), affiliated with Earvin ‘Magic’ Johnson, to get urban renewal projects off the ground. When a project needs more equity to be financed, lenders can bring in investors like CJUF, which specializes in urban renewal, to close a deal.

For example, in Chicago, KeyBank is involved in the redevelopment of the former Chicago Police Department Headquarters site on State Street in the South Loop area of the city. The $96 million mixed-use condominium/retail project broke ground in September 2003, and is being developed by a partnership led by Mesirow Stein Real Estate Inc., Near North Properties and Northern Realty Group Ltd. KeyBank Real Estate Capital provided a $62 million construction loan, and led the subsequent loan syndication. The financing of the project was made possible by the involvement of CJUF, in the form of a $15 million capital contribution. The condominium component will be comprised of 243 residential units in four buildings, 61,474 square feet of ground-level retail space and a two-story parking garage containing 406 spaces. Key served as a sole lead-arranger and administrative agent for the 3-year credit facility that was underwritten by Key’s Income Property Group and syndicated by the Real Estate Syndication Group. Thus, providing a myriad of financial services tailored to a complex publicly owned land parcel is affecting transformation of an infill site in an area of the city still transforming into a residential/retail neighborhood.

Similarly, in Miami in December 2003, KeyBank Real Estate Capital committed $62.5 million to a $125 million construction loan led by GMAC Commercial Mortgage, for the development of the Downtown Dadeland residential/retail mixed-use project in Miami-Dade County, Florida by Gulfside Development Company Inc. The project, located on a 7.5-acre site, will include 125,323 square feet of ground-floor retail and 462,707 square feet (416 units) of condominiums. CJUF also made a capital contribution to get this infill project out of the ground.

Making A Profit And Making A Difference

These projects are, each in their own way, transforming their communities. As communities, developers and retailers approach urban renewal, they should consider the unique perspective that a lender can bring throughout the development process, bringing informed financial acumen to the table at many critical points — not just as the last piece of the puzzle.

Tracy B. Edgers is senior vice president of KeyBank Real Estate Capital in Bellevue, Washington.