From left: Related CEO Stephen Ross and his West 30th Street lot, DDG Partners CEO Joe McMillan and a rendering of Gansevoort Square, and Minskoff Equities President Edward Minskoff and a rendering of 51 Astor Place
Has the construction lending spigot, once jammed shut, turned to allow a slow stream of financing for New York City development projects? Industry insiders think so.
Construction loans big and small are starting to add up in the city: $26 million for a condo project in Chelsea. Another $66 million for two Fashion District hotel developments. Most recently, Related secured a whopping $200 million construction loan for a 30-story apartment house on West 30th Street, and Minskoff Equities secured a loan in the $165 million to $200 million range for an office tower at 51 Astor Place.“If you look at the last three to six months, we’re getting lenders saying, ‘We want to entertain a construction loan,’” said Richard Jaroki, managing director at Grubb & Ellis’s New York office. “Last year, they would have hung up the phone.”
The construction lending process started loosening up at the beginning of 2011, said Jaroki, as lenders discussed possible loans but withheld approval. But it wasn’t until the summer that lenders asked him to “bring this stuff in.” In the last three months, things have only continued to heat up.
Jerry Swarz, one of the founding partners of Manhattan-based HKS Capital Partners, and Steve Kohn, president and principal of Cushman & Wakefield Sonnenblick Goldman, agree with Jaroki’s timeline, but are quick to point out that the number of loans issued lately is nowhere near the level seen during the go-go days between 2005 and 2007.
So nobody is quite ready to celebrate the complete comeback of construction financing, of course. Caution still dictates the game, and only the right developer with the right project and the right finances gets the green light.
“It’s still brutally difficult to get construction financing for a project,” said Gregg Winter, the president of Winter & Co., a financial firm that arranges commercial mortgages. “The only projects capable [of obtaining it] have very experienced sponsors with significant liquidity, net worth, and relevant track records for projects in good locations [that were] bought at a good price.”
Residential is king
All the industry insiders that The Real Deal talked to agreed that residential — either rental or condo — is the property of choice among most lenders. Indeed, the lion’s share of projects that have reportedly gotten construction financing since summer have been multifamily, though a handful of loans went to hotel developments or mixed-use projects with an element of residential.
“The vacancy rate for rental multifamily is so low, you can probably rent it before putting a spade in the ground,” said Jaroki.
The city’s vacancy rate (excluding Staten Island) for apartment rentals slipped to 2.6 percent in the third quarter from 2.8 percent the previous quarter, according to real estate data tracker Reis Inc. That dip sent average effective rents in New York City (again, excluding Staten Island) up 1.2 percent, to $2,859 a month, during the same period.
While condo fundamentals are stabilizing — sales jumped more than 33 percent year-over-year in the third quarter, according to Miller Samuel — condos are not the same slam dunk as rentals when it comes to securing financing.
Small, boutique condo projects that get the thumbs-up are located in well-established markets like Tribeca, Soho, West Chelsea and the West Village, Winter said. They are typically upscale, built to sell for around $1,700 or more per square foot. (note correction appended)
“That’s the only part of the market [where] we’re seeing any financing: deliverable projects in high-end markets with very dependable developers,” he said.
Mixed-use projects with ground-floor retail and residential on the upper floors also are getting second looks from lenders, said Jaroki.
Hotel developments are on lenders’ radars as long as a major hotel flag is on board. Case in point: Hidrock Realty nailed down two construction loans worth $66 million, for its 167-room Courtyard Marriott across from Macy’s Herald Square and a 173-room SpringHill Suites by Marriott on West 37th Street.
There is still almost no financing for speculative development, and any office, industrial and retail projects must show substantial pre-leasing to have a chance, both Jaroki and Swarz said.
The notable exception is Minskoff Equities’ mixed-use office tower, which secured a mega-construction loan in November valued up to $200 million — even with no tenants in place. Details of the loan, such as equity commitment and guarantees, weren’t disclosed.
Joe McMillan, CEO of DDG Partners, which secured a $26 million construction loan from M&T Bank in August for a condo called Gansevoort Square at 345 West 14th Street, said his firm had been shopping around for a lender since the beginning of the year and narrowed down the options this summer.
“If you have a strong team and a strong project, construction financing is possible,” he said, noting that the company’s recent success selling out its 41 Bond Street condo and the supply-constrained Chelsea market all played into getting the financing.
Construction on the condo began in September with an expected top-off date in the first quarter of next year.
Wanted: ‘Strong swimmers’
The project type isn’t the only consideration for lenders. Just as important is who is asking for the loan.
Lenders are looking for well-established developers, “names we know,” who have a track record of completing developments, said Jaroki. Experience should be relevant not only to the New York market, but also to the property type.
If not, industry sources say, developers should be prepared to pair up with a partner with the expertise they lack.
And lenders are asking developers to bring more to the table. They need to reach deep into their pockets and provide 30 to 35 percent in equity toward the project to show they can back up the development, said Jaroki. Kohn puts the number even higher, at 40 to 50 percent for the senior construction lender.
In some cases, developers must cough up a guarantee of completion or a repayment guarantee, while others must be willing to accept a recourse loan, in which the lender can come after the developer’s assets if he defaults. And condo projects must provide lenders with a rental backup strategy in case units don’t sell, Swarz says.
On the bright side, lenders are working with developers on payback terms that aren’t very “onerous,” said Jaroki. Typical timetables for construction loans could be anywhere from 24 to 48 months. And interest rates are attractive: Construction loans are coming in at between 4.5 and 6 percent, said Winter.
Still, the pool of developers who can clear the hurdles remains small, he said.
“Only the strong swimmers can qualify for construction financing now,” Winter said.
Behind the curtain
While a few new lenders have debuted in the Big Apple — such as the investment arm of the London-based non-profit called the Children’s Investment Fund Foundation, which provided a $250 million investment to Harry Macklowe for his condo conversion project at 737 Park Avenue — most of the faces are familiar, industry experts say.
There are the major U.S. banks, like Bank of America and Wells Fargo, along with regional banks like PNC and Capital One. German and Canadian banks, such as the Bank of Nova Scotia and TD Bank, have also been spotted looking at deals here, though most European banks have pulled back of late because of the debt crisis there (see related story on page 50).
The Industrial Bank of China has also sent in inquiries, said Jaroki.
HKS’s Swarz is seeing Wall Street investment banks take on the biggest construction loans, usually north of $150 million. The smaller loans, between $5 million and $30 million, are being picked up by commercial banks and thrifts.
The key is having a prior relationship with the lender, said Kohn. “It would be difficult for a developer who hasn’t borrowed from the lender before,” he said, “unless he’s a substantial player.”
