In projects in which the funding institution offers conditional credit – The chance of halting the work and the financing are slim

Adv. Assaf Englard gave a Real Estate Morning lecture by ZOOM, entitled Financing Projects in a Period of Uncertainty • Arbel Dar: “In the short term, housing prices are expected to drop by an undramatic percentage of up to 10% • The complete lecture – appears in this article

27.04.20 | Yuval Nisani

“The moment that the financing institution, any type of financing institution, offers a developer non-financial credit, i.e., conditional credit that is based on guarantees and sales policies, the last thing it will want to happen is for the guarantees to be confiscated.  You could say that in this way, the developer has bought himself a partner; and consequently, in such a case, the chance that the deal will fail, that the financing institution will halt the project or the funding is slim.”   This is a quote today from Adv. Assaf Englard, senior partner and head of the Banking and Finance Department at Hamburger Evron & Co., in a lecture he gave as part of a series of lectures entitled Real Estate Morning at the Real Estate Center, broadcast for the first time on ZOOM, due to the Coronavirus crisis.

The lecture entitled Financing Projects in a Period of Uncertainty was attended by 230 real estate professionals.  A lecture was also given by Arbel Dar -  CEO and founding partner at Granit Capital Raising of the Real Estate Center.  In the coming days, another two lectures will be broadcast in a similar format.

During the lecture, Englard said that “at the beginning of the crisis, there was an apocalyptic feeling; almost all of our projects were halted.  Financing institutions have taken a step back and some won’t supply credit, and will only offer credit for a specific project that they have already entered into with an agreement and have undertaken to provide it with funding.

Recently, we have seen an interesting phenomenon, which has been influenced by the crisis:  commercial centers that are seeking funding from the banks, which they generally don’t do.  It is well known that the price of a shopping mall is set based on the capitalization rate; and in recent years, this rate has dropped significantly – which has raised the value of those properties.  Recently, the market has become problematic and the shopping malls have been closed, income has been hurt and the capitalization rate has increased.  Consequently, the property value has decreased and the option of fundraising in the capital market has been hurt.    This will probably continue for an extended period of time.  Therefore, the strong shopping malls have suddenly approached the banks; and this is a new and interesting development.”

Adv. Englard also related to the current new conditions that include various financing institutions that are offering a financing package to the developer.  There are two conditions that should be addressed:  “Some of the signed agreements include a commission for early repayment that is likely to be very high at times and to reach huge amounts.  It is very important to pay heed to this and to insist that this commission is not included in the agreement or that it is low.  It is important that the developer have the option of repaying the credit in order to embark on a new path.

An additional condition is the first right of refusal – a situation in which the financing institution does not want compensation, rather the option of purchasing the property if the developer wishes to sell it.   No further explanation is necessary to understand that this is an onerous issue, and one must pay attention to the fine print.”

Adv. Englard also referred to the important regulation included in the Law for Promoting Competition and Reducing Concentration in the Israeli Banking Sector of 2017 – a prohibition against unreasonable refusal to a second ranking lien.  “This is a dramatic issue in the present period of time:  If the developer has already started with a particular financing agreement and the value of the property has dropped, the financing institution will demand additional equity.  In such a situation, the bank is prohibited from unreasonably refusing to provide a second ranking lien.  In some of the cases, this will mean that the developer can demand that the bank agree to add another party to the picture.  It doesn’t have to be another financing institution, rather it can even be a partner in the project – and this is a tool that can be currently used, which can offer many funding solutions in a time of crisis.

Either way, my advice during the Coronavirus crisis is to obtain many financing institutions, to utilize the subject of equity and regulation to the fullest, to seek other institutions or parties that can enter as partners, etc.  This way, the chance of halting the project is significantly decreased.”

Watch the full lecture: 

Alongside Adv. Englard, Arbel Dar of Granit Capital Raising also spoke as part of Real Estate Morning lecture.  Dar opened with a short review of the current state of the banking system, saying that “the banks are currently trying to reduce exposure as much as possible.  The system is experiencing an extraordinary overload of requests from businesses hurt by the crisis.  Close to 50,000 requests have been submitted to the banks, and only a small number of them have been handled.  The statistics indicate requests totaling NIS 30 billion.

Many of the banks have stopped loan proceedings and makers have halted the financial products that they are offering.  They are demanding higher equity and presales of higher scales as well as an increase in the collateral offered by the developer for the benefit of the funding.  All this leads to the clear conclusion:  the probability that the system will approve new customers is practically nil at this stage; and consequently, more and more customers who in the past would not have approached a non-banking system are doing so today.”

Dar referred extensively to the subject that is occupying the thoughts of many during this period:  housing prices.  According to Dar:  “In the short term, the prices of apartments will drop by 10% - not a dramatic change.  Most financial decision makers agree on this.  The prices of commercial property, on the other hand, is expected to drop by a more significant margin.

In the mid and long-term, the present quarter can be considered a lost quarter, in which the planning committees have been practically inactive.  The impact is the delay of planning of 30,000 apartments.  Additionally, there is talk that with the conclusion of the global crisis, 100,000 new immigrants will move here, so the gap between the low supply and high demand is expected to grow.  The conclusion:  In the mid and long-term, a very significant increase is expected in the prices of apartments, which will apparently correct the price decrease, when looking at the multi-annual average.”

Dar also referred to steps recommended for this period of crisis and uncertainty:  “Instead of killing yourself over sales that do not truly reflect the real value of the apartments at the moment, the recommendation is to buy time and to seek financing during this period.  There are currently non-banking funds that allow you to receive financing without any advances at all, and even without equity, so the developer can use this time to think about how to kickstart the next project and to begin construction – and to focus on that instead of the sale of the actual apartments.”