By Carole Hawkins, [email protected]
Within the last year, Robert LaMendola’s responsibilities as a senior loan officer for American Enterprise Bank of Florida have shifted.
They now include — on a part-time basis — lending for single-family home development and construction. One person, a full-time loan processor, has been assigned to work with him. It’s small-scale, but still a difference over last year.
“Before, we weren’t doing any development deals at all,” he said. “Zero.”
Sidelined for years during the housing crisis, banks are finally dipping their collective toe back into the water on development lending. That’s huge to local builders and developers, for whom bank financing is the lifeblood of business.
National homebuilders have held the advantage in Jacksonville’s recovering housing industry. That’s because the companies are publicly traded and therefore funded by stockholders, not banks.
Now with banks back in the game, local developers and builders may get a shot at recovery, too. But the deals are still hard to come by and local builders aren’t feeling like their fortunes have turned a corner yet.
During the recession, from the developers’ point of view, banks stopped lending.
From the point of view of banks, there was little reason to do so.
The real estate boom and bust left the market with an oversupply of houses and developed lots, said Scott Keith, North Florida region president for BB&T.
That halted lending, he said; the bank never changed its loan criteria.
“There really isn’t a rational reason for a business person to try to grow when there’s an excess supply. We simply lined up with supply and demand,” Keith said.
Now, excess inventory has been absorbed in several hot submarkets in St. Johns and Clay counties. BB&T has been issuing construction loans for just over a year.
Another reason why banks stopped lending to builders is banks went through the recession like everyone else.
During the downturn, Atlantic Coast Bank held problem assets on its books, said Phillip Buddenbohm, executive vice president. That, and the uncertainty of a five-year malaise in the real estate industry, kept the company out of the game.
In December, Atlantic Coast raised $48 million in a secondary stock offering to recapitalize its bank and reengineer its balance sheet.
“It got us back to being a bank. We’re operating on an offensive strategy instead of a defensive one,” Buddenbohm said.
In a recession where other banks saw a housing market they wanted to flee, Fidelity Bank saw something else.
“We made a business decision, all the way up to the chairman and CEO level, that there were opportunities out there,” said Ross McWilliams, senior vice president.
Fidelity stopped financing lot development, but has been issuing lines of credit for home construction all the way back to 2008.
When the market crashed, Fidelity’s portfolio was not heavily weighted in real estate, so the company didn’t incur problems with regulators.
“We were the only game in town for years,” McWilliams said.
From that, Fidelity reaped huge benefits, bringing in 20 new construction companies and building a real estate portfolio that never took a loss.
American Enterprise is seizing an opportunity to lend early, now that housing is turning around.
During the housing boom most loans to developers had been done by large banks, LaMendola said, because they were more competitive on pricing. Even smaller developers used them.
After the crash, large banks stopped doing those deals. Most haven’t returned yet.
“It was predominantly because of the recovering economy and the tight lending environment that we started this arm of business,” LaMendola said.
If banks are lending again, builders aren’t feeling it yet.
“Nobody’s calling me and saying, ‘Send us an application for a development loan,’” said Greg Matovina of Matovina and Co.
A local developer, Matovina has been able to get one lot financed this year and is close to getting a second. But he still needs loans for two more.
Rick Morales, who does condominium construction, said in his experience, banks haven’t loosened their purse strings at all. The lenders still want to see a high number of homes pre-sold before they’ll commit a penny.
“They’re starting to look at deals, they really are,” he said. “But they’re finding very few, I think.”
Michael Bourre of Bourre Construction said before the recession, he was able to get a revolving line of credit large enough to take down 50 lots at a time.
Today instead, banks might set builders up with a $1 million, $2 million, or maybe a $3 million line of credit, he said. The banks approve deals on a house-by-house basis. Builders have to show specs and the lots they’re buying. They have to lay out exactly what they’re building and have it appraised.
“The banks are doing a lot more research to make sure they don’t get upside down in a transaction,” Bourre said.
Banks agree their standards are tighter.
Fidelity will look at how well-capitalized a builder is and their experience level, McWilliams said. New, more cautious terms include the reducing the loan-to-value that’s offered and getting builders to put more equity into the deal. Also, the bank limits the number of spec homes that are built.
“We haven’t done everything for everybody,” McWilliams said. “It’s been the folks at the top-tier of our industry who we felt deserved our attention.”
Regions Bank is actively seeking new builders, said Kathy Patterson, a Homebuilder Finance relationship manager. The bank closed 80 percent more construction loans in July 2014 than it did in July 2013.
But its lending standards also have been stricter than they were before the downturn.
“We look more closely at a developer’s financial capacity to carry the debt, should the project not succeed,” Patterson said.
The bank also now considers whether the housing market is trending up and likely to support the development.
Like Fidelity, Regions wants builders to have more equity in deals and studies their experience level.
While waiting for bank lending to return, local builders had to get creative on financing.
Bourre partnered with a developer who owned lots. He sought homebuyers for them and obtained construction-perm loans –– a construction loans made directly to the homebuyer that convert into a mortgage once the house is built.
Matovina knows some builders who turned to hard money lending. The cost is as high, as much as 15 to 20 percent. Bank loans typically top off at 7 percent.
Lee Arsenault of New Leaf Construction turned to a private equity investor for a condominium complex he built.
He still sees more interest from private investors than from banks.
The builders also are more skeptical of bank outreach after the role banks played in the downturn.
When the bottom fell out of the market, Arsenault helped a friend he worked for close his company.
“It broke my heart. It was one of the worst experiences I’ll ever go through,” he said.
There was no warning the market would crash. The banks each quarter invited builders and developers to sessions where a national economist gave them six-month projections on how well the housing market was doing.
The builders, developers and banks were all listening to the same economists.
Arsenault’s company had just purchased 30 lots in one community and 60 in another when the market failed.
“We were leveraged to the hilt, just trying to get these lots built,” he said. “After that, everyone was just trying to hang on, paying off all of this debt.”
Those builders who survived admit any sign of a turnaround is encouraging, though.
At the top of the market, annual housing starts in the Jacksonville MSA hit 18,000. Today it’s 6,000, up from a recessionary low of 3,000.
Matovina said he does see progress in bank lending, too.
“I would call it a little bit of progress,” he said. “But when you’re starting from zero, a little bit of progress feels like a lot.”
Atlantic Coast Bank: Has provided construction financing for pre-sold homes. Has negotiated, but not closed on, some land development deals.
American Enterprise Bank of Florida: Has opened lines of credit to builders and issued loans for several new subdivisions.
BB&T: Provides construction financing on pre-sold homes, models and specs. The bank is currently financing the development of four subdivisions.
Fidelity Bank: Issues lines of credit to homebuilders for pre-sales, specs, models, and taking down developed lots. Will consider a subdivision development loan when it benefits a client builder.
Regions Bank: Issuing lines of credit to builders and expanding lines of credit. Has not issued a full-scale development loan, but is interested in them.