Will construction lenders be the new residential market superheroes?

Left to right: Shaun Osher, Andrew Gerringer, James Raved

Credit crisis notwithstanding, can construction lenders save the day for sellers of new residential condominiums units?

Seeking to avoid overexposure, banks rarely do end loans in buildings where they’ve provided the construction financing. But as the credit crisis makes it nearly impossible for would-be condo buyers to obtain mortgages, some developers are hoping their lenders will revise that policy to help them sell units, especially since they have a stake in the projects’ success.

“It could be a saving grace for a lot of these developments,” said Richard Bouchner, managing director at Commodore Property Group, a real estate firm and mortgage brokerage, adding that lenders generally prefer to see the units sold rather than foreclose on them. “The banks are realizing that if they don’t want to be on the hook for a lot of units, they should step up and do this. It’s one of the only viable ways to move some of these units.”

As the credit crisis has deepened, banks have become increasingly skittish about lending in new condos with only a small number of units in contract. The last nail in the coffin came March 1, when government-backed mortgage finance company Fannie Mae stopped guaranteeing mortgages in condos where fewer than 70 percent of the units have been sold.

That’s extremely bad news for some 12,000 new condo units scheduled to come online in the New York City area by the end of 2009, according to data from real estate research firm Reis.

Developers of new condos can petition Fannie for an exemption, but regardless, “we’re kind of in limbo,” said Andrew Gerringer, managing director of the Prudential Douglas Elliman Development Marketing Group. “How do you get [to 70 percent] if there’s no financing for people? Who is going to fill in the gap?”

More and more developers are hoping their construction lenders will step up to the plate.

Real estate attorney Andrew Jagoda, a partner at law firm Katten Muchin Rosenman, said he has seen some lenders begin to do end-loans for buyers “in order to move the project along.”

“Anything that helps people get these deals done will help,” he said.

Shaun Osher, the CEO of Core Group Marketing, said he is currently working to orchestrate such a deal between a lender and developer, though he declined to name the specific project because he said it is in the preliminary stages.

“It’s all about trying to make it easier to close in this difficult credit environment,” he said. “A project’s lenders have an interest in seeing it succeed.”

Gerringer said developers he works with have begun to discuss the possibility with their lenders.

Prior to the early 1990s real estate slump, he said, it was common for lenders to do both construction financing and home loans, also referred to as end-loans, in the same buildings. But when the market plummeted, those banks were doubly vulnerable to the projects’ failure. When housing sales recovered, many instituted policies prohibiting them from lending on both ends of the same development.

“If a lender does that, then they’re getting heavily exposed on one property,” said James Raved, a senior vice president at workout firm Radco Development Solutions. “They prefer to get paid and go do another development deal.”

Still, many developers are hoping that their lenders may help them sell units by offering end-loans in their developments, even if they are unwarrantable, or ineligible for backing by Fannie Mae.

Lenders have an interest in doing this, Gerringer said, since they’re familiar with the projects and have a vested interest in their success.

“This would be a means to stimulate sales,” he said.

It’s easier said than done, however.

“It’s a great idea, but not always the easiest thing to pull off,” Osher said, noting that many developments today have three or four different lenders and mortgages may have been sold off to several different institutions.

Banking structures have become more complicated since the ’90s, Jagoda said.

“Things were different in the ’90s,” he said. “They didn’t have securitization pools. There are different players in the market now.”

Moreover, many lenders in the early 1990s were savings and loans, which frequently did both commercial real estate loans and end-loan mortgages. Today many of the savings and loans have fallen by the wayside, and “a lot of the big lenders are not set up for end-loans,” Jagoda said. “They have to have an end-loans finance department, and a lot [of banks] don’t have it.”

Banks that do both end-loans mortgages and commercial real estate loans, and thus could conceivably start doing them for the same projects, include Bank of America, Wells Fargo and Citibank, experts said, as well as some smaller, local banks. But many may be reluctant to do so because of market conditions.

“If a bank is well-diversified, they may feel comfortable doing that,” said Jarret Tarnol, the director of commercial real estate finance at GFI Capital Resources Group. “But there aren’t too many diversified banks right now.”

Mark Rogers, a spokesperson for Citigroup, said the bank sometimes does end-loans in condos where it has provided the construction financing, but even in those cases does not normally lend in unwarrantable condos.

A spokesperson for Bank of America said the bank currently does not routinely do end-loans in buildings where it has provided the funding, but did not comment on whether that may change in the future. Wells Fargo did not return calls for comment.

Tarnol added that with the subprime mortgage crisis in full swing, most banks are looking to do fewer end-loans mortgages, not more.

“There are just so few pockets of money right now,” he said.