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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2009

Time to Take a Global View

Domestic financing is limited -- which may point developer clients to international options

Property developers wishing to find financing for commercial real estate development and construction projects in the United States are having an increasingly difficult time. Lenders have virtually discontinued funding new projects. Except for some few-and-far-between situations, today's funding potential for developers in the United States has been indefinitely curtailed.

Commercial mortgage brokers, however, can still help their clients find development opportunities in this difficult market. In fact, some promising opportunities for developers are not in the United States but rather in international markets. Further, some private lenders who have been skittish about lending for U.S.-based projects are putting their money into offshore developments.

These international projects are capturing the attention of some private lenders that have overseas-funding capabilities. Brokers who understand where the prime locations are, as well as private lenders' requirements for international funding, can best help their developer clients tap these funding sources for a successful deal.

Favored locales and projects

Some private-lending sources are willing and able to fund offshore development and construction projects of multiple sizes. These lenders typically prefer locations in well-established tourist and resort destinations, as well as areas with relatively stable economies and politics.

Typically, the most-favored regions are Mexico, Central and South America, the Caribbean, the Mediterranean, Canada, Europe, Southeast Asia, and Japan. The Dominican Republic, Costa Rica, Panama and Morocco are especially attractive.

These locales typically are favorite haunts of the wealthy: celebrities, travelers and business executives from all over the world. They also feature stable governments, vibrant economies and attractive climates.

Most of these areas are suitable for recreational lifestyles, making them prime locations for hotels, resorts, casinos, spas, marinas, golf courses and high-end residential developments. Office towers and retail centers often are in demand in downtown areas of larger cities in these locations because of their relatively robust economies.

In some countries, there is interest in waste-to-energy conversion facilities, green projects and developments, and other types of newer, cost-efficient and pollution-reducing projects, as well, to avoid waste-disposal problems and pollution concerns. Planners hope to see state-of-the-art energy facilities that also protect the environment.

Brokers who intend to specialize in projects in specific locations should familiarize themselves with the legal and financial requirements of their chosen areas. The fastest way to do so is to contact firms that conduct real estate due-diligence activities there. These firms also can usually refer brokers to appropriate government agencies for further information.

Because it would be overwhelming to try to become familiar with international requirements in general, brokers should only make these inquiries when involved with a specific project -- especially because each project likely must comply with different requirements. Lenders also can be valuable sources of information because they know what information and documentation they require to close and fund a project.

Securing funding

Developers often will need their mortgage brokers' help to secure funding for these overseas projects. The process can be as simple as funding domestic projects previously was. Private lenders with interests in these areas are not intimidated
by distances.

Some private lenders decide to fund projects that meet their criteria, regardless of the property's location. They generally can identify whatever local resources or support personnel they need to initiate and close the funding process efficiently and effectively.

Brokers can be successful knowing to whom to steer their clients when engaging in international projects. When helping a client with a project in another country, brokers may wonder how to find a lender that finances international projects. Some private lenders advertise that they do so; most, however, do not.

Generally, private lenders focus on financing projects that will provide adequate returns to their investors. Therefore, they do not always make specific determinations regarding locations and may make funding decisions case-by-case. It is therefore conceivable that a lender that has only funded U.S.-based projects may fund an internationally based project if it meets other lending criteria.

Getting a list of international-funding sources usually depends on how well-established a broker's professional network is. The easiest way to present these projects to private lenders is to know someone who has funded an international project previously or to find a partner with a firm that specializes in international financing.

Otherwise, old-fashioned cold-calling to every private lender and inquiring about geographic boundaries -- although time-consuming -- may yield positive results.

Spreading things out

Apart from the favored locations, private lenders' primary consideration is portfolio-balancing -- i.e., distributing their assets over several locations instead of investing massive sums into a single area, regardless of its attractiveness or potential. In other words, private lenders tend to manage their real estate investment portfolios much like a typical savvy investor manages a stock portfolio: They diversify.

To do so, they may limit their investments to only one project in the Dominican Republic, one in Costa Rica, one in Mexico, etc. -- spreading the risk according to their self-determined internal standards.

From a developer's standpoint, this means that reasonable offers for financing in a given area should be immediately seized upon. That's because this opportunity likely is a one-time situation that the lender will otherwise give to the next-suitable applicant for that geographic location. There may not be a second chance with the same lender in the same location because of the lender's need to diversify. Once it is invested in a project in that area, the lender often moves on to consider other locations.

Meeting requirements

To represent clients successfully, commercial mortgage brokers should be aware of private lenders' requirements for international projects. The initial presentation should include a professional executive summary that explains the project, its costs and its financing requirements.

Brokers should present an in-depth portrayal of the current activities that contribute to the local and regional economies, as well. This should include an analysis of how the particular development project in question fits into the current environment from business and social standpoints -- that is, what it gives and what it gets.

A project overview is essential, along with information about the location's geography and its tourist attractions. In addition, include information about neighboring towns and points of interest. Developers must establish a firm foundation for their decision to build in a particular location. Current traveler-traffic can serve as a testimonial to the locale's interesting aspects.

It's also wise to highlight activities and amenities that the developer is bringing to the environment. Descriptions of residential and resort designs often should border on the extravagant and the exquisite, adding to the location's allure as a desirable luxury destination and for second or vacation homes. Ease of access and infrastructure advantages are also important considerations, especially when including air and water access and marina-type facilities.

To assure funding sources that you have considered the project's financial aspects carefully, always include preleasing and presales information, target-market and comparative analyses, advertising and promotional campaigns, pro forma cash flows, and exit strategies. Also, mention the sponsoring country's stability and attractiveness regarding long-term stability, growth, safety and economic factors.

In addition, lenders typically will prefer developers with extensive résumés and experience with similar projects. Most private lenders will require that developers have their own funds invested in the project as hard cash -- typically, 20 percent to 35 percent of the project's cost. Seasoned developers will include a breakdown of their own cash contributions to clarify the amount and date of these expenditures, their recipients and purposes.

Business and personal taxes and financials also should be available, preferably for a three-year tax period along with the most up-to-date financials.

Most important, project-cost breakdowns and use-of-proceeds delineations are critical. There should be no ambiguity in these disclosures; excluding these details can only lead to suspicions about the developer's intentions, experience or both.

Upon acceptance

Once a private lender decides to fund an international project, it will issue a letter of interest outlining the term, interest rate, fees and any other lending requirements. Depending on the lender's preference, this letter will come before or after a personal site visit. These travel expenses and any other upfront fees must be paid to or deposited with the lender within the stipulated time frames.

Additional upfront fees that may be charged can include application fees, commitment fees, equity-participation fees, negotiation fees and funding fees. Not all private lenders charge all these fees. Usually, the riskier the situation from the lender's perspective, the more fee-laden the funding offer will be. The number and amount of upfront fees will vary among lenders and by project according to location, type of project, loan amount and additional factors. In other words, they vary by case.

Due-diligence activities often are contracted out to third-party specialists with experience in the particular location. But a principal or representative of the lender often also makes a site visit and meets with the borrowers face-to-face.

Regardless of distance from the U.S., closing and funding time frames typically are 45 to 60 days.

•  •  •

Commercial mortgage brokers would be wise to realize that the international market could be as accessible to them and their clients as the domestic market. Today, international projects often are even more attractive to private-money lenders than U.S.-based projects.

Brokers who expand with the industry will see that these projects can reward them with handsome payouts, while allowing them to comfortably weather our domestic financial difficulties.


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