The Deal
Commercial Lending Solutions secured $40 million in construction financing for a 120-unit luxury multifamily development in San Diego's East Village. The seven-story Type III construction project represents one of the larger ground-up deals we've closed in the downtown San Diego market over the past 18 months.
The developer, with three successful San Diego projects in their portfolio, designed the building to capitalize on the East Village's proximity to Petco Park and the downtown employment corridor. The unit mix targets young professionals and empty nesters with 85 one-bedroom units averaging 750 square feet and 35 two-bedroom units averaging 1,100 square feet. Rooftop amenities include a pool deck, fitness center, and co-working spaces that differentiate the project from older East Village inventory.
Construction costs penciled at $333 per square foot, reflecting San Diego's elevated labor and material costs but remaining competitive for Type III construction in the market. The developer's general contractor had completed two previous projects together, providing execution certainty that became crucial during underwriting.
The Challenge
San Diego's East Village presented absorption concerns that spooked several construction lenders. Over 800 new multifamily units had delivered in the submarket within the previous 24 months, with an additional 400 units scheduled for completion during our project's construction timeline. Initial lender feedback highlighted occupancy softness at competing properties, with lease-up periods extending beyond original projections.
The capital stack required careful structuring due to the developer's equity constraints. While the sponsor brought strong operational experience, their liquidity position limited the equity contribution to 40% of total project costs. This pushed the loan-to-cost ratio to 60%, which several regional banks viewed as aggressive given the supply dynamics.
Construction timeline sensitivity added another layer of complexity. The developer had secured their site through a 1031 exchange with tight deadlines, creating pressure to close construction financing within 45 days. Traditional bank committees struggled to move quickly enough given their internal approval processes.
The Solution
We positioned the deal around three key differentiators that separated this project from competing East Village supply. First, the rooftop amenity package exceeded anything in the immediate submarket, with 6,000 square feet of outdoor space that maximized the site's Petco Park views. Second, the unit layouts incorporated 9-foot ceilings and premium appliance packages that justified a $200 per month rent premium over existing inventory.
Most importantly, we structured an extended lease-up period that addressed lender absorption concerns. The construction loan included a 12-month lease-up tail beyond the 24-month construction timeline, providing adequate runway for stabilization. Interest reserves covered the full 36-month period, eliminating cash flow pressure during lease-up.
The capital stack leveraged the developer's operational track record to secure favorable construction terms. Their previous three San Diego projects had all achieved stabilization within 10 months of completion, with average rents exceeding initial projections by 8%. We packaged detailed absorption data from these comparable projects to demonstrate the sponsor's marketing capabilities.
A national bank ultimately provided the construction facility at prime plus 50 basis points, with a floor of 4.25%. The pricing reflected the extended lease-up period and the developer's execution history. We negotiated a conversion option to permanent financing at completion, providing the borrower with rate certainty and eliminating refinance risk.
The Outcome
The construction loan closed within 42 days of application, meeting the developer's 1031 exchange timeline with three days to spare. Foundation work began immediately following close, with the general contractor mobilizing crews ahead of schedule due to favorable winter weather conditions.
Pre-leasing marketing launched six months before projected completion, generating over 200 inquiries within the first 30 days. The rooftop amenity renderings drove significant social media engagement, validating our positioning strategy around the differentiated design elements.
Construction progress has remained on schedule through the first 18 months, with all major milestone inspections completed without delays. Material cost escalation stayed within the original 3% contingency budget, reflecting the developer's fixed-price contracts with key subcontractors.
The East Village absorption concerns have proven manageable, with competing properties achieving improved lease-up velocity as pandemic-related relocations to San Diego continued throughout 2023. Pre-leasing results suggest our project will achieve 85% occupancy within six months of completion, well ahead of the conservative 12-month stabilization timeline built into the construction loan terms.
This transaction demonstrates how proper deal positioning and extended lease-up structures can overcome market oversupply concerns in high-barrier-to-entry markets like downtown San Diego.