Banks apply stricter rules in financing commercial development

CAUTIOUS LENDING

November 26, 1990|By Timothy J. Mullaney

Jon Bortz has a tale of two office buildings, a tale that tells a lot about what the commercial real estate industry is up against these days.

Mr. Bortz is a senior vice president of LaSalle Partners of Chicago, and the two as yet unbuilt buildings are the large development company's first major Baltimore-area ventures. Two things LaSalle's site in downtown Towson and the land it controls at Gay and Water streets in Baltimore have in common: They both have a deep-pocketed owner and neither has any tenants signed up to fill the office space.

But the two projects have at least two important differences. One is that LaSalle got construction financing for the Towson Commons mixed-use project last year, before the industry's slowdown and before the credit squeeze that is the talk of the industry today. The site at Gay and Water streets downtown didn't have financing.

Another difference is that Towson Commons is getting built. The downtown office building, for now, has been scaled back to a parking garage and a site that LaSalle will sit on until a tenant signs up for a big chunk of the office space, Mr. Bortz said.

"You couldn't get a loan now on the same terms [as the Towson Commons deal]," Mr. Bortz said. "We could do it, because we have the financial clout, but we couldn't do it on the same terms. . . . The markets didn't change until early this year. Maybe a little at the tail end of last year, but more so this year."

LaSalle's tale of development thwarted by slow leasing and hard-to-get financing isn't a solitary one. Banks' unwillingness to continue financing commercial real estate after the go-go 1980s and the crushing additions to loan loss reserves banks have taken this year is threatening to make commercial real estate's future a lot different than its recent past.

Gone are the days of 100 percent construction financing, or construction loans made before tenants are lined up. Mr. Bortz said banks want developers to have equity as high as 30 percent in some deals, with an additional 20 percent or 30 percent of the amount of the construction loan deposited in the lending bank. On top of that, banks are looking for half or more of a commercial building to be leased before construction starts, he said.

It's more than a recipe for different styles of development, developers say. It's a recipe for slowing down building dramatically.

"That gives you the ability to project future development," Mr. Bortz said. "There isn't going to be a lot."

It's hard to get developers to admit they can't get financing for specific local projects. Like LaSalle's Mr. Bortz, most say instead that they are waiting for tenants instead, or else they won't discuss financing at all. Neither will some banks, notably Maryland National Bank, whose spokesman declined comment on the issue.

But the real estate industry's credit crunch and its slowdown are a multibillion-dollar chicken-and-egg question. If the bank won't finance a building until it has tenants, and tenants won't make early commitments because in recent years they haven't had to, whose fault is it that the building isn't getting built? The bank's or the market's?

The developers and real estate brokers are unequivocal. The market is slow, they say. But the banks are the biggest short-term obstacle they've got. "Even if a project makes some sense, it's very difficult to get financing from the banks," said Robert Oare, manager of Manekin Corp.'s Columbia brokerage office.

James Flannery, president of Riparius Development Corp. in Timonium, agrees. His company opened 9690 Deereco Road in Timonium last year with only one small tenant in the building. That project would probably be hard to get financed today, he agrees. But he insists it's a good deal for the bank -- the building is now more than 99 percent leased.

Even many bankers agree that they're passing on quality and risky real estate loans alike. "Absolutely," said Henry A. Berliner Jr., president of Second National Federal Savings Bank in

Annapolis. "There are many properties presented to us, but we can't afford to make new commercial loans."

"Although the whole economy has its problems, the headlines and the concentration initially is in real estate, and the banks with big real estate portfolios have been hit harder," said Thomas M. Scott, executive vice president at Signet Bank of Maryland. Wall Street expectations are one reason, he said. "The analysts seem to be penalizing banks that have more than 10 or 12 percent of their portfolio in real estate."

Signet has about 17 percent of its loans in commercial real estate deals; some Maryland banks are even more concentrated in real estate.

Mr. Scott said another reason banks are passing on real estate loans is that insurance companies are reluctant to provide long-term commercial mortgages. Mortgages made by the insurers have traditionally let developers repay their short-term construction loans from banks, freeing the banks' cash for new loans. That's much less true now.

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