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The credit squeeze born out of the subprime housing lending debacle has begun to carry over to commercial real estate, putting the brakes on what had been a brisk market in buying and selling income-producing properties.
The Minnesota Vikings' cancellation of a $45 million deal to buy Star Tribune property near the Metrodome could be the first visible sign of a transaction called off because of tighter credit markets. The team Wednesday said it was backing off an agreement reached in June to buy the property from the Star Tribune's owners, New York-based Avista Capital Partners.
Area lenders, lawyers and developers involved in commercial real estate declined to name any specific deals that could face a similar fate. But in general they said the credit crunch has raised borrowing costs and tightened standards significantly in the last month or so, prompting some buyers -- both here and elsewhere -- to abandon, postpone or restructure deals.
Commercial loans are packaged together, then sold off in pieces to pension funds, hedge funds and other institutional investors. In recent weeks these investors have largely shunned commercial-backed mortgage securities, shutting off a source of easy and relatively cheap financing.
"The subprime situation has put fear into investors and driven liquidity out of the marketplace," said Ed Padilla, CEO of NorthMarq Capital, a Bloomington-based real estate investment banking firm.
Padilla said he has yet to see evidence that the credit crunch is affecting property owners' ability to refinance. But there are signs borrowing costs have risen and buyers are having come up with more cash to meet lenders' requirements. Earlier this year it would not have been uncommon for a buyer to be able to borrow 90 percent of a commercial property's cost, he said. Today the same buyer might only get a loan for 75 percent of the purchase price, he said.
The more conservative lending standards are closer to those typically offered by banks, said Terry Kriesel, senior vice president of commercial real estate for St. Paul-based Bremer Financial Corp. Some banks have seen their commercial real estate lending business pick up because the source of funding from commercial-mortgage-backed securities has dried up, he said.
Padilla and Kriesel said some buyers and sellers are "retrading" deals -- changing the terms and sometimes the purchase price based on an "adverse market clause" that is often included in sales agreements. Padilla said he recently received a note from a consultant saying that some retradings are shaving 5 to 15 percent off the initial price.
A Star Tribune spokesman declined to comment on whether Avista's agreement with the Vikings included such a clause.
Scott Pollock, vice president of investment services at Bloomington-based United Properties, said three deals he closed in the last 30 days were not affected because financing terms had been locked in before the credit squeeze took hold. He said he's less certain of deals he might do in the coming weeks.
"You're starting to see a gap develop between buyers and sellers," he said. "It becomes a question of whether sellers are willing to accept a lower price."
It's unclear whether the tougher credit market could also wind up affecting developers' ability to build or redevelop commercial properties. "Developers with deeper pockets will get their projects done," Padilla said.
That's the case for Indianapolis-based Duke Realty Corp., whose current projects include the $400 million West End mixed-use development in St. Louis Park and the Gateway North Industrial Park in Otsego. Pat Mascia, senior vice president of Duke's Twin Cities operations, said the company has large and well-established lines of credit with banks.
Todd Simning, president of Chanhassen-based Plowshares Development, said his firm locked in financing terms last year for Interlaken, a $450 million mixed-use project it is developing in Waconia.
"I'm very glad we did," he said. "If we hadn't, [financing] might have become an issue."
Susan Feyder • 612-673-1723
Susan Feyder • sfeyder@startribune.com
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