Apartment Builder Lets Lenders Peek at Product in Show of Confidence : Housing: Western National Group’s president says it’s time to start aggressively building again. So he tried to show the banks that ‘there is some demand out there.’

Open houses are nothing new. Developers and real estate agents have used them for years to attract customers.

But Western National Group, the Orange-based apartment developer, added a new twist with an open house last week exclusively for potential lenders.

By getting the lenders out to the building sites to examine the property after renters have started moving in, company officials hope to break down some of the anti-apartment prejudice that has developed over the years.

The company manages about 18,000 apartment units in Orange County. Some it built and runs for its own account; others it built and manages under contract for clients like the Irvine Co.

Building for clients is what kept Western National busy for most of time between 1989 and the beginning of last year, President Michael Hayde said. But since then, the company has begun a 230-unit complex in Aliso Viejo. Earlier this year it began renting units in the first phase of the $22-million Wood Canyon Villas development.

Hayde said he thinks that it is time for his company to start building aggressively again. The credit crunch, however, makes construction and land-acquisition loans scarce--especially for apartment builders, who need cash up front because they must build everything at once rather than in the small 10- to 25-unit phases that home builders can use to keep a lid on borrowing.

Hayde said Western National got a $6-million equity investment for Wood Canyon from Bardeen Partners, a subsidiary of the Irvine Ranch Water District. Another $16 million came from a county-sponsored, tax-free bond offering, but Western National had to provide a letter of credit from a commercial lender to secure the bond debt.

Security Pacific Bank--which subsequently was acquired by and merged into Bank of America--issued the letter after a process that Hayde said was exactly like extracting a loan from the bank: “It wasn’t easy. The climate back in December, 1991, was not very favorable to loaning money to build apartments.”

In the hope of easing that process, Western National threw open the doors at Wood Canyon Villas last week to strut its stuff before a group of lending officers from Bank of America, Wells Fargo, First Interstate and a number of community banks, Hayde said.

“We did it because we think the lending community needs to see that we can design and build a good affordable product and that we are hitting our pro formas ,” which is real estate talk for meeting projected rental or sales volume.

At Wood Canyon, where construction is expected to be completed early next month, an initial section of 98 apartments has been opened, and 60 of those have already been rented, Hayde said.

“There’s been such doom and gloom in the market, and we felt it was time to show the difference between the perception and the reality, which is that there is some demand out there if you design and price your product correctly.”

To participate in the tax-exempt bond program, Western National guaranteed that 20% of the apartments will be rented to low- and very low-income families. The unsubsidized rents range from $690 for a one-bedroom apartment to $1,050 for a two-bedroom, two-bathroom unit. The rent-reduced units, which are in all parts of the project, cost $500 to $650, Hayde said.

While the apartment vacancy rate for most of the county hovers around 6% these days, it is as low as 3% in part of South Orange County. “The growth area is in the master planned communities in the south,” Hayde said, “and the lack of affordable housing will continue to be a crisis” from which a savvy apartment builder can profit.

Hayde said he thinks that apartment rents, after staying flat for four years--the average in the county is $800 a month--will rise by only 3% or so this year. “But we expect to see 5% to 6% annual increases by 1994 or 1995 and beyond.”

To take advantage of that, Hayde said, Western National is planning four new projects with a total of about 750 units: 300 in Rancho Santa Margarita, 150 in Mission Viejo and 300 in two complexes in Aliso Viejo.

“We are hoping to break ground on them late this year or early in 1994,” he said, “but we don’t have financing yet, and we don’t have a joint-venture partner.”

That is precisely why Western National hosted its open house.

The results of that event?

“Well, we didn’t have anyone from the banks come up and volunteer to finance any of our projects,” Hayde said, “but the response was pretty positive. The bankers seemed to be interested in our message and to be willing to take a new look at the apartment market, and that’s a start.”