Financing for a French village

The music of construction rises from a seven-acre lump of dirt and concrete in North Raleigh.

Trucks beep. Hammers bang. Walkie-talkies crackle.

The sound is rare these days. Across the country, development plans are being stalled or canceled as cash-strapped lenders tighten standards.

Yet, the investors behind Lafayette Village managed to secure financing for the $20 million North Raleigh shopping center.

T.D. Bank agreed to lend the investors up to $15.9 million. The loan is a lifeline for Lafayette, which stalled after a previous lender fell out of the picture.

That's the news, but not the story behind this ambitious – some say risky – project.

Financing is a mere chapter in a two-year epic whose main characters include inexperienced retailers and unproven retail developers with unwavering vision and the drive to finish an expensive project despite tight lending and slowing consumer spending.

If all goes according to plan, the tale will end with mimes and balloon twisters.

The idea is to have an open-air center with its own character, Paul Bronson, a partner, explains.

“We're building a French village,” he says.

He leans back in a leather swivel chair, gazes at a rendering hung above a futon on a cantaloupe-colored wall, and elaborates:

Stores in the 73,000-square-foot center will face inward, separated by narrow roads. No cars will be able to drive through the center. Rather, shoppers will park on the perimeter and walk in, or they park in an underground deck and take the elevator.

French villagers “came out from the field and into the village through various points,” he says. “We've done the same thing here.”

There will be bocce courts, classical music, puppet shows.

Mimes and other minstrels would rove the grounds, surrounding a collection of small, independent shops that fit the European-village theme.

Half the space is for shops – including a gourmet market, a gelato vendor, a coffee shop, a spa, a salon and a few restaurants.

“The answer here isn't who we've leased to,” Bronson says. “It's who we have not leased to.”

He “accepts applications” from tenants. A hamburger restaurant, for instance, was rejected.

“It's kind of like when you have a cashmere jacket and a cheap tie,” Bronson says. “It just doesn't look right. I can't have burger smell wafting through my plaza.”

That kind of discipline is crucial, says Antonio Saladino, a chef who is opening a gourmet market and restaurant at Lafayette. A carefully plucked mix of tenants will give Lafayette the complementary cohesion that will make it a destination for high-end clientele who crave personal service.

But when it comes to tenants, it's hard to be picky these days.

As consumer spending has dropped, so too have expansion plans by many retailers.

Weighing pluses and minuses

“If this was just a regular strip mall, like you see all around, it would worry me,” says Andrew Cash, who plans to open Jubala Village Coffee at Lafayette. “But it's not that. This is extremely unique for North Raleigh.”

The location is solid. The project is near Interstate 540, at Falls of Neuse and Honeycutt roads, close to a growing core of offices and fancy homes.

But will uniqueness be enough to lease the rest of the space?

“The good news is that we're only 73,000 square feet,” Bronson says.

But filling the rest could prove challenging. For starters, the inward design could be a challenge. Retailers often seek high visibility and an anchor tenant, such as a grocery, that draws shoppers. Indeed, the boutiques Bronson is chasing are destination tenants that thrive on word of mouth.

“The attraction here is the mystique of coming in and discovering a village,” he says. “Not who you see from the road.”

But all tenants – particularly boutiques – have lots of options these days. Cheaper options.

About 16.6 percent of the specialty-shop space available in northern Wake County was vacant during the first half of the year – the most empty space during that period in at least a decade, Karnes Research data show.

The Triangle's retail vacancy rate was 6.4 percent.

Bronson is asking rents starting at $28 per square foot annually. The average rate for specialty space across the Triangle is $17.73 per square foot – and $13.66 per square foot in Lafayette's submarket, according to Karnes.

At that rate, one could lease 2,600 square feet at another specialty center and still have enough money to hire Cirque du Soleil dancers for the grand opening, followed by a full-day mime visit every other week for a year.

If price alone isn't a hurdle, demand for space could be – particularly if Bronson and his partners stick to their boutique guns.

“There aren't that many high-end European types of establishments around,” says Henry Dirkmaat, who plans to open Henry's Gelato at Lafayette.

Of those that do exist, fewer are ready or able to take the plunge.

“Smaller tenants have or will put on hold expansions, not only because of the economy and consumer spending,” says Brian Reece, a partner at Karnes Research. “They just don't have the funds, they don't want to spend the funds, or they just can't get financing.”

Bronson and his partners know this all too well.

Lenders are raising borrowing costs for developers, too, requiring more equity and requiring that more space be pre-leased before parting with cash.

Shopping for a loan

Changes to Lafayette's design forced the developer to go back to the table with its initial lender, KeyBank. But the Cleveland bank, licking wounds from losses to residential developers, didn't make an appealing loan offer.

So the developers went to T.D. Bank, a subsidiary of T.D. Banknorth of New Jersey, which itself is owned by Toronto-Dominion Bank of Canada. T.D. Banknorth hasn't been hampered by losses to residential builders.

They required 25 percent equity and 50 percent pre-leasing.

The developers had the cash and managed to get the commitments – a list that seems counter to Bronson's philosophy of not “having sub shop after sub shop after sub shop and a nail salon.”

Of the 38,300 square feet pre-leased, half is reserved by companies registered to Bronson or his partners. Four businesses who have signed leases or letters of intent have the word “cafe” or “coffee” in their names, and there's a hair salon.

“Are we going to be one big food court? No,” he says. “It's going to be a shopping experience.”

He hopes to get galleries and furniture shops to diversify the mix. In the meantime, he's keeping an eye on the economy. But he's not letting it slow him down.

“You've always got to be concerned,” he says. “Will it get better? Yeah. How soon? I don't have a crystal ball.”

He does know one thing: “Failure is not an option.”