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Interview with GlobeSt: Developers Loosen Up On Underwriting

LOS ANGELES—Developers are loosening up on their underwriting of new projects, according to Paul Rahimian, the CEO of Parkview Financial. Rahimian’s has been incredible busy funding short-term construction loans on the West Coast, but says that he is starting to see more and more risky deals come in. We are reaching cycle peaks but developers are still factoring in significant rent growth to meet their pro forma. It’s a scary trend considering that it is eerily reminiscent of the 2008 financial crisis. We sat down with Rahimian for an exclusive interview to get the inside scoop. Tell me about the approvals process and some of the challenges that you are seeing in approving deals?

Paul Rahimian: One of the challenging factors moving forward is that construction prices have increased so dramatically. They have gone up 1% a month, so construction prices are 20% to 30% higher today than they were in 2014. Developers are optimistic by nature and they think the rents are going to escalate, so when they are doing they pro forma, they are coming up with room for profit because even with escalated Los Angeles construction costs, they think the rents are going to go up. That is where we sometimes have a challenge because you can’t assume that rents are going to go up. They might, but they could also come down and that is where we are sometimes at odds with the developer. In which product types are you seeing this issue most?

Rahimian: We are seeing this issue on all products, but definitely on multifamily. Developers think that because rents across the board have gone up over the last few years, they are going to continue to go up. Is this reminiscent of the issues that lead to 2008? Rahimian: That is what a lot of people are saying, especially people who are a little more pessimistic. We saw very similar issues in 2007 and 2008, and a lot of people are asking why we are repeating this. If we don’t have the expectation of rent growth in a particular market or we think that the expected rents are too high, we would consider it too risky and we would pass on the deal. Are there markets where you will take a deal when the developer has anticipated rent growth?

Rahimian: Yes, for sure. It isn’t necessarily a huge geographic area as opposed to pockets. You can be in Northern California, and there are certain areas where we are projecting that rents are going to go up. In Silicon Valley, for example, there is such a demand for multifamily and the supply is so scarce for new multifamily that we fell very comfortable there. In Southern California, it is the same, but there are more specific pockets, like Playa Vista and the West L.A. area. It really depends on the area. You aren’t funding these deals, but are their developers that are? Where do these developers go when you have denied their deal?

Rahimian: I think they try to, and I think some of them do get funded by other lenders, but I think a lot of them just sit idle because they just don’t make economic sense or because the developers would need to put more money into the project and they don’t want to or don’t want to take that risk, and the project never gets built. We’ll sometimes see the same loan come back to us 60 or 90 days later after we have already passed on it. Another broker will bring us the same deal, so it is obvious that they are having a hard time getting financing. Does that act as a safety net to avoid another downturn like 2008?

Rahimian: Definitely, and we are private lenders. The banks are even more conservative than we are. So when you make comparisons to 2008, the banks are not lending like they were in 2008, and the private lenders are not as risky as they were then too. So, there might be some safety there in terms of what is actually being done

Interview by GlobeSt


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