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Opposition To Construction May Cause Banks To Re-Consider Financing
Increasing number of lawsuits against approved projects hinders economic development and causes banks to scrutinize permit process
BY LIDA ESTELA RUAÑO
June 28, 2001
Banks are becoming increasingly concerned with the rash of lawsuits by neighbors opposing approved construction of major condominiums and housing projects.
When the courts stop construction to study the cases, the committed financing is put on hold. If this trend continues, it could dry up available construction financing.
The Puerto Rico Bankers Association has teamed up with the Home Builders Association & the Contractors Association. Together they have developed a two-pronged approach to address the issue. The first effort is to ask the Legislature to pass a bill determining that once public hearings on a project are over and the permit is issued, there cannot be any further appeal.
The second effort is aimed at the Homebuilders and General Contractors associations membership to ensure full compliance with all laws and permit requirements in each project undertaken. The ultimate goal is to ensure that the construction sector, which for the past eight years has been fueling the local economy, continues vigorously.
Carlos Davila, Citibank mortgage director, said there should be full trust in the system and revoking permits and paralyzing projects erodes that faith. Davila added however, that the percentage of revoked permits is actually very small compared to the number of construction projects that are approved. He too expressed concern that if the trend continues, it could put at risk the credibility of the whole system including financing and permitting.
The bottom line is money. Delays increase the cost of the project and raise housing unit prices. For banks, it means the committed money is paralyzed and they must put pressure on otherwise good clients to pay monthly interest on these high cost projects. Developers must make payments from their own funds.
For homebuyers, it means paying higher prices because lawsuit costs are passed on to them. This means units may wind up overpriced.
A sampling of the biggest beachfront projects temporarily halted due to lawsuits are the $150 million Caribe Hilton condominium, retail, and entertainment center; Ocean Parks Madeira condominium; and Isla Verdes Princesa del Mar condominium. Additionally, a handful of Guaynabo housing projects near brooks or rivers are also the target of lawsuits.
Most of the bankers interviewed have not financed projects that are subject to these lawsuits but all of them were emphatic that the government must address this industry-wide concern before it gets out of control.
Alberto Nido, executive vice president in charge of real estate financing at Banco Bilabo Vizcaya Argentaria (BBVA), said the problem is complex and the government should understand that once a permit is given it should be final.
"Once a permit is issued, revoking it disrupts the economy of the whole projectfrom the bank to the developer to project employees and on to the client who has purchased an option," Nido. Option deposits are placed in escrow and will remain there until litigation ends unless buyers ask for their money back.
Ariel Lebron, senior vice president in charge of construction at Santander, explained that by the time neighbors see a project under construction, millions of dollars have already been invested. This includes the costs of land, design & blueprints, advertising, and legal & closing fees. Developers continue paying interest on loans, even though the project is at a standstill.
"At first, most banks will be understanding with their clients and will be lenient with payments but, at a certain point, they must ask for repayment of their debt," Lebron said.
Lebron said that if banks continue to see a proliferation of revoked permits, it could reach a point where many seriously question whether they should continue to offer financing to projects that may be vulnerable.
Ivan Mendez, president of Scotiabank of Puerto Rico, said his institution is very careful in its due diligence process to ensure permits are in order. The process normally involves an in-house or contracted engineer, who scrutinizes all details of the project and assures the bank everything is in order.
Mendez said the issue entails a potential credit risk for banks, which have to question where the repayment is going to come from. It forces banks to ask for other sources of repayment until the problem is solved. "We are not stopping or refusing to take projects, simply studying each development extra carefully," Mendez said.
For his part, BankTrust President & CEO Gabriel Olivera said both sidesneighbors and developersmust be heard so a well-balanced decision can be made. "While environmentalists may have a valid point, the need for housing in Puerto Rico is such that one must find a solution that takes all interests into consideration," he said, adding that the balance lies in public hearings where all involved express their viewpoints.
Olivera agreed that revoking permits disrupts economic process causing very serious damage. "If this trend continues, we will have to ask for other guarantees. Up to now, weve approved financing based on the governments judgment for issuing a permit," he said. "If hearings are not the cut off point, there will be very few developers who have the financial strength to sustain prolonged litigation."
On the other hand, Lebron thinks its about time the island started looking for a more organized and efficient urban plan. He suggests areas like Santurce and Puerto Nuevo be targeted for high-density development. However, high-density condominiums have high construction costs, which translates into high risk.
Lebron also said the interest rate drop has helped maintain the number of construction projects. He expects the economy to pick up by the time projects started now are ready for delivery.
Davila wondered whether administrative changes in the government may have something to do with the cases now before the courts.
"At the end of the day, the financial sector is only asking for consistency in the permit process and that the rules be made clear. Just because a boss is changed does not call for a change of rules," he said.
This Caribbean Business article appears courtesy of Casiano Communications.