Lenders seek developer’s ‘commitment’ to project

The loan spigot is still open at several financial institutions, but other financial outlets simply don’t have the ability to lend right now, according to Holly Jacoby, a client manager of commercial real estate banking at Bank of America. Even where loans are available, lenders are being more cautious these days.

Jacoby said she doesn’t know of any banks that are providing loans for any type of residential development projects or that are acquiring existing residential projects, including condominiums, single-family homes and second homes.

As for commercial real estate projects, banks are looking ever more carefully at a developer’s commitment to a project, Jacoby said.

“In addition to your cash, banks are looking at your commitment as developers to the project. We look at that in a couple of different ways. One way is the guarantee, which I think you’ll find is increasingly unlimited rather than pro rata or some of the other loosened up guarantees that we saw in 2005 through 2007.”

Secondly lenders should be prepared to ask a developer whether he was around during the last recession and if he was, how did he handle it? Did he ever get property back? Did he ever default on a property? How did he work his way out of his problem?

“We’re looking more carefully at the history of behavior in case it might repeat in the next three years,” Jacoby said. “I think you’ll find that lenders are more careful than ever about that sponsorship question. Is the developer prepared to be personally committed to the project?”

Furthermore, for the next few years developers will probably see more three-year term loan deals than the five-year deals, Jacoby said.

Michigan developers need to understand, too, that many believe Michigan is in a one-state recession: Many lenders — even if they would lend in 49 states — would not lend in Michigan, she said.

“We have been written off the map. It’s like they sawed off the mitten and it’s gone,” Jacoby remarked. “Even when the economy returns, lending will not look like it did in the past 36 months.”

—Anne Bond Emrich