Why is build-to-suit financing relevant now? The answer is pretty basic, as investment firm W. P. Carey director Kathleen Barthmaier noted. "The days of speculative building are done," she said. "There’s less demand and financing is gone." For a fee developer, there are several advantages: build-to-suit minimizes the risk; financing can be lined up from day one and it doesn’t require equity. Build-to-suits have a renewed attraction for corporations, too, she pointed out. "Construction costs are at an all-time low, so they can lock in a lower lease rate and achieve considerable savings."
W.P. Carey purchases the land, funds construction and owns a development at the end, with a long-term lease to the tenant. The developer’s fee is built into the budget, although a promote for the developer is less frequent, she noted.
In a recent transaction, W.P. Carey & Co. LLC, through CPA®:17 – Global, one of its publicly held non-traded REIT affiliates, is providing $41 million in build-to-suit financing for the Sun Products Corp., a leading provider of fabric and dish care products, in Bowling Green, Kentucky. Funding will be for construction and long-term financing. When completed, the 1.4 million-square-foot facility will be leased to Sun Products under a long-term triple net lease and will enable the company to consolidate operations of nine other facilities in the Bowling Green area. Located adjacent to one of Sun Products’ four manufacturing plants, the distribution center will be one of two distribution facilities serving the East Coast.
Johnson Development Associates, Inc. is developing this facility, which is expected to open in June 2011. Garrett Scott, president of Johnson’s Industrial Division, said that this was a pure fee development, a departure for the company. Why the shift? It allowed Johnson to keep its development team intact. Because of the size, it was a high-profile deal that would draw attention to the company.
Going forward, Johnson will continue to focus on build-to-suits in transportation-related markets, in three ways, said Scott: on an all-equity basis; in joint ventures; or more fee development.
Scott sees a loosening of take-out capital, but construction financing is "still challenging, although with a deal in place it definitely can be put together."
W. P. Carey & Co. LLC provides long-term sale leaseback and build-to-suit financing for companies worldwide and manages a global investment portfolio approaching $10 billion. Barthmaier outlined what the company looks for in prospective developers. "We want a credible party and a guaranteed maximum price contract," she said. "The risk of a budget increase falls on the developer. The construction schedule is set and we require a rent certain date." Lease term is 15-20 years, the longer the better. Pricing will depend on the market and the credit of the tenant. The company brings on a developer early in the process, she noted. W.P. Carey expects a return in the mid- to high-teens, over the life of the project. "We look for facilities critical to the long-term business of the tenant, which was the case here," she said, adding that "we’re working on a number of buy-to-suits, with existing vacant properties," planning on bringing in developers to renovate or rehab them.
What’s in the Box?
By many accounts, debt financing is becoming more plentiful, but lenders are still veering to the opposite ends of the spectrum, or what the pros refer to as "trophy or trauma." At a NAIOP Development ’10 conference session on "A Current Look at the Rapidly Evolving Debt Markets," panelists offered some guidelines for prospective borrowers.
Michael Sarkozi, managing director of JP Morgan Chase Company, said that conduit production has come out of hibernation and predicted that the domestic CMBS market would reach $30 to $40 billion in 2011. He also predicted that 2011 to 2013 will be a "really terrific time to be a borrower and buy new deals." With $10 billion in conduit production in 2010, the firm is a leader in the multi-borrower CMBS market and expects to come to market perhaps nine times in 2011 with new deals.
Paige Hood, managing director of Prudential Mortgage Capital Co., said that "it’s a very different market today than two years ago. Life companies have weathered the storm and most are allocating as much as their investment units can reasonably do. But they’re not taking a lot of risk and that trend is likely to continue. We’re not seeing much in the market for short-term, higher-leverage, value-add transactions."
Panelists discussed "the box," i.e., the kinds of deals and terms they are looking for. Hood noted that "the box" is a little smaller than it was a few years ago, with regard to leasing risk and yield. The firm is focused on more moderately leveraged deals in more supply-constrained markets, with sponsors that have adequate capital and expertise.
Discussion moderator Edward Padilla, CEO of NorthMarq Capital, observed that "It’s almost impossible to know what’s in the box; it’s always changing." He also noted that single-tenant buildings, except for those with publicly-rated tenants and long-term leases, are among the hardest to finance. He cited the case of two large industrial properties, in secondary markets, whose loan requests were turned down by 30 life companies.
Sam Kupersmith, managing director of Cantor Commercial Real Estate (a unit of Cantor Fitzgerald, the Wall Street firm), said that this firm raised $1 billion a year ago to invest in commercial real estate debt, noting their nimbleness over life companies in making deals. Having officially opened for business in July 2010, Cantor has $200 million in deals in process currently; it has already seen $8 billion in possible transactions. It is also developing a floating rate bridge program for 2011. "I think we’ll do $5 billion in 2011," he said.
Sarkozi noted, "It’s a more robust market today than six months ago. Loans impaired today may not be, six to eight months from now. You’ll see servicers not running to foreclose." For those dealing with servicers on problematic conduit loans, however, he said, "If you rattle the cage, it will not do well with us."
Panelists offered a number of insights regarding loan applications and the importance of quality information, indicating the need to "ask a million questions and get a complete story."
Hood commented, "If we know someone is a long-time client with a competitor, we won’t spend a lot of time on it." He also said that the company prefers the possibility of working on multiple vs. single deals with a borrower. "They need to be much more realistic in their ‘ask.’ If the values are too high, or the package isn’t realistic, you’re doing yourself a disservice. I don’t want to see the same deal coming in from two different mortgage bankers; that goes to the bottom of the pile and it’s very hard to get my attention a second time. A little bit of a cash-out is okay, but if you think a ‘big gob’ is going to get past us, it’s not. Borrowers and mortgage companies that do their homework get to the finish line faster. Rather than going to half the lending community in the U.S., go to a handful of people. There’s a pretty defined bandwidth of where deals are getting done," said Sarkozi.