It's fingernail-biting time for developers pursuing projects above $100 million as tight-fisted lenders' appetite for risk abates. Across the country, several projects have experienced delays or died. Among the major developments scrambling for financing is The Grand, a $3 billion mixed-use project in downtown Los Angeles.
The developer, New York-based The Related Cos., says it hopes to complete a new financing package by the end of the year, following the departure of its largest investor, the California Public Employees Retirement System (CalPERS) last year. The pension fund had invested $180 million in The Grand, a set of eight residential towers, and 500,000 sq. ft. of retail. Because of the financing problem, the multiple high-rise development won't reach completion until 2013, six years past its original deadline.
Related is far from alone in experiencing setbacks. Forest City Ratner's hotly debated Atlantic Yards, a $4 billion redevelopment in Brooklyn, N.Y. also has revised its schedule. At a time when financing and leasing are difficult to secure, multiple lawsuits from neighborhoods opposing higher density and a slow design-approval process forced the company into delays, according to chief executive Bruce Ratner.
In Las Vegas, where developers have given up on many high-priced condominium projects, the most prominent defeat was the foreclosure of the $3.9 billion Cosmopolitan Resort Casino in May, after developer Ian Bruce Eichner failed to secure new financing. And in Boston, the $800 million Columbus Center project, a venture of CalPERS and WinnDevelopment, stalled this spring after state officials reneged on pledges of public subsidies.
“Financing large projects of $100 million or more has become extremely difficult,” says David Rifkind, principal of George Smith Partners, an Orange County, Calif. financier that lends on multifamily and office projects nationally. The innovative nature of projects like The Grand, also known as Grand Avenue, poses a further challenge to investors, who must be convinced that a high-density, mixed-use complex in downtown L.A. can succeed. “Investors have to buy the story,” Rifkind adds.
The Grand's financing unraveled last year when San Francisco-based MacFarlane Partners, an advisor to CalPERS, a $250 billion public pension fund, made the decision to ditch the office-retail-condo complex. The pension fund “already has an adequate level of investment in downtown L.A.,” according to company spokesman Doug Holm. CalPERS' exposure to Los Angeles' weakening condo market includes three separate complexes.
Joanna Rose, a Related spokesperson, says the company has replaced CalPERS in part with $100 million from Istithmar, an investment outfit owned by the royal family of Dubai, plus another $42 million from Mandarin Oriental. A third investor, as yet unnamed, will soon join the equity partners.
Ironically, plenty of U.S. private equity remains available for real estate, says Rifkind. But lenders are biding their time, waiting for projects to become more financially troubled so they can buy the properties or their mortgages at fire-sale prices. “There's a tremendous amount of capital on the sidelines, and that money is looking for distress.”