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Tighter credit puts brakes on Madison area real estate developments(Wisconsin State Journal, The Via Acquire Media NewsEdge) Sep. 23--Bad loans on a handful of high profile projects have caused Wisconsin banks to toughen credit standards for developers. The banks haven't stopped making commercial loans, but they're demanding higher interest rates, more sales or leases prior to construction and lower loan-to-value ratios, which requires more investment capital. "Commercial credit is getting much harder to find, especially real estate related credit because of the fallout in the mortgage markets," said James Johannes, director of the UW-Madison Puelicher Center for Banking Education. "It is still available for the right price and security, just not at yesterday's terms." Longtime Madison developer George Gialamas said the credit problems of some developers have made banks more cautious. "I'd hate to be a new kid on the block today," he said. "Underwriting has definitely become a lot tougher. People are doing their homework, which they should have been doing before." Projects on hold Gialamas, developer of the Old Sauk Trails Business Park, said he hasn't had any credit problems but that he's put construction of two office buildings on hold until the economy improves. Speculative construction of office buildings or other commercial projects has come to a halt, said Michael Reisinger, vice president of brokerage services at CB Richard Ellis in Madison. "If you're planning a large-scale development with no tenants in hand, it's a lot tougher to get financing," he said. "(Banks) want to see some interest or leases signed." Developer Steve Brown, who opened the 359-unit Lucky apartments last month on University Avenue and is building the 116-unit Brownstone Terrace Apartments on Madison's Far West Side, said financing was secured for those projects a couple of years ago, when credit conditions were better. But he said refinancing could become more difficult as notes come due if conditions don't improve. "(Banks) have to get all this fright out of their system," he said. "They're trying to remove all risk from their lending and that's impossible to do in real estate." Madison developer Randy Alexander, who's involved in commercial real estate projects around the country, said he's also noticed a change in credit standards. "I can guarantee you there are deals that aren't getting financed," he said. "There's no doubt underwriting standards have changed." Alexander, developer of the Capitol West condominiums in Madison and Novation Campus business park in Fitchburg, said he's turned to community banks for financing because larger banks are so cautious. "We're still doing deals but we're having to look at our non-traditional sources," he said. "We have much better luck with community banks. Even though their lending limits are small, they're getting into consortiums (with other banks)." Fewer loans in forecast A year ago, Marshall & Ilsley M&I Bank was forecasting double-digit growth in commercial loans, which now has slowed to single digits, said executive vice president Tom Ellis. The struggling economy has softened loan demand, but the bank, which he said makes about half of all Wisconsin commercial loans, also has raised interest rates. Ellis said the bank's customers are borrowing less, but loan officers also are being more selective. The tighter credit market has a bright side for Wisconsin banks, said Jim Hegenbarth, president and chief executive of Park Bank of Madison. In the past, he said, Park Bank might finance a short-term construction note until the developer got a loan in the conduit market, where loans were packaged and sold as securities. The conduit option, however, is gone. "I think what's happened in the market is some of the players have gotten out and it's created more opportunity for players like Park Bank," Hegenbarth said. Problem loans Financial problems of a few high profile commercial projects have increased bank scrutiny for commercial loans. First Place on the River, a 152-unit Milwaukee condominium project, was placed in receivership early this year and a consortium of banks led by AnchorBank, of Madison, is trying to complete the project so they can recover the $56 million they provided in loan principal and interest. Phase II of Metropolitan Place, a 164-unit Madison condominium tower at 333 W. Mifflin St., also went into receivership last spring after Associated Bank, of Green Bay, and LaSalle Bank, of Chicago, said developer Cliff Fisher had defaulted on loans of $26 million. Funds still are available for good projects, but regulatory standards on bank partnerships have intensified, making it more difficult to finance large projects, said Kurt Bauer, president of the Wisconsin Bankers Association. "I think there's a lot more scrutiny when it comes to construction and development projects," he said. "Now they have to justify whether it's going to be a good investment." To see more of The Wisconsin State Journal, or to subscribe to the newspaper, go to http://www.wisconsinstatejournal.com. Copyright (c) 2008, The Wisconsin State Journal Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |