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Commercial loans are available, but demand lags behind
Brody Broker, a real estate agent for Jace The Real Estate Company in Sequim, says it’s still possible to borrow money to build or renovate commercial property. In fact, he said the “financing is relatively cheap” for those who want to build a commercial space or an apartment complex.
The terms are what were long standard in the industry: 25 percent or so down, with a loan-to-value ratio in the 75-80 percent range.
The trick, he said, is to make sure the numbers work. “It’s a good time to do a project if it makes sense.”
The problem is finding a project that makes sense. Broker said the value of too many commercial properties has been hurt in the current recession. “Some are under water.” In real estate parlance, that means the owners owe more on the property than it’s now worth.
The downturn also has led to a lack of demand.
Like many real estate professionals the Sequim Gazette spoke to, Broker said it’s almost impossible to make the numbers work for building a single-family residence to sell in Sequim. He notes that over the past five years city fees for building a home in Sequim are up “five to 10 times.”
He provided an example: “In 2004, I could buy a lot for $40,000 and pay the building permit and other fees — about $3,000. Then the house would cost me $200,000 total.” The house, he said, would then be worth $240,000.
Today that same house, he said, wouldn’t find a buyer at $240,000. “The price is down,” he said, “but the fees are up. I’m paying half or more of the cost of the lot in fees.”
Sequim developer Greg McCarry, founder of Westerra Homes, agrees. He said five years ago, “the bankers were calling developers.”
“They were asking me, ‘Can we help you?’”
When times were good, McCarry developed Jennie’s Meadow, a small development just north of Walmart in Sequim. But in 2007, “changes took place in the market.”
His lender, Kitsap Bank, called him to say they were getting out of the business.
McCarry says with the value of homes plummeting, lenders found their real estate portfolios were too large for their capital structure.
“The regulators started cracking down — and they all got out at the same time. You can’t look at them and say they’re bad guys,” he said about the lenders. The market simply changed, he said.
McCarry explained the system, saying banking regulators ordinarily require banks to keep 8-12 percent of their assets in liquid capital.
“If you deposit one dollar, they can lend 88 to 92 cents on that,” he said. But if the value of the assets securing the loan declines, the ratio changes.
“If the reserves go too low, the feds close them down,” he said.
McCarry said that’s why Frontier Bank was purchased by Union Bank and West Sound was bought by Kitsap Bank.
In 2010, nine banks closed in Washington.
As a result, he said, “There is no financing available to build houses. But to be fair, I wouldn’t do it anyway.”
For Sequim homebuilders, he said, securing financing is least of their worries.
The biggest issue is that the median price of resales has dropped. Buyers always have been willing to pay a premium for a brand new house, McCarry noted, but the difference between the cost of a new and existing home has grown too great.
The second issue is the cost of city fees, McCarry said. While the average value of a home in Sequim has dropped by nearly 30 percent, the fees charged by the city have risen more than 200 percent since 2006 and will soon make another jump.