Transit Oriented Development A Lender s Perspective

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1 Transit Oriented Development A Lender s Perspective Scott R. Rodie Bank of Hawaii Appraisal & Environmental Risk Management Hawaii BrownDields Forum # 7 Tuesday, September 22, 2015

2 Most Frequent Question.the reason I am here today What do Banks want in terms of the information necessary to lend on proposed development sites? Answer..everything. Banks don t like uncertainty. Banks will price for risk.

3 The Need Aloha aina we must be responsible stewards We are an island community with scarce resources and a burgeoning population relative to the useable, zoned and utility served land mass. Urban sprawl into the hinterland contributes greatly to inefdicient allocation of scarce economic resources, reducing the quality of life for residents and decreasing tourist satisfaction. Re- use of existing urban and core proximate sites - although somewhat challenging - assists us by helping to achieve our shared goal of long term sustainable growth. Vibrant, thriving, high quality and culturally relevant urban neighborhoods which are truly live- work is not merely a dream but a necessity.

4 Project Attributes What is the lender looking for? Economic feasibility/effective demand (market studies by reputable & independent consultants). Product which is appropriate to the market. Complimentary uses that create a sense of place within the urban core and transit corridor. Project characteristics that enhance quality of life promote the ability to enjoy support & entertainment uses in the absence of an automobile.

5 The Borrower What is the lender looking for in a borrower? Sponsor experience matters. Given the scope & nature of TOD projects (mixed- use, mid- to- high rise buildings, high density) sponsor groups/ developers with experience are of the utmost importance. Strong capital. A demonstrated history of the development team in solving problems from concept to execution. A strong development team with local experience is a key lender consideration. This is the single most important criteria.

6 The Lender What should a borrower look for in selecting a lender? First and foremost, the same thing a lender looks for in a sponsor/developer experience. History and familiarity with the product type and the development process. Support team infrastructure (lender, credit approval authority, underwriting, documentation, construction monitoring/ disbursement, appraisal, environmental risk). Ability to work with you. If there is a problem, and this is likely in any development, a strong relationship will help to resolve issues more efdiciently. Financial strength through market cycles growth, stabilization & decline. Broad Dinancial products and structures consistent with the project scale and type.

7 The Basics of the Deal General parameters Complete information packages are a must.entitlements, plans, specidications, budgets, critical paths, multiple cost bids and/or construction contracts, feasibility studies, marketing plans, end- user purchase & sale agreements/leases. More information is better than less. Information shortfalls create delays. Equity generally speaking, 30 to 40% of cost depending on price points. The higher the price point, the greater the equity. Land equity land can count towards equity, but not entirely. A minimum of 15% cash equity is required. Recourse varies, but generally a minimum of 25% of the top end is fairly standard. Non- recourse loans, while perhaps available, will be priced for risk. Lenders are not pioneers or equity partners. Interests rates Dloating. Usually LIBOR based. Pre- sales absolutely necessary. 65 to 70% of the units (to 100% of loan exposure). Pre- sale contracts must be arms- length transactions for qualidied buyers with signidicant non- refundable cash down payment.

8 Strategy How do I maximize my chances with a lender? Provide project documentation that is comprehensive. The Dinancial request should be clear and fully developed - from the project start to end- unit sales/leasing. Introduce your development team. The Team should be seasoned, well qualidied and experienced in similar projects (sponsor/developer, general contractors & major subcontractors, land use planners, architects, engineers, valuation/market study consultants, brokers, environmental professionals, archaeologists and attorneys). Be prepared to respond to inquiries that may be generated by various support team members (underwriting, appraisal, environmental risk, etc.). Delayed and incomplete responses tend to hold up the decision making process.

9 Environmental Risk Again, we encourage Team Building Encourage the client to seek qualidied and competent legal counsel specializing in transactional environmental due diligence. Allow counsel to recommend/refer a qualidied EP based upon complexity of the site/transaction. (For liability reasons, we do not have approved Environmental Professionals - banks may be held liable as operator/ managers ). The client, counsel and the EP determine the appropriate scope of due diligence. The team should involve the regulatory agencies, as necessary on complex sites, early in the process (scope change is expensive and time- consuming). The bank dovetails their due diligence to the efforts of the client. We reserve the right to have due diligence peer reviewed. We may or may not require additional research or subsurface investigation depending upon peer review. We may employ Probable Maximum Loss Analysis and hold back/escrow loan proceeds to address characterization and remediation during construction.

10 What we are trying to avoid Pictures are worth.well..a lot.

11 Likes That which makes my job easier Well advised clients. Due diligence prepared by well qualidied EPs whose primary business is transactional due diligence. Well developed reports which are scope appropriate for the transaction and prepared in compliance with ASTM Standard Practice E and 40 CFR 312. Clear, well supported and unambiguous Dindings, opinions and conclusions. EPs that value add for the client.

12 Dislikes What we do not like to see Seller (as client/user) or broker (as client/user for seller) ordered reports for an acquisition. Cookie cutter reports (all investigations deserve the same attention complex & non- complex). Obvious bias in eliminating RECs (e.g., PRP is identidied so no REC is concluded; former gas station has NFA so no REC concluded). Environmental Professionals delegating responsibility to junior staff on complex sites that require material professional judgment. Assuming NFAs, H- RECs (and even C- RECs) do not represent RECs for the subject site or adjoining properties for a proposed development. Consultants that move to Phase I limited subsurface investigation for a buyer without fully developing a current Phase I.

13 Dislikes (continued) What we do not like to see QualiDied reports without discussion of materiality (e.g, key site personnel could not be interviewed ). Amount of fee constraining the amount of effort (low bid, quick turn impacting effort/quality). Add- on fees for additional work (e.g., charging for records review, vapor intrusion and or vapor encroachment surveys when required by standard). Poorly edited documents/bleed through errors (e.g., property is located on Oahu and narrative is describing Maui). Added charges for reliance letters. Consultants with an undisclosed condlict of interest.

14 Dislikes (continued) Last slide of dislikes..i promise Mistaking volume for quality in a Phase I. Believing that all NFAs are created equal. Reports which do not meet ASTM Standard Practice E and 40 CFR 312 (inclusive of vapor intrusion & encroachment screening). Attempts to limit liability to the amount of the Phase I ESA fee or some other nominal amount. Weasel words (while issue may be gray conclusions and opinions are black and white). Consultants unwilling to discuss the results of their report, even with client approval.

15 Collaboration is key We are al in this together A strong working relationship between all stakeholders in the process is paramount to achieving successful results for our island communities. A city is not an accident but the result of coherent vision and aims. Leon Krier [Our] real duty is not to explain our sorry reality, but to improve it. August Losch.

16 Who Are We? Bank of Hawaii Founded in 1897 in Honolulu Hawaii- centric community bank Regulated by the Board of Governors of the Federal Reserve System (FRB) Largest non- subsidiary local commercial bank $15 billion in assets, 2,000+ full time employees, 74 branches & 500+ ATM s 2015 Forbes ranked as a top 5 bank in US for 6 years 2013 ABA Banking Journal #1 Large Bank in US ( 3rd time in last 6 years, # 1 in 08 & 11) 2014 Small Business Administration #1 lender Hawaii District (#1-10 out of last 12 years) 2014 Hawaii s Best Bank People s Choice Awards Honolulu Star- Advertiser

17 Thank you for your time I hope this was helpful. Questions? scott.rodie@boh.com (808)