With a slumping Rhode Island economy, it’s becoming increasingly common and in many cases necessary for “creative” financing – and out-of-state financing – to help seal Rhode Island commercial-property deals, says Zachary G. Darrow, principal of DarrowEverett LLP, a real estate law firm he co-founded in January 2007.
With the struggling Rhode Island economy and changing state programs – like the fee increase and credit decrease recently approved retroactively to the Historic Preservation Investment Tax Credit program – financing has become difficult to count on, he said.
“You could have a loan commitment for an 80-percent loan to value [of the project] and, in the middle of the project, since the markets have been changing, the bank could come back to you and say ‘The underwriters took another look and we’re only willing to go 70 percent loan-to-value or 65 percent loan-to-value,” Darrow said.
That can leave developers that aren’t flush with capital with a pressing need for outside financing. And many are looking to such creative options as mezzanine financing – a second loan sought out by the project’s owner – or short-term financing, both of which are becoming increasingly common, Darrow told Providence Business News earlier this month.
Because those methods depend on high-capital investors and underwriters, there’s an increased need for some developers to look out-of-state for financing. There’s also been increased interest from out-of-state firms looking to invest in real estate and Rhode Island projects, Darrow said.
For example, DarrowEverett represents Philadelphia-based FB Capital Partners, which has invested heavily in the state during the last year. That firm purchased the former Union Trust building, at 170 Westminster Street, and the Turks Head building, both downtown landmarks that together represent a $24 million investment in the state.
In the past, such outside interest might have been a signal that the Rhode Island commercial market was doing poorly.
But “with today’s network – just the connectivity of the business world today – and also the brokerage networks…you’re naturally seeing more of that” out-of-state interest, Darrow said.
The commercial-mortgage-backed securities crisis has been slowing national lending and “there’s clearly a reluctance to lend locally,” said Darrow. “You see a lot of the banks’ underwriting becoming much more stringent and banks passing on a lot of transactions that maybe 12 or 18 months ago they would not have passed on.”
Shelter Mortgage Loan Officer Michael Conley told PBN in February that the similar residential-lending slowdown was a return to lending practices from 10 years ago. Darrow says the commercial lending market is undergoing a similar change.
“But I also think that right now, where the dollar’s been for a long time, being relatively weak and the economy being a bit sluggish, underwriting it still disproportionately stringent,” Darrow said.
Still, there’s a lot of new activity and repositioning in the local market, he said. The sale of large downtown properties, along with renovations such as the former Francis St. Chapel being built into a new Hampton Inn & Suites downtown, shows that the Rhode Island market isn’t “stagnant,” he said.
“Look around, even in Providence – which is not usually a national-indicator market – we still have our cranes up, there are new projects going up and there are re-gentrification projects and urban renewal projects,” he explained.
Darrow pointed out, however, that some of those projects have been hit hard during the past months due to the changes in the historic tax credit program. “The banks and the financial institutions would look at a project and they’d [calculate financing] with the tax credits, now that they’re not available; it changes the banks’ desire to be involved.” •
