Financing Large-Scale MXDs
By: Ellen Rand and Ron Derven, contributing editors, Development
Financing mixed-use developments (MXDs) that may span many city blocks and take decades to develop is significantly more complex than financing single-use projects. In a session titled “Mixed-Use Case Studies: The Price of Success” at Development ‘13, three developers described their large-scale mixed-use projects and Kevin Jennings, senior vice president, Bank of America Merrill Lynch reacted to each project, offering comments about how lenders approach financing these and similar types of projects, and describing some of the unique financing vehicles employed.
South Lake Union
Sharon Coleman, director of real estate development at Vulcan Real Estate, described Seattle’s South Lake Union District, a 60-acre MXD that now includes Amazon.com’s world headquarters. To date, about 5 million square feet of space have been constructed and an additional 5 million square feet will be built over time. (For more on this project, see “Amazon Stays True to the Urban Grid,” Development, Spring 2013, p. 44.)
Kevin Jennings’ View: It is hard to speculate about how each piece of a large-scale MXD will be financed, because these projects happen over time. What is critical for lenders in these types of projects are sponsorship (i.e., the developer’s track record and creditworthiness) and leadership. The initial challenge on a project like South Lake Union is to “sell the dream” early on and to attract an anchor or two to seed the project and activate it.
A one-size lender does not fit all, so the developer typically needs a “menagerie” of lenders. Over time, plans and uses change; so do lending and underwriting standards. Both developer and lender must be extremely flexible and adaptable to changing market conditions. Over more than a dozen years, Vulcan has used 24 different lenders — including balance sheet lenders, private equity and life companies that can finance build-to-suit projects from beginning to end, with construction loans to permanent financing.
Development '13 attendees gather prior to the "Mixed-Use Case Studies session.
Joseph Haeussler, senior vice president, commercial real estate for the Corky McMillin Companies, presented this adaptive reuse project, which encompasses 350 acres of a 500-acre former naval training station in San Diego that closed in 1997. The facility features Spanish Colonial architecture and 44 buildings (with more than 600,000 square feet of space) that are on the National Register of Historic Places. The developer started with residential development to bring in revenue, then developed additional phases with hotel, office and retail components in phases over a long time period.
Kevin Jennings’ View: On the financing side, some of the commercial buildings are in fee (meaning they were developed by third-party developers), while others were developed using ground leases from the redevelopment agency. Ground leases pose certain issues with lenders that can be overcome with the right type of documentation.
In a project like this, which contains a lot of common area and many different uses (residential, commercial, hotel), as well as several different associations and shared parking, lenders will want to look closely at the various reciprocal agreements.
Two financing vehicles — new market tax credits and historic tax credits — were key to this project. These vehicles can boost yields in these types of transactions and help make the cost basis of historic buildings, which are very expensive to redevelop, make sense to investors.
Britt Snider, senior vice president with the JBG Companies, described this Washington, D.C., project. In 2003, the firm acquired 1 million square feet of office, hotel and retail space built in the late 1960s, as well as 1 million square feet of untapped “by-right” density. Existing uses include 810,000 square feet of office in two buildings, a 350-key hotel and 200,000 square feet of retail space. JBG plans to develop an additional 800,000 square feet of office and 200,000 square feet of new hotel or residential space. The developer also is renovating all of the existing retail space; it has completed the first phase of this renovation and the second phase is currently under construction.
Kevin Jennings’ View: This project is driven by U.S. General Services Administration (GSA) leases; most lenders are more comfortable with a GSA project in the nation’s capital than with one in a suburban location, because some GSA leases can be terminated on short notice. The retail component of this project is the key challenge for lenders; developers must know who the retail users will be (in this case, government employees), and put in place the right type of retailers to appeal to that tenant base — which helps make lenders comfortable. This project, in contrast to South Lake Union and Liberty Station, is being financed by a single lender, GE Real Estate.