The Real Deal New York

Michael Stoler – Show me the money!


December 01, 2008
By Michael Stoler

Today during the worst dislocation of the capital and credit markets since the Great Depression, when little or no financing for real estate is available, I ask the few financial institutions who are publicly stating that they are providing financing to answer the question poised in the 1996 film “Jerry Maguire,” when one of his clients said, “Show me the money.”

Oh ho ho! Show! Me! The! Money!

Unfortunately, few of the institutions that I remember being active in financing in 2005-2006 can actually show me any money.

Some of the world’s leading business leaders are asking the same question. Mort Zuckerman, chairman of Boston Properties, recently appeared on Fox Business and the McLaughlin Report. He said, “I am deeply worried about the economy; we have not solved the financial crisis.” And, he said, “No one is lending any money.”

In my recent discussions with more than 50 lenders, I surmise that nearly every foreign lender, including banks from Germany, France, Ireland, Scotland, the Netherlands, Australia, China and Japan, have not been lending since the summer. The few domestic commercial and savings banks who continue to offer financing are offering at terms and conditions that we have not experienced during the past decade.

A real estate executive at one of the world’s largest commercial banks, who asked not to be identified, said, “In my view the financing pipes are frozen, risk tolerance is extremely low and we are lending but capital is being allocated on a very controlled, higher-priced basis. I’m not seeing the typical repayments because the CMBS, insurance and pension fund takeouts of completed commercial debt are not happening.

“The only way to increase real estate lending is to further increase the percentage of capital allocated to real estate, which makes no sense given the declining markets in this industry.”

Gino Martocci, senior vice president in charge of real estate and commercial lenders for New York City and Long Island at M&T Bank, said, “While we remain committed to providing financing to our customers, the rapidity and severity of the economic shocks, as well as the demise or near demise of some of the largest institutions in New York, has created tremendous opportunity around underwriting assumptions. Cap rates, vacancy rates, rents and financing costs are all moving with little clarity on where or at what levels these will settle. As there is very little commercial real estate trading in the private markets, we are forced to use New York publicly traded REITs as a rough proxy on the direction of values and implied cap rates.

“The three best-known New York City-centric REITs have seen share prices decline between 45 to 90 percent from their 52-week high. While this appears to be something of an overreaction, it certainly implies significant 25 to 45 percent declines in net asset values and a corresponding increase in cap rates,” Martocci said.

“We have seen a flight to quality in the financing markets; lenders are more focused than ever on sponsorship when evaluating a loan request,” said Ronnie Levine, managing director at Meridian Capital Group. “The uncertainty regarding valuations has caused lenders to dial back the leverage. Lenders are now topping out at 60 to 65 percent on office loans and retail centers. The reduced first mortgage levels have increased the need for mezzanine loans to fill the gap in capitalization,” he said.

He added, “The hard money sector of the market has been extremely active in the current environment. These lenders typically charge rates in the low- to mid-teens and can move quickly to get a transaction closed. They have been particularly active working with borrowers who are trying to buy their loans back at a discount from a current lender.”

Gregg Winter, president of specialty lender W Financial, said, “Even in these dark days of the credit crisis, a steady stream of lower-leverage loans from fully stabilized, cash-flowing assets are not only getting done, they are getting done at historically low interest rates on very favorable terms for the borrowers. No one is paying attention to this sunny end of the marketplace, preferring to dwell on the idiotically underwritten loans of two years ago that are now blowing up all around us.

“Eventually all the carnage will have run its course. The financial system will reboot and will return to sound underwriting fundamentals, keeping future blowups to a minimum. This time around the damage is so severe that it may take a generation or two until the trauma dissipates and underwriting standards once again degenerate to dangerously low levels.”

Winter secured a loan for the owner of two residential buildings with a total of 298 units on the Henry Hudson Parkway in the Riverdale section of the Bronx. The borrower secured a 10-year (yes, I said 10-year) fixed-rate loan of $7 million, or $23,489 per apartment unit, with amortization of the loan over a 30-year term at a rate of 5.25 percent. The transaction was priced at 217 basis points over the 10-year Treasury bond, which was 3.08 percent at the time.

Lenders, including New York Community Bank, one of the strongest lenders for apartments, continued to be active during the fall. In September, the bank provided a seven-year interest-only loan for $135 million for the purchase of a multifamily apartment complex in Lower Manhattan. The deal represented a loan of 77 percent to the cost of the purchase with debt service coverage in excess of 1.20.

On the opposite extreme of reasonably low-priced financing, in November, W Financial provided a loan of $3.6 million for a first mortgage for a 70-room waterfront hotel in Sag Harbor on the East End of Long Island. The borrower, a private equity fund, needed bridge financing for its $11 million purchase of the property. The borrower had a $2 million deposit and had to close and was unable to secure financing. No bank would touch the deal, resulting in the borrower securing debt at a rate of 13 percent plus an origination fee of three points for the 18 month loan. At the end of the term of the loan, when he refinances, the borrower is obligated to pay W Financial a two-point exit fee.

In conclusion, I concur with Ronnie Levine when he said, “There is still debt available in this market. You just need to spend a great deal of time to know where to find it.” And to that I add, one day someone will SHOW ME THE MONEY.

Michael Stoler is the host of the real estate programs “The Stoler Report” and “Building New York” on CUNY TV in New York City and WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is also an adjunct professor at New York University’s Real Estate Institute and a director at Madison Realty Capital. He is a former columnist and contributing editor for the New York Sun

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