Sustainable Land Development Today - April 2008 - (Page 46)
THE LAST WORD Hang In ‘Til 2010 I have been in the real estate development industry since 1982, and I know that the real estate markets run in cycles. I remember when the Pacific Coast Builders Conference slogan was “Survive Until ’95”. The housing market on the West Coast did recover –before 1995 – and fortunes were made by those who were able to stick it out. My motto for this year is “Hang In Until 2010” because I know that we will see similar opportunities as this cycle turns back up. Experience tells me that those who deal with things as they are, plan for contingencies, and differentiate themselves and their products by incorporating cutting-edge ideas (such as sustainable development techniques) will be the industry leaders when the market recovers – and, again, it always recovers. I want to address the impact of current events in the capital markets on the home building industry. What began last summer as a liquidity crisis has grown to include concerns regarding solvency, which further impacts liquidity. Make no mistake – what brought Bear Stearns to its knees on March 16 was effectively a “run on the bank” (just without the lines in the streets), and bankers everywhere are unsettled by bank runs. This situation affects your lenders and your investors. Both groups are nervous about their real estate loans and both have experienced unpleasant changes in their portfolios. In addition, many lenders are concerned about upcoming bank examinations. Some of “ By Skip Preble these institutions are in need of additional capital, or conversely need to reduce their assets in order to get their capital/asset ratio into compliance. Put another way, there is great pressure on many lenders to get rid of loans. And if your loan is one of those not renewed, you will likely find it difficult to refinance. So, what does this mean for you? In my opinion, it is vital that you make it a priority to earn and maintain the confidence of both your lenders and investors. You want to maximize the ® Be proactive. Communicate regularly with your investors and lenders, and let them know that you are reviewing your projects in order to see them to completion. Tell them that you will keep them informed as conditions change. ® Start thinking about what you would do if your lender does not renew your note, or just stops funding draws. Don’t think it can’t happen – and no, it does not matter what your loan documents say. In a crisis, my experience tells me that contracts only have meaning if you have the time and funds to fight it out in court. ® If you have personally guaranteed any notes, visit with your attorney and ask him about the legal concept referred to as “right of offset”, and consider how it could affect you and your business if your lender were to exercise this right. History indicates that builders and developers who react quickly and effectively to changes in market conditions survive, while those who postpone dealing with the crisis do not. Do everything you can now to inspire the confidence of your lenders and investors. Be proactive. Differentiate yourself. The market will recover, and I personally believe that the recovery will begin in 2009 – but we have to get there first. Remember, the goal is to “hang in ‘til 2010.” SLDT Skip Preble is member of the SLDI Executive Board and is president of Land Analytics, which provides targeted analysis and planning for builders and real estate development firms, including restructuring evaluations. He can be contacted at email@example.com. The sound of your hammer at five in the morning or nine at night heard by a creditor makes him easy six months longer. probability that your loan will be renewed with the lender you are currently with, and you want your investors to work with you and be flexible. You want both groups to know that they are better off in the long run with you and your company involved in your projects. At the same time, you must invest the time and money now to develop contingency plans for the possibility that your lender won’t (or can’t) work with you. ~ Ben Franklin ” Items to consider: ® Hope for the best, but plan for the worst. Ask yourself what you would do if your sales fell another 25-50%, as compared to last year. Develop an answer to this question – not just because it is possible, but because it is the question being asked by your lenders and investors – and I don’t think you will like their answer. 46 April 2008 Sustainable Land Development Today
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