A wave of local construction and redevelopment projects has been revitalizing the Rochester region over the last decade.
But construction projects come at a high cost, so it is imperative for developers to seek adequate funding from lenders. Local developers acquire funding in a variety of ways, while banks have various means of deciding which construction endeavors are worth financing.
Acquiring adequate funding
Banks tend to be the go-to source for financings projects, but some companies are using nontraditional ways of acquiring funding.
Kurt Sertl, director of leasing at Gallina Development Corp., said the company is not currently turning to conventional construction loans. Gallina is a family-owned business that primarily develops commercial spaces.
Although Sertl could not disclose many details about the company’s process for acquiring funds, he explained that the reason why they are not using the standard procedure for securing construction loans is because they found it to be slower and pricier.
“In order to streamline the construction loan process, we’ve been able to find some local lenders who work with us under nontraditional terms,” he says. “We’re very happy to work with a number of local lenders, and we like keeping the business local because it’s good for the Greater Rochester area.”
Similarly, Webster Properties has been using unconventional funding because their projects are unconventional, says Craig Webster, partner.
“The value of unconventional is speed,” he says. “The banks require you to go through a long process, so they can dot their i’s and cross their t’s, whereas the unconventional financing will help speed up processing, which helps save money in the end.”
John Rizzo, managing member of Prilend Funding Group, says the term for these unconventional loans is “private lending.”
“Private lending is unconventional, and it’s certainly more expensive; however, we generally tend to lend based on the risk,” Rizzo says. “So if we’re charging more, then we’re taking on more of the risk in that loan. The sort of risk that we’re willing to take that maybe a bank isn’t is that we’re willing to lend more as far as loan-to-value; we have the ability to close much quicker than a bank.”
Going through a bank for construction financing may take months to get a loan secured, but private lending can be approved in a matter of days due to the smaller committee approving the loan and the already established relationships with the borrowers, says Rizzo. But private lenders only hold on to the loan for a year or two before handing over the financing to the banks.
“At some point, it becomes too expensive for a borrower to continue to pay higher rates in excess of, let’s say two years,” Rizzo says. “That’s why we work closely with the banks, so we know we have an out. After a year we know a bank’s going to come in once construction is complete and the building is rented.”
Edgemere Development Inc. walks the line between traditional and nontraditional means of accruing funds for construction. Since the company’s inception in 2000, it has financed 33 projects for an overall total of $333 million. Edgemere works mainly on residential projects, including affordable mixed-income, mixed-use and multifamily rentals.
Funding for Edgemere’s projects typically comes from the state through various sources, says Stephanie Benson, partner and COO.
“While there may be bank letters of credit because we get taxes on bonds, or there may be a bank that does a construction loan, there’s not a traditional or conventional type of financing for the sorts of projects that we do,” Benson says. “Our projects tend to have restrictions from the state on the use of their money (regarding) who is eligible in terms of income and household size for the rental apartment.”
Besides new construction, Edgemere also does historic adaptive reuse projects such as the Eastman Dental Dispensary. For projects like this, Edgemere uses historic tax credits, says Benson. Projects are then nominated for historic preservation status on the National Register of Historic Places, and certain guidelines must be met in order to receive the credit.
“We primarily use low-income housing tax credits and historic tax credits, which a private investor then purchases,” Benson says. “They provide equity for funding. But the state has to allocate the state and federal tax credits.”
John Oster, partner and president, adds that the funding for Edgemere’s projects does not come from one source, but rather a specific combination of public and private sources that are “mutually reinforcing.”
Construction projects can be risky with all of the unforeseen issues that may crop up. Sometimes there is contamination in the job site or a brownfield that compromises construction. Even if developers and contractors have done thorough research before beginning the project, the possibility for one or more of these issues to arise exists, which can prevent a project from starting on time. When a project is delayed, lenders may end up pulling their funds.
“This is a possibility for any project, especially urban sites where you don’t know what you’re running into,” Benson says.
Another factor that can threaten funding? Zoning regulations.
“From a contractor standpoint, you have to make sure you’re very familiar with the existing conditions of the building, and you have to be certain that you’re fully compliant with the zoning regulations of the city or town you’re building in,” says Nick Charvella, president of UDN Inc.
Furthermore, there tends to be a lingering concern that the building will not fill up, says Dan Burns, Rochester regional president for M&T Bank. If a project is built and nobody comes to rent it, all of the money that was put into that building has essentially been squandered.
With developers and investors doing their due diligence on construction projects, lenders withdrawing funds tends to be rare for developers.
“Construction projects take several years to come to fruition,” Oster says. “By the time you get to the point where the project is ready to start, it’s not inconceivable to lose financing, but it almost never happens because so much goes into putting it together with such widespread community and financial support.”
Bank weighs in
Developers may strategize and pitch the construction projects, but it is up to the lenders to decide if the project will be executed.
Burns credits the many local family-owned development and construction businesses in Rochester for groundbreaking project ideas that are worth funding and adding to the community. After working with these businesses for so many years, banks like M&T and local construction companies have developed a mutually rewarding system.
“What’s really unique to Rochester is that these developers are all extremely innovative, and we’re seeing a lot of properties being repurposed, whether it’s commercial to apartments or even condos,” Burns says. “We know that these developers are committed to making Rochester a vibrant community, not only in the city, but across Monroe County.”
But not every project pitched is worth financing. In order to decide if a project will be a worthwhile addition to Rochester, banks and lenders examine a plethora of variables. For instance, if a developer seeks funding for a hotel, banks like M&T turn to third-party resources to see if the area could benefit from another hotel. If there are already enough hotels in the region, the project is deemed unnecessary.
Burns notes that M&T relies on Rochester Downtown Development Corp. for gathering such information about the local market.
RDDC “has fantastic data that all of us in the banking industry use to determine whether there is demand for a project,” Burns says. “For example, downtown vacancies are around 5 percent, so that would be a good sign that building more apartments might be a good idea. However, you also need to look at what apartment projects are in line to be built to determine whether there could be a bubble of too many apartments going up.”
Right now, redevelopment projects downtown are a hot commodity for development groups and lenders. Historic buildings remain, but their purposes are ever-changing.
“You look around town and see buildings that might be built for tens of millions of dollars, and now our family-owned local developers are able to acquire these properties at a significant discount, make improvements and make downtown visually impressive,” says Burns. “There’s a renaissance of downtown, and it’s the local developers that have been taking advantage of these properties.”
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