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It is highly likely that development of all types will remain subdued for a few more years. Although developers are hoping to start projects that had been put on the shelf in 2007, the reality is there is, and will remain, very limited construction financing. The construction financing that will be available is low leverage and usually requires a personal guarantee. I am working on financing two development projects in Manhattan right now for very credible developers, and the projects make very good economic sense from a cost and market basis, but finding construction funding that is priced at an economic level, and that does not require large personal guarantees is extremely difficult. Nonrecourse financing is possible but the cost of capital becomes equity like so it is not conducive to making the project economically viable and the risk justified if you pay for equity but it comes in the form of debt.

The other mitigant to new development is the fact that you can still buy existing projects at less than development cost. This will remain the case for another two years or maybe longer in many parts of the country. It is likely that you will still find properties to acquire through note purchases or direct property buys which are discounts off of replacement. If they are not then why buy them. Even with renovation costs and remarketing costs added, they are often better values than development. How long that lasts is very market driven. Prices in Manhattan and Washington have risen already to levels where the trade off is less apparent than it is in many other parts of the country.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.