HFF’s Kaufman: Top locations, best sponsors the key to winning commercial financing

 

Daniel Kaufman

Daniel Kaufman

By Dan Rafter

Midwest Real Estate News recently spoke with Daniel Kaufman, managing director with Chicago’s HFF, about what it takes for investors and developers to qualify for commercial financing today. The key, he said, is to have a solid location, sponsor and business plan in place.

MREN: When it comes to financing requests, what are lenders looking for today before they give their approval?
Daniel Kaufman: There has definitely been a direction toward quality in the construction-lending market, particularly on the bank side. Only the best sponsors and the best projects get capitalized and proceed through construction. That is a trend we have seen. We have handled one fully speculative construction financing in the past year, in Chicago’s West Loop neighborhood. Everything else for the most part has had some fairly meaningful pre-leasing component attached to it.

MREN: What about when it comes to multifamily financing requests? What are you looking for then?
Kaufman: For multifamily, it comes down to the best locations and the best sponsors. In Chicago there has been some appetite for smaller projects, those with 80 to 150 units, in the city’s neighborhoods. That includes the neighborhoods of Bucktown, Logan Square and others. Outside of those neighborhood-centered projects, it is the projects that are in the communities of River North, West Loop, Streeterville and some in the South Loop that are attracting financing today.

MREN: When you speak about working with the best sponsors, what makes a sponsor a high-quality one in your opinion?
Kaufman: The best sponsors have a solid track record. They have experience building the kind of project for which they are seeking financing, whether it’s a multifamily project or an office project. We look for companies that have the best track records over the last 20 years of doing just that kind of business. Sponsorship has always been important, but it’s particularly important right now. It’s not just the developer partner, but their capital, as well. We want to work with a sponsor that has a significant base of their own lending relationships and asset base. That is an important driver.

MREN: Are lending guidelines tighter today when it comes to commercial financing?
Kaufman: Banks are operating in a very cautious environment right now. We are going to see a lot fewer projects get started because of that, in my judgment. The regulatory environment is challenging for them right now.

MREN: Are you worried that the apartment sector is being overbuilt right now, or is the pace of construction about right for the demand for this sector?
Kaufman: I think the development of multifamily has been fairly well held in check. Where we are delivering multifamily units we are in line with historical residential deliveries. We don’t want to get overbuilt, so developers have been tapping the brakes some. I don’t there is an abundance of concern over the current supply of apartment buildings. This sector is busy, but I don’t think that we are in danger yet of seeing overbuilding in most markets.

MREN: It’s not easy to make predictions, but what do you expect to see when it comes to commercial financing requests throughout the rest of this year and into next? Will we continue to see a lot of financing requests?
Kaufman: On the existing property side, there are a lot of maturities in the market that owners will be grappling with during the next two years. That will yield a lot of financing requests. On the construction side, it will remain fairly tough for developers to source equity and debt capital to complete their projects. It is a relatively tight market.

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