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$$$ Economy Watch $$$
Stormy weather: Local developers deal with credit freeze
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By Douglas J. Guth
Senior Staff Reporter
This autumn has been a dark season for Cleveland-area real estate developers. Major projects designed to boost the city and region have been dropped or delayed because of a near-freeze on credit.
Nonetheless, some local development plans continue to move forward despite the banking industry turmoil that has brought tough times for builders across the country.
“We’re in a period of transition from the old capital market system,” explains Coral Co. president and CEO Peter Rubin, who recently backed out of a $500 million development in Solon due to the collapse of the credit market. “We don’t know what the new rules are yet.”
Earlier in the month, developer Bob Stark, owner of Eton Chagrin Blvd., announced he was dropping a multi-billion dollar project to transform Warehouse District parking lots into a mixed residential, office and retail space. In a statement given to The Plain Dealer, Stark said the project fell through after lot owners on the site declined to extend his options to buy the land.
The nation’s credit crisis and turmoil in the retail industry also contributed to the decision to drop the project, notes Alan Melamed, spokesman for Stark Enterprises. There were concerns, for example, about attracting cash-strapped retailers and restaurants to the district.
There were concerns, for example, about attracting cash-strapped retailers and restaurants to the district. Stark had also been seeking creative sources of public financing before his private financing dried up.
Economists and real estate experts believe that credit will be hard to obtain for at least the next year, but Melamed doesn’t expect Stark to try and reboot the project even when the country’s economic situation improves.
“Somebody else will need to pick it up,” he told the CJN.
On the east bank of the Flats, the Wolstein Group and Fairmount Properties have “temporarily suspended” construction of a $522 million riverside mixed-use neighborhood.
In a press release, Scott Wolstein, who is leading the development of Flats East Bank with his mother Iris and co-developer of Fairmount Properties, points to the global credit crunch that is hindering the developer’s ability to secure private and public financing for the plan.
Additional infrastructure improvements, including street and utility work, will eventually be financed through bonds, which would be repaid from future tax, parking and other revenues. The builders must first acquire private financing commitments before the bonds are issued.
Wolstein is hopeful that the markets will return to “some level of normalcy” in the near future, which would enable the developers to finalize the remaining private financing.
Debt capital, the investment capital that must be borrowed, is “the raw material of commercial real estate,” says Adam Fishman, a Fairmount principal, in a phone interview with the CJN.
Rubin of Coral Co. estimates that debt capital makes up 30%-50% of the industry’s capital resources. “You take that away, and what industry could go on in a normal fashion?” Rubin asks rhetorically.
Wolstein’s company, Developers Diversified Realty Corp., is also among the companies slashing shareholders’ dividends or trying to sell properties to ease debt. Since the start of October, Wolstein has sold a total of 2.6 million shares of Developers Diversified stock to meet margin calls.
Forest City Enterprises recently announced three separate, out-of-state construction financing transactions totaling more than $167 million.
Although the company’s stock fallen 91.5% in the past year (from $50.61 to $4.31 as of press time), “these transactions, demonstrate that there continues to be both opportunity and access to financing for high-quality real estate development in strong markets,” Charles A. Ratner, Forest City president and chief executive officer, said in a statement.
Rubin maintains that his plans for the South Euclid side of Cedar Center will move forward as planned due to the project’s low level of debt capital and its high level of commitment from prospective retailers.
The project includes 120,000 square feet of retail space, 20,000 square feet of office space, 75 residential units, and a parking garage. Demolition of the old Cedar Center site is on schedule for this year, adds Rubin, who expects construction of a new shopping center to start in the middle of 2009.
Meanwhile, MRN Ltd. and Nathan Zaremba of Zaremba Homes are making progress with banks for their UpTown project, which would add new homes, restaurants and stores to the University Circle area.
The developers are currently attempting to close on construction financing for the 59,000-sq.-ft., first-floor retail portion of the project’s initial phase, says MRN principal Ari Maron.
The project, notes the developer, will move forward though a financial package that includes just $5 million in bank debt, a relatively small amount in today’s market.
Another $5 million in financing comes from a loan from the city of Cleveland. And $5 million more comes from the federal New Markets Tax Credits program, which offers tax credits against federal income taxes for making equity investments in community development projects in low-income areas. The deal requires that builders personally guarantee the bank and city loans, an unusual practice in real estate.
Creativity with financing is a bit easier for smaller projects such as UpTown, explains Maron. Indeed, financial ingenuity may be a necessity until the markets straighten out.
“We’re all trying to figure out when (financial) liquidity will return,” remarks Fishman of Fairmount Properties. “It’s going to be awhile before this gets better.”
dguth@cjn.org
Nonetheless, some local development plans continue to move forward despite the banking industry turmoil that has brought tough times for builders across the country.
“We’re in a period of transition from the old capital market system,” explains Coral Co. president and CEO Peter Rubin, who recently backed out of a $500 million development in Solon due to the collapse of the credit market. “We don’t know what the new rules are yet.”
Earlier in the month, developer Bob Stark, owner of Eton Chagrin Blvd., announced he was dropping a multi-billion dollar project to transform Warehouse District parking lots into a mixed residential, office and retail space. In a statement given to The Plain Dealer, Stark said the project fell through after lot owners on the site declined to extend his options to buy the land.
The nation’s credit crisis and turmoil in the retail industry also contributed to the decision to drop the project, notes Alan Melamed, spokesman for Stark Enterprises. There were concerns, for example, about attracting cash-strapped retailers and restaurants to the district.
There were concerns, for example, about attracting cash-strapped retailers and restaurants to the district. Stark had also been seeking creative sources of public financing before his private financing dried up.
Economists and real estate experts believe that credit will be hard to obtain for at least the next year, but Melamed doesn’t expect Stark to try and reboot the project even when the country’s economic situation improves.
“Somebody else will need to pick it up,” he told the CJN.
On the east bank of the Flats, the Wolstein Group and Fairmount Properties have “temporarily suspended” construction of a $522 million riverside mixed-use neighborhood.
In a press release, Scott Wolstein, who is leading the development of Flats East Bank with his mother Iris and co-developer of Fairmount Properties, points to the global credit crunch that is hindering the developer’s ability to secure private and public financing for the plan.
“We don’t know what the new rules are yet.”
Peter Rubin, Coral Co. president/CEO
Extensive improvements are needed on this former industrial land, including significant environmental cleanup and replacement of deteriorating sewers. Thus far, the Wolstein family has incurred more than $50 million in private and public costs.Peter Rubin, Coral Co. president/CEO
Additional infrastructure improvements, including street and utility work, will eventually be financed through bonds, which would be repaid from future tax, parking and other revenues. The builders must first acquire private financing commitments before the bonds are issued.
Wolstein is hopeful that the markets will return to “some level of normalcy” in the near future, which would enable the developers to finalize the remaining private financing.
Debt capital, the investment capital that must be borrowed, is “the raw material of commercial real estate,” says Adam Fishman, a Fairmount principal, in a phone interview with the CJN.
Rubin of Coral Co. estimates that debt capital makes up 30%-50% of the industry’s capital resources. “You take that away, and what industry could go on in a normal fashion?” Rubin asks rhetorically.
Wolstein’s company, Developers Diversified Realty Corp., is also among the companies slashing shareholders’ dividends or trying to sell properties to ease debt. Since the start of October, Wolstein has sold a total of 2.6 million shares of Developers Diversified stock to meet margin calls.
Forest City Enterprises recently announced three separate, out-of-state construction financing transactions totaling more than $167 million.
Although the company’s stock fallen 91.5% in the past year (from $50.61 to $4.31 as of press time), “these transactions, demonstrate that there continues to be both opportunity and access to financing for high-quality real estate development in strong markets,” Charles A. Ratner, Forest City president and chief executive officer, said in a statement.
Rubin maintains that his plans for the South Euclid side of Cedar Center will move forward as planned due to the project’s low level of debt capital and its high level of commitment from prospective retailers.
The project includes 120,000 square feet of retail space, 20,000 square feet of office space, 75 residential units, and a parking garage. Demolition of the old Cedar Center site is on schedule for this year, adds Rubin, who expects construction of a new shopping center to start in the middle of 2009.
Meanwhile, MRN Ltd. and Nathan Zaremba of Zaremba Homes are making progress with banks for their UpTown project, which would add new homes, restaurants and stores to the University Circle area.
The developers are currently attempting to close on construction financing for the 59,000-sq.-ft., first-floor retail portion of the project’s initial phase, says MRN principal Ari Maron.
The project, notes the developer, will move forward though a financial package that includes just $5 million in bank debt, a relatively small amount in today’s market.
Another $5 million in financing comes from a loan from the city of Cleveland. And $5 million more comes from the federal New Markets Tax Credits program, which offers tax credits against federal income taxes for making equity investments in community development projects in low-income areas. The deal requires that builders personally guarantee the bank and city loans, an unusual practice in real estate.
Creativity with financing is a bit easier for smaller projects such as UpTown, explains Maron. Indeed, financial ingenuity may be a necessity until the markets straighten out.
“We’re all trying to figure out when (financial) liquidity will return,” remarks Fishman of Fairmount Properties. “It’s going to be awhile before this gets better.”
dguth@cjn.org
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