Real Estate Development Financing Creates Critical Situation For Developers

The real estate development industry has created a negative impact on today’s economy. Throughout the United States real estate developers are experiencing many concerns with their development projects. These concerns are mostly related to the lack of financing available and lenders unwillingness to extend or restructure current obligations. Whether you are a residential developer, homebuilder, commercial developer, or any other related real estate development professional without the proper financing terms and structure the projects will remain stagnant or be sold.

The news has hit Wall Street and Main Street that real estate developers and homebuilders require financing, restructuring, and more time to manage through this cycle. Lenders, investors, and other financial institutions have scaled back their lending programs to developers and builders due to the risk associated with real estate development. Many real estate developers rely on financial leverage to make their respective projects successful. In today’s economy the term “leverage” has been a word many people feel has created this current crisis.

The impact has created partially built stagnant projects filled with graffiti, damages, and hazards facing the immediate communities. The citizens of these communities are demanding that police patrol the projects, fire departments monitor access to water, and local municipalities ensure that the integrity of the community. The cities are also being negatively hurt because they relied upon projections of tax revenue created by these real estate development projects.

The real estate development industry has developed alternative contingency plans to adapt to the current real estate environment. Some of the most successful alternative strategies include; raising equity, developing joint venture partnerships, negotiating with their current lenders, and to secure additional debt. Real estate developers that can raise equity can reduce their leverage position and can satisfy lenders needs for paying interest or paying down principal. Real estate developers in turn give up equity into the project. Joint venture partnerships entail teaming up with other real estate development partners or investors to provide additional equity or relationships that create value for the project. Negotiating with lenders has also proven to be successful; however, many lenders are having a tough time with how they restructure the loans. Finally, securing additional debt to either refinance the entire project or pay down the existing debt and hold funds for interest carrying costs has been a strategy for real estate developers.

There are other issues and concerns facing real estate developers besides financing such as finding homeowners, builders to develop projects, and end tenants to occupy the projects. The residential mortgage industry has been experiencing an enormous increase in bankruptcy filings, foreclosures, and lack of funding available to create mortgages to buyers of new homes. The government has been creating programs and ideas to help keep homeowners in their homes and to also stimulate new buyers to the market.

The retail sector of commercial real estate has seen retailers scale back their operations in terms of growth and expansion. The retailers are also struggling to secure financing for tenant improvements for their locations. One of the most troubling concerns for retailers has been the lack of consumer spending. Office tenants have also had to scale back their operations, reduce staffing needs, and cut expenses as much as possible. Office tenants are also experiencing opportunities to move into more desirable locations at more affordable prices causing vacancies in many submarkets.

The recent economic indicators and stock market trends are showing some signs of strength in the economy while others believe that the economy is still due for a slow recovery. As the credit markets start to thaw out and lend to real estate developers the projects will start to get back on track and create momentum. There will be many learning experiences real estate developers will take away from this current real estate market and hopefully will not repeat in the future.

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