Portland Project Stopped; Highlights Financing Difficulties

Construction of a 50%+ pre-leased project in downtown Portland, Oregon has ground to a halt as a result of a lack of financing. Despite half of the project being committed to by a Nike Store and a law firm, the well-heeled developer behind the project was still unable to secure financing for the Park Avenue West project. The developer, TMT Development, one of the most well known in Portland was financing the project himself, but has now pulled the plug on the project as it seems he has been unable to even secure sufficient financing on his other projects. The developer expects construction financing to materialize in early 2010.

According to the article, depsite being more than fifty percent pre-leased, the developers were unable to secure more than 45% LTV on the construction financing. I’ve seen this project in person, and it is a well located, quality development, with immediate access to street-car transit, shopping, and parking. And like the article says, Portland is indeed a fairly stable office market. Despite this, a strong development team, and 50%+ pre-leasing, no financing.

Now extrapolate this situation to Silicon Valley, where you have several million square feet of new office product out of the ground without tenants. Those projects were undoubtedly financed by loans provided by lenders and developers who would have expected to comfortably roll off their construction loans into a take-out permanent loan by now. Clearly, that’s not the case. What you have instead is a bunch of projects (e.g. Jay Paul’s Moffett Towers, Jack Myer’s Centennial Towers, Menlo Equities’ 525 Almanor) which have been out of the ground for quite some time now.

As a result, the question becomes where do developers go to find money on these vacant projects now that their construction loans might be coming due? One solution is that the original lender agrees to an extension, but that will likely come at the cost of the developer’s equity which the lenders may elect to start taking back, or the loan becoming recourse. The other alternative for the developer who likes to gamble is to pump more money into the project and secures what is likely a new, lower LTV/higher interest rate bridge loan. The problem though is that as prices have depressed, this becomes more and more difficult to justify since the developer might as well just use that money to acquire other income producing assets, rather than risk throwing good money after bad and losing everything. That leaves a third option, and that is foreclosure, which is likely where some of these projects will likely end up.

HT to CalculatedRisk for heads up on the Portland story.

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