Mc Apartments

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  • Topic: Loan, 1993, Debt
  • Pages : 7 (2180 words )
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  • Published : April 15, 2012
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Millegan Creek

Background:
Tom Hayden—March 1994, VP of commercial real estate at Fleet Bank

Proposed Loan: $15,715,000 on 390 Unit Apartment in Austin, Texas -new market—new construction concern, new developer
-question about sponsors—financial capacity & development experience -Lack of a commitment for permanent financing--takeout or permanent loan was how most construction loans are repaid -past 5 years, Fleet + other commercial have lost billions because when construction loans became due, economics of project had decreased and no one was willing to make a permanent mortgage loan sufficient to repay

Tom joined Fleet in 1989 after 6 years at another bank
-spent the next 3 years working with troubled loans in “workout” division -1992 Tom reassigned to originate new loans
-his assignment: seeking financing opportunities in real estate and help Fleet diversify its portfolio out of the Northeast

1st step: Tom researched best developers, met with mortgage bankers, attended forums + conferences, and read articles -found active developer, JPI Multifamily, who survived Texas crash and was building large number of apartments -introduced to principals at JPI by mortgage banker, Holliday Fenoglio, Dockerty, and Gibson -Fleet preferred to work directly with developers—but would work with mortgage bankers if developer paid fee (1% of loan)

Early 1993, Holliday Fenoglio began sending Tom preliminary deal packages—to gauge Fleet interest in financing one of JPI large apartment projects -reviewed proposals including projects that had takeout commitments from General Electric Credit Corporation -because of strength of takeout, JPI wanted Fleet to finance 100% of cost—contrary to Fleet policy requiring developer’s to invest equity 10-20% of total cost -Tom saw package in Dallas—but once visited it was eclectic neighborhood where hard to tell its direction—decided it was too difficult a location November 1993: Holliday Fenoglio sent him package of 21.5 acre site outside of Austin—Tom was impressed with Austin market—after a year of financial review he decided it might be right opportunity for Fleet

JPI Multifamily
-founded 1989 by two men who worked together previously
-they had done large scale developments Las Casolinas, including apartments -after crash, found their apartment projects held up better than their other projects—hence their focus -known as “merchant builder”—they develop properties with intention to sell not own -try to achieve at least 150 basis point spread between Initial Yield and Current Market Cap Rates -“cap rates for institutional grade apartment range from 8-9% today’s market” -Seeking development opportunities which provide a Going-In Cap/Return on Assets of at least 10% on total cost -since 1989, developed approx. 2,800 apartment units and sold 1,640—in line with investment strategy of targeting a “holding period for projects of 2-3 years” -currently have 8 projects with 2,700 units under construction, 4 to be sold upon completion -looking for additional lenders because some existing lenders have reached limit of exposure with 1 borrower

Fleet
-largest bank in New England with > $45 Billion in Assets and 10% market share -in 1991, 75% of portfolio loans below $500,000—small loans very expensive to originate and manage, have higher delinquency rate during economic downturn than rest of portfolio -new strategy: proactively target developers it wanted to work with and then go after their business aggressively—developed relationships with top developers in country 1994 goals:

-originate & close $1.5 billion of new loans and maintain overall portfolio of $4.3 billion -reduce concentration in franchise geographic area from 75% to 60% in next 4 years -improve credit quality by focusing on well capitalized/experience developers and financing leased properties to credit worthy tenants like K-Mart -increase average loan size in portfolio

-be a preeminent national provider of real estate...
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