Credit crisis halting commercial construction

updated 3:27 p.m. ET July 22, 2008

With a vision of transforming downtown Seattle, the Clise family spent more than a century buying up key pieces of land. But the credit chaos has forced Al Clise to postpone his plans for a grand, 13-acre commercial and residential development.

Clise Properties Inc. halted discussions with potential partners in April after it became clear that most investors wouldn't find reasonable financing to develop the site with the company during a global credit crunch. Interested investors had to put up more than $600 million just to compete for the opportunity.

"The world changed in a very negative way. Everybody pulled back," said Clise, the chairman and chief executive. "Deals like this are just not getting financed."

Large and small commercial developments nationwide have been delayed or scrapped as lenders tighten credit standards on construction loans. Whether some of these projects will break ground or reach completion remains uncertain.

Last month, Australian gambling firm Crown Ltd. backed out of a $5 billion project to build Las Vegas' tallest tower because of financing issues. The company held a 38 percent stake in the joint venture with Texas developer Christopher Milam and private-equity firm York Capital Management and will have to write off about $42 million related to the investment.

Also in Sin City, the ownership and future of the Cosmopolitan Resort and Casino are up in the air. In March, Deutsche Bank started the foreclosure process after developer Ian Bruce Eichner and his company defaulted on a $760 million construction loan.

Construction still continues on the $3 billion high rise casino and hotel. General contractor Perini Corp. declined to comment on the project, while Deutsche Bank did not return calls seeking comment.

"Some big lending institutions have a big 'X' over Las Vegas right now," said Garrett Toft, senior associate at Voit Commercial Brokerage. "It's true for other markets, too, I think."

Commercial real estate projects in Denver, Phoenix, New York and even Donnelly, Idaho, have run into similar snags, while developers in housing-bust markets like Florida and Southern California have axed smaller projects.

The problems have spread overseas too. Getting project financing for the Athletes' Village in Stratford, England, has taken longer than expected, project investor Lend Lease Corp. said in a statement in June. Lend Lease's equity contribution to the project depends on the debt funding, which it expects by the end of the year. Meanwhile, the company has started work on the site.

"Probably 18 to 24 months ago, anybody could get a loan, anybody could do a deal. The markets were so aggressive," said Hal Kempson, a first vice president in CB Richard Ellis' debt and equity finance group. "The toxicity of the residential market leaked into all U.S. real estate and the liquidity turned off."

Before, developers could put up as little as 5 to 10 percent of equity behind a project and qualify for a mezzanine loan to bridge the gap between the equity side and debt side. It was the commercial equivalent of the so-called piggyback loan that is tripping up homeowners today. Or, developers could turn to cash-rich investors from every corner of the world, who were hungry to get a foot into the real estate market.

Those investors would put up capital to start projects and the developers would buy them out of the deal using short-term debt. No more. The quick change of tide has left some developers with blueprints in hand but pockets empty.

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