Real estate financing is the crucial element in enabling difficult projects

A couple months ago I wrote about ("Revitalization in impoverished neighborhoods can be very difficult because different "stakeholders" have different understandings of what's at stake") a situation in Portland, where an African-American enterprise promotion group had protested a particular development on a property owned by the Portland Development Commission, where the developer had lined up a Trader Joe's as lead tenant.

After frequent protests, TJ's walked, and the project fell apart.

This is important lesson because in projects that aren't a slam dunk, financing--especially since the 2008 real estate crash--can be extremely precarious, even for well respected and generally well financed companies.

Left:  Fort Totten Square, a mixed use development with a Walmart store on the ground floor and 350 apartments above, under construction on Riggs Road NE in Washington, DC.

This comes up in DC with regard to the financing of a mixed use project called Fort Totten Square--retail on the first floor, residential above--project a couple blocks from the Fort Totten Metro Station.

Most people think that any project at a Metro station would be rated an "A," but it isn't that simple.

I rate Fort Totten a C or D, because there isn't any center to the community generally or at the station.  It's not a walkable area.  By contrast locations in the Central Business District and neighborhoods around it are rated A, and neighborhoods in the next ring further out are B (Columbia Heights, Petworth, Brookland) or C (Rhode Island Avenue), the next ring would be rated C or D, unless there are town centers, and the furthest out stations D or E--there's a reason that after decades most of the furthest out stations haven't experienced much in the way of ancillary development.

The financing for the Fort Totten Square project was recognized by Washington Business Journal as exemplary for 2013 ("Best Real Estate Deals of 2013: Financing").  The lead developer on the project is JBG, which since the crash, has been one of the most active and best financed of companies focused on the local real estate market exclusively and has been able to take advantage of "pricing opportunities" presented by the failures of other firms.

According to the article, without the Walmart lease and "progress payments" by Walmart, JBG wouldn't have received a construction loan for the Fort Totten Square project. The progress payments are key, because typically a big chain retailer doesn't begin paying "rent" until the store opens, or even sometime afterward, depending on the inducement package they receive--this case was unusual also because instead of getting a free ride, they agreed to pay for part of the construction cost for their space.

From the article:

Wal-Mart signed a lease for nearly 120,000 square feet with JBG in August 2012 to anchor the 345-unit residential-and-retail development, kick-starting a project that had been in the works since 2008 but stalled due to the recession. Still, even with a lease in hand, getting lenders on board wasn’t a slam dunk. There was the uncertainty of whether a mixed-use project with Class A apartments in the Fort Totten neighborhood would be successful. There was also the challenge of getting any one bank to back a construction loan for $73.6 million.

Wal-Mart helped answer both of those problems, as it turned out. The retailer agreed as part of its lease to reimburse construction costs up to a certain point and to make monthly progress payments during the construction. Bank of America and SunTrust agreed to credit JBG with those monthly payments toward its equity requirement, which was enough to structure a financing deal with a loan-to-cost ratio of just less than 60 percent.

This is relevant to the debacle of the Walmart store on Georgia Avenue (ANC4B Large Tract Review Report on Walmart, 5/2011; "Walmart opens two DC stores tomorrow"), which is a single use project at a prominent intersection on the Georgia Avenue corridor.

Given the desire of Walmart to open stores in DC, it is not unlikely that had Foulger-Pratt presented a similar kind of deal to the company, they probably could have received the financing necessary to build a similar kind of mixed use project.