Credit crunch crimps commercial development

With a vision of transforming downtown Seattle, the Clise family spent more than a century buying up key pieces of land. But the credit chaos has forced Al Clise to postpone his plans for a grand, 13-acre commercial and residential development.

Clise Properties Inc. halted discussions with potential partners in April after it became clear that most investors wouldn't find reasonable financing to develop the site with the company during a global credit crunch. Interested investors had to put up more than $600 million just to compete for the opportunity.

"The world changed in a very negative way. Everybody pulled back," said Clise, the chairman and chief executive. "Deals like this are just not getting financed."

Large and small commercial developments nationwide have been delayed or scrapped as lenders tighten credit standards on construction loans. Whether some of these projects will break ground or reach completion remains uncertain.

Last month, Australian gambling firm Crown Ltd. backed out of a $5 billion project to build Las Vegas' tallest tower because of financing issues. The company held a 38 percent stake in the joint venture with Texas developer Christopher Milam and private-equity firm York Capital Management and will have to write off about $42 million related to the investment.

Also in Sin City, the ownership and future of the Cosmopolitan Resort and Casino are up in the air. In March, Deutsche Bank started the foreclosure process after developer Ian Bruce Eichner and his company defaulted on a $760 million construction loan.

Construction still continues on the $3 billion high rise casino and hotel. General contractor Perini Corp. declined to comment on the project, while Deutsche Bank did not return calls seeking comment.

"Some big lending institutions have a big 'X' over Las Vegas right now," said Garrett Toft, senior associate at Voit Commercial Brokerage. "It's true for other markets, too, I think."

Commercial real estate projects in Denver, Phoenix, New York and even Donnelly, Idaho, have run into similar snags, while developers in housing-bust markets like Florida and Southern California have axed smaller projects.

The problems have spread overseas too. Getting project financing for the Athletes' Village in Stratford, England, has taken longer than expected, project investor Lend Lease Corp. said in a statement in June. Lend Lease's equity contribution to the project depends on the debt funding, which it expects by the end of the year. Meanwhile, the company has started work on the site.

"Probably 18 to 24 months ago, anybody could get a loan, anybody could do a deal. The markets were so aggressive," said Hal Kempson, a first vice president in CB Richard Ellis' debt and equity finance group. "The toxicity of the residential market leaked into all U.S. real estate and the liquidity turned off."

Before, developers could put up as little as 5 to 10 percent of equity behind a project and qualify for a mezzanine loan to bridge the gap between the equity side and debt side. It was the commercial equivalent of the so-called piggyback loan that is tripping up homeowners today. Or, developers could turn to cash-rich investors from every corner of the world, who were hungry to get a foot into the real estate market.

Those investors would put up capital to start projects and the developers would buy them out of the deal using short-term debt. No more. The quick change of tide has left some developers with blueprints in hand but pockets empty.

Condo developers are especially vulnerable. As the housing market spirals down, condo buyers, many of them small-time investors, are reneging on their condo contracts as development nears completion. Developers, who depended on those proceeds to pay back their construction loans, are clambering to find alternative financing to pay off the mortgage.

"If a developer acquired the property at step one with an acquisition loan and then, at step two, the lender asks for more equity to get a construction loan. The developer was not counting on that," said Stuart Kaplan, a partner with Blank Rome LLP, which helps negotiate commercial real estate transactions.

Now, construction lenders are demanding so-called "recourse" construction loans, which allow a lender to go after a delinquent developer for some kind of repayment even after taking back the property. Lenders also want more equity in a project and will approve only seasoned developers with healthy balance sheets.

The fear is unfounded, many in the industry say. While delinquencies on commercial real estate loans have crept up, they remain below a half percent and aren't suffering the damage seen in the residential market.

In the meantime, it's back to the drawing board for many developers, while others are slowly finishing projects in progress.

"Anything started or planned in '06 or '07 is moving forward in some fashion," said Kit Graski, senior vice president at Voit Commercial Brokerage. "But there's nothing large I can see planned for the future right now."

The Clise land portfolio drew nearly 100 offers, with significant interest from foreign developers last year, said Michel Seifer, managing director of Jones Lang LaSalle Inc. who marketed the portfolio. By early October of last year, they had wittled the pool down to 15 investors.

"We continued discussions with several parties into early this year, until, ultimately, we elected to put the offering on hold," Seifer said. "Given the headwinds in the capital markets, even the most well-capitalized investors couldn't take on a project of this size."

Seifer continues to receive calls from interested parties, and he's keeping in touch with some of the investors in the final pool until the credit markets settle down.

Al Clise remains optimistic about the prospects for the downtown Seattle development. He envisions a sustainable urban center that rises to international prominence. The current credit crisis is just a hiccup on the way there.

"We started this process over a 100 years ago," Clise said, "a few more years isn't going to make a difference."