It’s prime time to be an affordable developer. The market is ripe with deals and debt is readily available.
But panelists at AHF Live last week cautioned developers to play it smart instead of feeding the frenzy.
The recipe for the healthy debt market is being driven by banks trying to satisfy their Community Reinvestment Act obligations and the government-sponsored enterprises focusing more on the affordable space.
However, the market may be approaching the place in the cycle where it’s getting frothy, Sarah Garland, senior vice president at PNC Bank, said.
“I do think it’s a good time to be a borrower, if you can find a piece of property,” she said. “Because I think there a lot of people chasing the same deals, and they’re driving up prices. It seems to me that there are a lot of people who have discovered affordable housing is a great industry to be in so we’re finding a lot more competition for the same properties.”
But, Garland warned against getting too overconfident on debt-service coverage when trying to close deals.
“I do think that most developers are very optimistic that their deal will be the deal that will succeed,” she said. “But, when you’re sizing a deal to 1.15x there’s very little room for error.”
And lenders, while they may be enthusiastic about closing deals, aren’t willing to play on a pass or fail basis.
“I think they tend to be conservative on their assumptions going in where they feel like maybe that 1.15x is more like a 120 because they’ve used a higher vacancy, or they bumped up their replacement reserves, or something like that… but they’re definitely sizing to an exit year 15 and if it doesn’t work you don’t get the loan now,” she said.
Rob Hoskins, managing principal of developer The NuRock Cos., agreed that planning for the future, especially at the back end of a deal, is important in today’s market.
“We’ll take less proceeds and have a higher developer fee so that we’ve got more cash flow coming out of the deal over the long haul,” Hoskins said. “Because we recognize that it may look good in years one, two, three, and four but we’re in it for years five through 15, and we’ve got to focus on that.”
Hoskins said debt-service providers are laying the pressure down on developers now to get the deals done, but developers should err on the side of caution.
“Anything you can do to provide a gap to, really, achieve what I call a 1.20x,1.25x debt-service coverage, serves you, the developer, in a far more favorable fashion than going out and getting maximum proceeds just so you can stick more money in your pocket only to start dribbling it out over the course of time,” he said.
Lindsay Machak is an Associate Editor for Affordable Housing Finance. Connect with her on Twitter @LMachak.