LENDERS – Banks Battling to Lend Money to Urban-Core Developers

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It’s too risky. The return on investment is too small. The loans aren’t big enough.

Those are some of the reasons L.A.’s financial institutions have cited for years of avoiding doing business in the inner city.

But don’t tell Tokai Bank of California or Bank of America that there aren’t opportunities to be had. The two banks engaged in a tough bidding war for the right to provide a $15.5 million loan to the Chesterfield Square retail development at Slauson and Western avenues in South Central Los Angeles.

Such battles by banks are incredibly rare when it comes to inner-city projects, but they are starting to become more common particularly when they involve a proven developer and high-profile tenants, as the Chesterfield Square project does.

In the end, Bank of America won its fight with Tokai, and will take over the loan originally funded by the L.A. Community Development Bank for the project, which is the biggest commercial real estate deal the blighted area has seen in years.

“Both of us were competing hard, and they won,” said Doug Weld, Tokai’s chief credit officer, whose bank has funded a number of redevelopment deals downtown, including a $24 million loan to turn the old Robinsons-May department store into a telecommunications hub with a retail component on the ground floor.

Tokai is also looking at some deals in South Central L.A., including the possibility of funding the on-again, off-again Santa Barbara Plaza project fronted by Earvin “Magic” Johnson’s development company.

“I think that deal would do very nicely,” Weld said. “It just has to be thought out.”

Signs of progress

Even as community lending activists say banks are still less than enthusiastic about financing commercial or large residential projects in places like Inglewood, Compton and Watts, they acknowledge that activity is picking up.

“Banks in general are being more aggressive in doing these deals,” said Roberto Barragan, president of the Valley Economic Development Center. “BofA is stepping up some, I’ve seen Wells Fargo step up as well.”

To be sure, lenders that hear “inner city” aren’t exactly beating down developers’ doors. Any loan that is offered is going to have a much lower loan-to-value ratio than on the Westside; i.e., a loan that covers much less of the purchase price of the property, to minimize the risk exposure.

“If you match (the lender) dollar for dollar, then you can get anything you want,” said Geoff Palmer, president of G.H. Palmer Associates, which is building a $100 million apartment complex at the intersection of the Harbor (110) Freeway and Seventh Street. The 658-unit Medici complex, which will include 40,000 feet of retail space, was financed by Guaranty Bank of Texas.

“It’s not easy,” Palmer said. “I’m meeting with a lot of banks, but mostly what I hear is talk. I had to put in a tremendous amount of equity (for Medici).”

Real estate bankers remain extremely risk-averse in the wake of the bubble market of the 1980s that collapsed in the early 1990s. To do business in the less-desirable parts of Los Angeles, lenders need to know that the developer working on a project has a proven track record and can ensure quality tenants.

The reason the Chesterfield Square project has attracted so much attention from lenders is its desirable characteristics: a proven developer, Katell Properties, with a guaranteed major retailer, Home Depot, along with some star power in the person of NFL star Keyshawn Johnson as a financial backer.

“You need all the right elements to come together,” said Tokai’s Weld. “The typical inner-city project takes a little more time and a little more investment.”

Need for better relationships

Other lenders who are at least sniffing around on the fringes think relationships need to be cultivated with ethnic developers, who are more aware of local possibilities and can bridge the gap between cautious bankers and suspicious communities.

“I still think it is going to take a group of minority builders to lead the way,” said Mark Schultz, regional vice president of Berkshire Mortgage Finance, which lends to residential developers through Fannie Mae and Freddie Mac.

But minority developers point out that, until bankers take the time to come into less-privileged areas, progress is going to be slow.

“Most (financial institutions) tend to draw a line at Culver City,” said Raymond F. Staples, whose Millennium Capital Corp. develops low-income housing projects. “And the return on investment, if done right, is substantially higher (on projects south of Culver City). The risk is substantially less because there is less price fluctuation. There is slow, steady price appreciation.”

Liam McGee, president of Bank of America’s Southern California region, touts the Chesterfield Square loan as proof that his institution is committed to doing good while making good profits. But he also admits that much more could be done.

“I do think we are seeing now the reality of the marketplace, as well as a sense of responsibility,” McGee said. “(But) I think there are many of the communities that are under served, whether in high rises or retail and supermarkets. The number of residents within these areas is off the charts. Would a supermarket or drugstore do well there? Just look at the population.”

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