The Borrowers Still Landing Construction Loans

LOS ANGELES—Despite the pull back of construction loans in recent years, borrowers with projects in well-located Los Angeles submarkets are still landing healthy funding from lenders. The developer behind The Rise Hollywood, a 369-unit apartment complex in Hollywood with 2,500 square feet of retail, has secured a $100 million construction loan. Kevin O'Grady of Walker & Dunlop secured the funds on behalf of the borrower. According to O'Grady, borrowers in California with well-located projects are weathering the pull back from lenders. To find out more about this deal, why it was a fit, and how developers are still getting funding, we sat down with O'Grady for an exclusive interview.

GlobeSt.com: We recently saw come tightening for construction loans. What was the appetite like for this deal?

Kevin O'Grady: Tightening on loans has been influenced due to regulation factors through FDIC to Banks and the leverage points have dropped significantly over the last two years, so alternative structures have been the way of most ground up deals, particularly through the debt funds. Secondly rental growth in many markets has slowed due to supply, which has also caused some slowdown and lenders being more selective in what they take on. Los Angeles is one of the markets that is now seeing rent concessions and some slow down and also some pull back on rent growth in certain L.A. markets, so lenders have been a little more cautious. Having said all that, it is a very tough environment to achieve development entitlements and good locations will be met with good response. This location and the quality of sponsorship behind it, gave us a lot of options to choose from. We had , at the end of the day 15 senior lenders in the matrix and several mezzanine lenders we could work with in combination to get the best pricing and execution, so it was not really a problem for us on this loan.

GlobeSt.com: Did the geography play a role in the interest that you saw?

O'Grady: “Geography” can mean many things. As I related above, the location in Hollywood and it being prime in Los Angeles were influences to lenders interest that were positive

GlobeSt.com: How did these terms fit the borrowers needs?

O'Grady: Bank of the Ozarks issued a whole loan term sheet structured as non-recourse debt. We ended up at approximately 65% LTC with a rate of 375 basis points over LIBOR. Bank of the Ozarks is a very reputable bank headquartered in Little Rock, Arkansas. All borrowers want better than the market will give, so RESCORE is no different but the key metrics work for an institutional grade Apartment building for underwriting purposes and for RESCORE's investors

GlobeSt.com: In general, how has construction financing for similar projects changed throughout this cycle?

O'Grady: As indicated, apartments are still a very desirable product with a very defined market and lots of capital chasing the deals. The debt funds have taken over a lot of the construction finance and value-add acquisition finance. This trend will continue until natural economics of supply and demand drive them out to other products or rate spreads stress the metrics too much. We aren't there yet , however developers have a hard time finding ready-to- go sites that aren't over-priced to the underwriting metrics

GlobeSt.com: Is this deal representative of any other market trends?

O'Grady: This building and the developer are mindful of the renter profile that is pervasive in the nation. It appeals to singles that live as doubles and upwardly mobile trending professionals that need amenities that fit their life style. RESCORE is very good at identifying these trends and localizing them. We enjoy working with professionals such as them.