Developer dodges lending landmines

Commercial developers have always walked the line between lenders and tenants, but in today's economic climate, increased regulatory pressure on banks and declining retail sales have made that line feel more like a tightrope.

Bill Jester, president of Resource Development Inc., has been performing a tenuous balancing act for months now, and there have been plenty of close calls.

Until recently, three of his commercial properties were on the cusp of foreclosure. The New Sunshine Technology Center in Springfield and Town Center Plaza in Republic were rescued through debt restructuring. The third - French Quarter Plaza on East Republic Road - is at the center of a pending Chapter 11 bankruptcy petition filed in March.

Jester said RDI defaulted on its loans after tenants experiencing financial difficulty fell behind on rent payments. Adding insult to injury, he said stricter regulatory oversight of banks has had a negative trickle-down effect, especially on developers with marks against them.

"Historically, in real estate development, there was a food chain," Jester said. "It was the developer's job to keep the tenants happy and in place. It was the banker's job to keep the developer happy and in place. And it was the developer's job to keep the bank happy and in place. But because of the aberration in a fairly small sector of the real estate market - secondary housing and the derivatives market - a fourth element was brought into the food chain and that ... was the regulators."

He added, "The fourth component has become the head of the food chain, and that has been driving all the other elements down the row."

Flexibility is perhaps the biggest casualty under this "new set of rules," Jester said. Generally speaking, banks previously had more flexibility in their lending, and developers were more flexible with struggling tenants, he said.

"Our philosophy is that our job is to keep our tenants in business," Jester said. "So far, we've been able to assist a number of them with staying on and working their way out, and in some cases, that's put pressure on us."

Jester said he was able to forestall foreclosure of New Sunshine Technology Center, 3534 E. Sunshine St., and Town Center Plaza, 500 E. Harris St. in Republic, by negotiating with two banks - Southwest Community Bank and SolutionsBank, respectively - that had filed breach of contract lawsuits against his company for failing to make loan payments. Under the new terms, RDI Chief Operating Officer Jerry Hill said he expects the suits to be dismissed.

'Back down to reality'

The U.S. economy is undergoing a harsh but necessary cycle that's left few industries untouched, said Max Cook, president and CEO of the Missouri Bankers Association.

"I call them cleansings, and it helps us flesh out some of the excesses," he said. "It brings us back down to reality."

While developers may feel as though new regulations have been placed on banks, Cook said that's not the case. Ramped-up enforcement of existing regulations is what's causing headaches for businesses dealing in real estate, he said.

"The regulatory oversight and scrutiny of that type of lending is probably greater right now than it has been in the past, and that is a byproduct of the fact that our housing market has all but come to a screeching halt," Cook said. "Unfortunately, developers - by the very nature of what they do - sometimes get caught on the short side of that process."

Hill said banks feeling pressure to shrink their commercial portfolios are making less money available to developers for shorter periods of time and at higher interest rates. And some lenders are requiring annual reappraisals of commercial properties, he added.

"Sometimes, they're having to make decisions that affect an individual developer that have nothing to do with anything particular about the development," Hill said. "We're not blaming the bank for that issue. It's just the reality of what's happening."

But not all banks are facing the same circumstances, said Bob Berlin, senior vice president at Empire Bank. He said Empire's commercial lending policies have long required developers to demonstrate sufficient equity, adequate cash flow and initial occupancy rates of 50 percent or higher.

"I think a lot of the problems are coming down for the banks that did have the more risky development loans, and they probably are pulling in their horns because they're busy working out their own problems," Berlin said.

Both Berlin and Cook said open lines of communication between banks and borrowers are extremely important right now. Restructuring debt is almost always preferable to foreclosure, they said.

Last resort

A separate dispute between RDI and Regions Bank over financing for French Quarter Plaza, 1602-1638 E. Republic Road, is now under the purview of the U.S. Bankruptcy Court. Hill said the disagreement predates the shift in banking practices set into motion late last year.

"Hopefully, we'll resolve the issue with the lender in short order," he said.

Jester's New Sunshine Technology Center is home to Anthem Blue Cross and Blue Shield. Town Center Plaza in Republic has signed two new tenants: McAllister's Deli and Cielito Lindo. The shopping center, which consists of three buildings totaling 65,000 square feet, is now almost half full, Hill said.

RDI also continues to move forward with the $15 million first phase of Oklahoma Plaza, a $110 million, 129-acre mixed-use project in Claremore, Okla., near Tulsa. The phase consists of two hotels -- a Holiday Inn Suites and Hampton Suites - and a CVS Pharmacy. Negotiations with potential restaurant tenants are ongoing, Hill said.[[In-content Ad]]