Extend and Pretend Part 2: Development Approvals and Permits

When it comes to the financing of commercial real estate, the “extend and pretend” approach taken by many banks is well known.  However, it feels like more and more stakeholders in the commercial real estate industry are doing their part to kick the can down the road.  The latest evidence of this is the Permit Extension Act, signed into law last week by Governor Rendell and the Pennsylvania Legislature.  The law extends expiration dates on permits, approvals, and other agreements issued by local governments and agencies in Pennsylvania authorizing real estate development.  While the Act provides a gasp of fresh air to developers who are stuck in a tight spot on their stalled development projects, it is yet another blow to folks waiting on the sidelines with dry powder to pick up distressed deals. 

We’ve all heard stories of well seasoned developers whose projects are stalled today because they can’t achieve the necessary pre-sales or pre-leasing for their lenders to be comfortable with vertical development.  Although lenders are extending the developers’ loans on these projects, the borrower is accumulating painful carry costs, including the costs of extending approvals and permits beyond their original expiration dates.  The Act automatically extends all building permits and approvals to July 1, 2013–no fee required (unless your project is within the city limits of Philadelphia, in which case a fee applies).  Extended financing and extended permitting, what more could a developer ask for on a distressed project? 

Well, I’m sure not everyone would like to see Mr. Developer’s project get kicked further down the road.  All of the investors, developers, and funds who have been waiting on the sidelines with plenty of capital have already been frustrated that banks are extending and pretending.  Extended financing coupled with extended permitting may be just enough to keep a project from getting sold at a discounted price.  Bad news for opportunistic investors.  Rendell’s case for the Permit Extension Act is that it will prevent troubled developers from losing their shirts, and thus prevent further deterioration in commercial real estate values.  However, for every developer whose project is getting kicked further down the road, there is an investor pulling his hair in frustration.