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Lenders address risk at CBE

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When Champaign Bank was evaluating the $33 million Water Street mixed-use project in downtown Dayton this year, developers already had 50 percent of the office space pre-leased with solid anchor tenant PNC Bank and two independent studies that showed the apartment space would be fully leased in 13 months.

The market prospects for the city’s newest development looked “very promising,” said Scott MacDonald, a commercial lender with Champaign Bank.

The formula is typical for what it takes to get a lender to finance a development in the current economic environment, according to recent interviews with bankers and developers who operate in the region. Whether it’s a developer looking to construct and lease a new building or a business hoping to build a new facility of its own, many lenders these days say they like to see at least 50 percent of the space pre-leased, anywhere from 25 percent to 40 percent equity in cash up front, and studies that show demand for the space within its market.

Yellow Springs Community Resources is currently set to finance the infrastructure for Yellow Springs’ Center for Business and Education, or CBE, using a combination of state grants and about $1 million in local taxpayer dollars if the public financing referendum passes in the Nov. 4 election. Once utilities and roads are brought to the 30-acre property, project leaders must then look at the prospects for new construction on the vacant land adjacent to Antioch University Midwest.

According to area lenders, every bank looks at a project differently to gauge both positive and negative signs of its success. Several things going for the CBE are the relatively low interest rates for new construction and the draw of Yellow Springs’ educated workforce and desireable community atmosphere.

“We’re financing projects, and we’d like to do more,” Dave Walton, a commercial lender at Old Fort Bank, said in an interview last week. And for certain types of commercial projects, such as manufacturing and industrial users, “Yellow Springs isn’t out of the question.”

But Yellow Springs is also relatively far from the transporation hubs and labor pools that many manufacturers and distributors rely on. And it’s got steep competition for office space that is both finished and closer to areas with a larger customer base. All of these factors add up to the CBE being a not insignificant risk for a lender, according to Mark Dlott, a principal at Cassidy Turley Real Estate in Dayton. In his estimation, Yellow Springs would do better to grow from within.

“Look at your heritage and your strengths in the arts, your restaurants, entertainment and of course education,” he said last week.

All of these factors affect a bank’s willingness to fund construction for either a developer or an owner-occupied building, according to Jared Barnett, of Synergy, the development firm that has informally agreed to market the CBE for Community Resources.

“When you look at that [CBE] site, it’s a very fair question: When do you pull the trigger?” he said last week.

Financing new construction
The first thing many bankers will say when asked to fund the construction of a new commercial building is that they need a certain percent of the equity in cash to secure the project.

In the current financial climate, the cash rate can vary depending on the stability of the project. But several bankers said 25 percent of the building’s equity is typically the minimum necessary, and possibly more if the future building’s appraisal doesn’t meet the construction estimate.

“Everything’s appraisal driven now,” Barnett of Synergy said.

The cash need can go even higher, up to 40 percent of the total, if the project is a first-time build on vacant land, according to Walton of Old Fort Bank.

The second thing banks look for is the amount of space already leased by businesses with the means to carry their commitments for 10 years, or as few as five years if the developer is willing to increase the initial amount down, according to Eric Joo, vice president of Miller-Valentine’s Development Group. Most developers are looking for at least 50 percent of the building pre-leased, (and possibly up to 100 percent pre-leased if demand for the space looks questionable), plus the credit of the developer to guarantee the ability to pay the other 50 percent lease until that too is filled.

After those two essential needs, when considering a proposal banks will also look at the credit and stability of both the borrowers (the business or the developer) and the prospective tenants. Start-ups are always considered a high risk, so banks prefer those with at least 10 years of operation and enough credit to demonstrate they can make sustained mortgage or lease payments. And according to Andy Brossart, managing director of public finance at Fifth Third Bank, absent adequate business credit, the banks will lean on the developer (or a guarantor) for more credit or cash down.

To demonstrate the likelihood of a project’s success, banks also like to see studies that show high demand for the commercial space and low competition for that type of space in the area. And for the CBE specifically, the competition is high for all types of development.

According to MacDonald of Champaign Bank, who knows Yellow Springs because he’s taught at Antioch Midwest since 1997, of the types of development that the current zoning allows at the CBE, neither manufacturing nor distribution appear to be right for the space. For distribution, there are many other vacant spaces located closer to major highways and airports than Yellow Springs is. And with manufacturing the labor pool would come mainly out of Fairborn and Springfield, where there is already much vacant space available to build.

“Where is your labor coming from? Is there enough of it? I would question that,” MacDonald said. “Trying to convince a manufacturer to build there when there’s so much land available elsewhere … who would move out there?”

That leaves office space, which is already widely available in the east Dayton market Yellow Springs belongs to, but which could serve a need for professional services such as doctors, dentists, attorneys and accountants. These practitioners would likely serve the local population, which is fairly small, MacDonald said. In addition, the office use competes with already built space directly across the street at the former Creative Memories building owned by California investors with Yellow Springs, LLC.

Other financing factors
Other aspects of a project can influence the likelihood of its receiving traditional financing, including interest rates, incentives and availability of infrastructure.

Current interest rates on new builds are still low, according to Barnett of Synergy, who said generally new builds can secure 5.25 to 5.5 percent. But the rate can also vary depending on the risk of a project, according to MacDonald of Champaign Bank, who said a low-risk project could get a rate as low as 3.25 percent, whereas a less solid project might go as high as 7 percent.

Also having the zoning and infrastructure already in place, as Village Council is planning to do with the CBE, is a major advantage because it provides available inventory (buildable lots) to market to potential users, according to Walton of Old Fort Bank. Getting a buildable lot is typically at least a 24-month process, he said, and something that has taken the CBE about 10 years. And just because construction doesn’t happen immediately, doesn’t mean the investment was a waste.

“Sometimes you get the basic infrastructure — utilities and a stub road — and you leave the project open to users that might come,” Walton said.

Financial incentives are another tool to help push a development forward — one developers such as Dlott of Cassidy Turley feel are essential, especially for projects like the CBE that are competing with an abundance of vacant industrial and office space with the newest communication technology for businesses with high paying jobs.

“There is nothing compelling without grants from big cities — you can’t downplay economic incentives,” Dlott said.

One common incentive is tax increment financing, or TIF, that enables a developer to use the increase in property taxes the development produces to pay off the cost of infrastructure improvements. According to the Ohio Department of Development, because a TIF affects the tax revenue for both the municipality and the local school district, local governments and in some cases school boards must approve the TIF agreement before it can be used.

According to ODD, Sugarcreek Township used a TIF to finance a $600,000 roadway to open up a commercial thoroughfare on Clyo Road in 2006. According to Barry Tiffany, Sugarcreek’s Director of Development, the Township paid the TIF in three years and, despite the recession, is now enjoying the tax revenue generated not only by the initial roadway but by new businesses that have established in the area because of it. Sugarcreek Township schools did forego the first few years of tax increases, but they are also now benefitting from the general economic expansion, according to Beavercreek School District Treasurer Penny Rucker.

Opinions on risk for CBE
With regard to the prospects of developing the CBE in particular, the lenders who were contacted for this story had some opinions about the risks. They first talked about the competition.

According to Dlott of Cassidy Turley, the fact that the former Creative Memories across the street from CBE is still largely vacant is a huge sign that the demand for commercial space at that location is not booming. And he sees no compelling reason that outside businesses with high paying jobs would choose Yellow Springs over more centrally located, modern parks such as downtown Dayton’s Tech Town (a Cassidy Turley project) or Research Triangle Park in North Carolina, for example, which have a higher capacity than the CBE to attract state and federal dollars. The village is also competing with jurisdictions that offer Community Reinvestment Area programs in developments over 20 years old for a 15-year 100 percent tax abatement on new investment.

“Any company with any decent number of jobs will right away start asking for incentives,” Dlott said. “There are a lot of obstacles here — you’re sticking your neck out pretty far if you had to get conventional financing for a building.”

Instead of competing with bigger parks, Yellow Springs is more likley to succeed if it invests as a community in its artistic, recreation, and education strengths, Dlott said.

Still, success is more a factor of expectations than anything else, according to Walton of Old Fort Bank.

“Risk is commensurate with expectations. If you want to complete the CBE and have it full in 36 months, the risk of failure could be high,” he said. “But if we think we can fill the park in 10–12 years, success could be had.”

And Walton believes that Yellow Springs is unique enough to appeal to “certain employers” who are looking for a place with a vibrant downtown, a bike trail system and a thriving community. And with continued expansion from Wright Patterson Air Force Base and a substantial amount of growth in distribution toward Springfield, possibilities exist here. The community just has to be patient.

“It’s not unusual to keep marketing a 30-acre property for 10 years — it’s a long-range plan, and you can be considered as an option in this part of the market,” he said.

See ysnews.com for more about competition for the CBE in a story called “CBE one of many business parks here,” which the News printed in September.


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