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Housing Development Trends: A Conversation with a Commercial Lending Advisor

August 10, 2023 Robert J. O'Brien

Housing development financing trendsAs housing development gets more expensive, financial lenders are getting more cautious, and projects are getting leaner. Although it now takes longer to assemble financing, the same number of projects are in the pipeline, which means new housing is taking longer to come to market.

To gain more insight on this issue, Camoin Associates’ Senior Housing Specialist Robert O’Brien recently interviewed Cooper Bramble, the owner of Maine Street Capital, a commercial lending advisor based in Portland, ME, about his thoughts on current financing trends in the housing sector.

Robert: Camoin Associates has observed that banks in the last few years have been getting more conservative about their lending to commercial projects. An 80% loan-to-value used to be common, but more recently, banks are topping out at 75%. Have you seen banks scale back their loan-to-value offerings, too?

Cooper: This is definitely true to an extent. Based on where we are in the economic cycle with some recession fears on the horizon, lenders are certainly making an effort to dial back leverage. Plus, in recent years, there has been a substantial increase in values. As such, an 80% loan-to-value on an asset today in absolute dollars is significantly more than an 80% loan-to-value two to three years ago. Some 80% loan-to-value deals are still getting done, though, but the standards are more rigorous.

Robert: If banks are lending less of the project total, what has it meant for gap financing? If banks require more of it, that increases demand and gap investors control supply. Is gap financing becoming more expensive? Are gap investors becoming more conservative and pulling back at all?

Cooper: I am certainly seeing a lot more gap financing/subordinate loans in the capital stack. This can come from a variety of sources, both high-cost and low. If the project is right for it, I like to pull in mission-based lenders who focus on community/rural development, affordable housing, etc. These programs typically come with strings attached to maximize their economic impact but are typically less costly and, in some cases, subsidized in terms of interest rate cost. I am also seeing a lot of seller financing [of real estate] as sellers realize they can collect solid 5-6% returns and beat the bank on the rate.

The other push for more gap financing is to increase overall deal leverage [loans] and drive down the equity investment [owner’s cash]. As asset prices and construction costs have gone up, deals have gotten more lean from a return standpoint. One way to increase returns is to lower your cash outlay, so I think this is another big driver here.

Robert: Are you seeing increased pressure on municipalities by developers to cover more of the development costs (infrastructure, taxes, parking, etc.) to try to reduce debt? How have you seen public-private partnerships change in the last few years (if at all)?

Cooper: Tax Increment Financing, or TIF, [where a municipality shields new tax revenue from state assessments and in turn may share some of that protected revenue with the developer in the form of a tax reimbursement] are a popular ask for sure. A lot of projects, even with gap financing, don’t pencil [out] without TIFs. When done right, TIFs can be a real win-win by allowing developers to complete projects that would not be feasible without TIF money. It’s also a great way for communities to direct private investment. I’d expect to see a continued push for more TIF funding as well as asks from façade-improvement funds [such as Community Development Block Grants, or CDBG], and the like.

Robert: To get a higher bank loan, you’d need a higher value now, and part of that equation is projecting future revenue. Are you seeing increased pressure to maximize potential rents or future sales prices as a way of getting higher loans? How have recent changes in real estate financing affected new rents or sales prices?

Cooper: Increased costs faced by developers are undoubtably being pushed, in part, onto tenants. Despite their complexity, there really aren’t that many factors that make or break a real estate deal. If the deal doesn’t pencil [out], you either need to cut costs or raise rents. Both are on the chopping block.

Also, we are definitely seeing values soften recently as interest rates have risen. As interest rates rise, cap rates [i.e., the rate of return based on future revenues] must as well, and therefore values will fall. Right now, I think there is a disconnect in the market between buyers and sellers. Buyers are faced with today’s interest rates as they try to make deals pencil [out]. Sellers are looking backward at comps from six to 12 months ago when rates were significantly lower. That is leaving a lot of daylight between offers and asks. As rates continue to climb or stay where they are, that will pressure sellers to adjust their sales price expectations.

Robert: What are you seeing in terms of the volume of projects? Are there more projects coming forward with the red-hot housing demand in the marketplace? Or are other factors like construction costs/availability and restricted lending deterring projects? Are you seeing more projects than usual stall during the pre-construction phase (financing, permitting, etc.)?

Cooper: On the real estate side, I am seeing a fair number of projects that are semi-stalled or just moving slowly due to financing headwinds. Interest rates are not cooperating and that has certainly tightened up deals. Also, as mentioned before, banks are getting tighter on underwriting, which has led to more investigations and due diligence.

Robert: How big of a factor is a town’s permitting process and zoning on the success of projects? Do you see well-financed projects killed at the municipal approval stage?

Cooper: [It is] an important factor for sure. More than anything, the biggest thing almost seems like the ease of doing business with a town in terms of [its] openness to communicate in a timely and efficient manner. You see a lot of towns do this very well and receive a lot of development as a result. Biddeford, Maine, is a good example of a business-friendly city with staff who want to see projects get done and understand the value that developers bring.

Robert: Several towns in Maine have inclusionary zoning, which requires a certain proportion of units (typically 10%, but up to 25%) to be price-restricted or allows developers to pay an “in lieu of” fee to opt out of the policy. Have you seen these policies affect the size or number of projects coming forward?

Cooper: Certainly in Portland, Maine. The old IZ (inclusionary zoning policy) in Portland at 10% [where one in ten units needed to be price-restricted] seemed to be more manageable and you saw projects getting done. At [the new inclusionary rate of] 25% plus rising construction costs, it’s tough to make that pencil [out]. A small IZ requirement may be beneficial in terms of ensuring those units exist in new projects, but too much [of an IZ percentage] and you stall development, which reduces supply and increases housing costs for an aging stock.

Robert: Portland, Maine, has enacted several rent control and tenant protection provisions by referendum since 2020. Did you notice a change in volume — or structure (number of units, change of use from apartments to hotel, etc.) — in Portland-based projects after those provisions were enacted? How do you think those provisions will affect the new construction market in the long term?

Cooper: I don’t see this really having much of an impact on new construction. With new construction, you set your own base rents the first go-round [rent control only regulates increases in rent, not initial asking rent]. In terms of annual rent increases, as we’ve seen with Portland’s ordinance, the allowable increases are often more than what a landlord would pursue with existing tenants anyway. Plus, when underwriting a new construction deal, to be prudent (rent control or not), you’re never going to assume much more than 3% rent growth anyway, which seems to be allowable under Portland’s rent control.

The big losers under rent control are the owners of buildings with deferred maintenance and under-market rents. Those rents can never be increased to a level that would support a renovation, and therefore the buildings receive even less investment and more value deterioration. You see legacy assets trading at much lower rates than they would have in the absence of rent control.

I am working on one project right now where the seller would likely have received a $1-2 million larger purchase price if the deal could be underwritten at market rents. Unfortunately, while landlords are harmed, the average tenant doesn’t really get much benefit. Plus, when units do come available, because of the low supply, landlords receive tons of applications. Understandably, landlords choose the most qualified, highest-earning tenant. So, we’re not even keeping rents low for needy tenants, but rather [for] the least needy tenants.

Robert: Camoin Associates has many public-sector clients across the country — municipalities, counties, and states — who are wrestling with the housing crisis (both housing availability and price attainability for residents). Is there one thing you would recommend the public sector could change to see more price-attainable housing units constructed in the future?

Cooper: Any way that municipalities can ease and shorten the approvals process, allow increased density, and work with developers to help manage costs — whether that is through city funds or removing costly requirements — this will help increase supply. Also, managing the political environment and the ability [of] small, active groups to pass laws that harm development is key.


Cooper Bramble has been with Maine Street Capital since 2019. As a commercial lending advisor, Cooper focuses on finding clients the best financing solutions for their real estate and business transactions. Working with complex financial models and analyzing all potential funding sources, Cooper enjoys building the capital stack to bring projects to completion.

Maine Street Capital is Maine’s largest commercial lending advisor assisting dozens of clients annually with lifetime loan volume well in excess of $1 billion. Clients value Maine Street Capital’s industry experience, market understanding, and commitment to securing the best financing possible. Learn more.

Camoin Associates has completed over 1,700 economic development projects nationwide since 1999. We’re here to assist both public- and private-sector clients with project feasibility studies, market analyses, and housing needs assessments. To get started with your project, talk to Dan Stevens, Director of Real Estate Development Services, at dstevens@camoinassociates.com or call him at 518-871-1365.

Learn more about Camoin Associates’ Real Estate Development Services