Friday, July 1, 2016

The Basics - Understanding Commercial Real Estate Developer Financing

Commercial real estate developers are visionaries and dreamers. What the average person sees as a barren field or wasteland, a developer sees as a new community or high-rise development. What others see as urban blight a developer sees as the next business center. To make the dream into a reality, a developer needs to be passionate and bold.

Although a commercial real estate developer may be armed with the best construction crew, machinery, and materials, success is still at the mercy of market forces. The intervening time between eying the property until procuring final approvals can see significant economic shifts. These shifts can take what was a surefire success and make it into an abysmal failure. Thus, despite a commercial real estate developer’s aggressive plan and strong track record of accomplishment, market conditions often dictate a commercial development’s success.

The Risks

Furthermore, real estate development is an example of the Anna Karenina principle, wherein just one failure of a number of factors dooms a project. Leo Tolstoy’s book Anna Karenina begins with "[h]appy families are all alike; every unhappy family is unhappy in its own way."  This means that every happy family has all conditions, i.e. finances and children, in place. In contrast, unhappy families need to be missing only one factor to feel unhappiness. The same for commercial real estate development, a number of a variety of factors must be in place; if one is not in place then the project will be a failure.

As mentioned, the economic climate of an area often is the biggest factor determining a commercial real estate development’s success. Another significant factor is construction delays, which can trigger other issues. Often times, a commercial real estate developer needs to secure financing to complete the project. While a perceptive developer contemplates possibilities and scenarios that may affect the future completion of a project, a developer also knows that it is not possible to consider every possibility. Therefore, when unexpected issues arise, a developer may have to seek additional financing to complete the task.

To secure financing, a developer will often need to sign a personal guarantee.  A personal guarantee is perhaps the most dreaded concession a developer can make when trying to secure a loan. However, upon building a portfolio of successful development, lenders are more amenable to lending absent personal guarantees. Even so, a developer currently in the building process and foresees or is experiencing cost overruns may need additional financing to finish the job. At that point, a lender who prior to construction commencement would lend absent a personal guarantee may require a personal guarantee when a developer seeks such funding.

Contact a Real Estate Attorney

Currently, there is strong demand for commercial real estate in the Denver area. Lease rates are increasing, suggested increased interest in commercial space. Developers seeking to capitalize on the strong Denver commercial real estate market should contact the experienced attorneys at the Law Office of Eric Nesbitt, Esq. These attorneys understand the challenges real estate developers face and know how to negotiate with banks on their clients’ behalf.



Eric L. Nesbitt, Esq.
Law Offices of Eric L. Nesbitt, PC
Phone 303-741-2354
Email Us
Nesbitt Law Offices Website

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