Shopping Center Business

MAY 2015

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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224 • SHOPPING CENTER BUSINESS • MAY 2015 Interview by Randall Shearin A lender's perspective of mixed-use fnancing. Financing Mixed-Use W hen planning a mixed-use project, one obstacle often stands in a developers' way: financing. Too much of one use, or not enough of a certain use can send a bank running from a project. Shopping Center Business recently spoke with Rosemary Kehr, senior vice president in commercial real estate lending for Associated Bank. Based in Chicago, Kehr and Associated Bank's commercial real estate lending team provide financing for a number of mixed-use projects of all sizes. From neighborhood buildings with ground floor retail and office above, to suburban town centers, the bank has a good handle on what it takes to obtain financing for a mixed-use project. SCB: Tell us about your practice. Kehr: The commercial real estate di- vision at Associated Bank, headed by Breck Hanson, has provided financing for a variety of different property types, including office, retail, industrial, apart- ments, condominiums and a little bit of hospitality. Our footprint is generally the upper Midwest, working with developers based in the Midwest. We do look at in- vestment grade transactions in other parts of the country with developers based in the Midwest. SCB: How does Associated Bank view mixed-use projects? What does the bank look for when considering whether to un- derwrite a mixed-use project? Kehr: A mixed-use center is a combi- nation of space users, usually within one integrated building or one planned de- velopment. One of the key factors, for whatever type of mixed-use development it is, is that there is generally a retail com- ponent. A successful center could include ground floor retail with second story of- fice, or retail on the lower floor with apart- ments above. Sometimes there is a hotel element. There is generally convenient parking on site, or as we have seen lately, adjacent parking available from municipal garages. We look for the same economic features in a mixed-use development as we do on any other successful develop- ment. The majority of mixed-use projects today are being built on infill sites in the city or close-in suburbs. In those loca- tions, we see strong existing population density, good disposable income, good parking and convenient access to public transit. We also prefer they be close to major roadways. As a lender, we are re- ally looking for the elements for success that the developer is today. The developer wants to see good pre-leasing in place, just given the risk that arises today. With ad- equate pre-leasing, we can move forward with financing. SCB: You say 'adequate' pre-leasing. Can you elaborate on that, specifically how you determine what amount you are comfort- able lending for a project? Kehr: That depends on several factors. First, what percentage of the total space is retail? What percentage of the income stream is the retail intended to drive? It is likely easier to obtain preleasing on retail than the apartment component to- day — that's most of what we are seeing. We will survey the apartment market and make sure that we are comfortable that the market will support the rents that the developer has in their pro-forma. How- ever, you cannot usually get pre-leasing on apartments until you are well under construction. Today, most projects have a 12- to 18-month construction period. During that time, the retail — which is typically on the lower floors — would be completed first. We would be projecting loan balances during that timeframe and take a look at all fac- tors. Those include the retail pre-leasing and the anticipated absorption of the apartment units. That helps us determine a loan amount that we believe is workable for both the developer and the bank. SCB: You mentioned that infill projects are the name of the game today? Can you give some examples of recent deals you've financed? Kehr: Yes; right now we have a number of developments underway in suburban and infill areas. The first is in Naperville, Illinois, a western suburb of Chicago. Naperville has 150,000 people; it is the fifth largest city in the state. There, we are working with developer Dwight Yackley with BBM Development on a mixed-use retail/office development that is nearing completion. It is adjacent to a municipal parking garage. The ground floor is re- tail, anchored by Anthropologie, J.Crew, Evereve, as well as a tea shop and hair salon. The tenants of the office space have access, floor-by-floor, to the municipal parking garage. At that project, all of the retail space leased up nicely and nearly all of the office space is spoken for. In North- brook, we are financing Northshore 770, which is being developed by Morningside Group and Crossroads Development. It is a grocery-anchored retail component with 347 apartments. Associated Bank and an- other local bank are financing both pieces Rosemary Kehr

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