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Ominous signs for new condos

Lofts on Lex in Brooklyn has been on the market for about eight months, but only five units are in contract.

In recent months, buyers' struggles to finance new homes have dominated the headlines, but a far more ominous problem has now reared its head among prospective buyers of the city's new condominium developments.

Despite buyers' desire to purchase the apartments, banks â€" under intense pressure to ensure returns on their loans â€" are increasingly unwilling to write mortgages for some new buildings, especially those that have sold only a small percentage of their units. That, in turn, makes it harder for the buildings to sell out, leading to a chicken-and-egg problem that's likely to pose significant obstacles for new developments in the coming months.

"There are certain buildings that some lenders just won't lend to, period," said Allan Trub, a senior vice president at GuardHill Financial. "There are a lot of buildings with very low presale numbers, far below the numbers that lenders typically require. It's become much more challenging to get them approved."

New York hasn't yet seen the formal bank blacklists â€" lists of developments that lenders won't touch â€" that mark devastated real estate markets like South Florida. But as slower sales make it harder for developers to unload units quickly, more and more buildings are failing to meet banks' presale requirements.

"A lot of new developments going forward are going to have this issue, and it hasn't really been dealt with," said Ross Weinstein, a managing partner of the Union Square Mortgage Group. "In the next couple of months, as these buildings become ready and buyers can't close, there will have to be some tough conversations."

In the red-hot New York real estate market of recent years, end-loan lenders focused more on buyers than buildings.

"In the past, banks weren't as worried about the buildings," said Melissa Cohn, the president of Manhattan Mortgage. "Now, with the economy slowing down, they want to make sure they're going to be protected with a solid investment. Everything needs to be carefully vetted."

Banks have always maintained certain guidelines to ensure buildings they lend in are financially stable, completed on schedule and sell out quickly. But in recent years, lenders â€" buoyed by the booming real estate market â€" weren't particularly concerned about meeting those guidelines.

"In the past an appraiser would show up, and if the appliances weren't quite ready, they'd say, 'Just send us a picture,'" recalled developer Kenneth Horn, president of Alchemy Properties. "Now everything has to be 100 percent completed."

For older buildings, banks are scrutinizing everything from financial records to board meeting minutes. "Things that buyers would never have dreamed of looking at before are now coming to light," said Weinstein, who recently endured a bank's careful review of the minutes of a co-op board's meeting about a leaky roof.

In new developments, much of the scrutiny centers on the number of units that have been sold. Banks want to make sure that the majority of a bulding's units are sold, because if they don't sell and prices are slashed, the investment has less value.

"They relate to the financial stability not only of the building, but of the effect that the volume of inventory has on the sale of each unit in the building," explained Marc Shapiro, a partner in the real estate group at the law firm Orrick, Herrington & Sutcliffe. "You go to a clothing store and it's the day before Christmas and the store's only open for an hour and there are 100 dresses on the rack. You think to yourself, 'I'm going to be able to buy this dress for less.' People ask the same question when they look at an apartment building and it's 20 percent sold. The lender feels the same way."

In other words, "if you have a 500-unit building and only 10 to 15 percent of the units are sold, that's a problem," Trub said. "That's going to scare a lot of lenders."

Banks were previously lax about presale requirements because they were confident that buildings would quickly sell. But that's recently changed, and banks are now reluctant to provide a buyer with a mortgage if the building has sold less than 51 percent of its units â€" known as "non-warrantable." Some banks want as much as 71 percent sold.

"Traditionally, there were no requirements," Weinstein said. "Then it grew to 25 percent, and now very few lenders are doing anything unless you can hit that 51 percent mark."

And as sales slow, more New York developments are unable to reach that benchmark.

"In the previous couple of years, buildings had no problem hitting that 51 percent number," Trub said. But now, "the slowing market has affected some of these buildings. They're not selling as quickly."

The problem hit home for Patricia Neinast, a Corcoran senior vice president and the principal broker at Lofts on Lex, a 20-unit development at 95 Lexington Avenue in Brooklyn. Though the units have been on the market for roughly eight months, only five are in contract, Neinast said.

When several banks increased their presale requirements to 51 percent just weeks away from closing, she almost lost three of those buyers in one fell swoop. "I knew right away they wouldn't be able to get their financing," she said. "We would have had to have 10 units to start closing."

A seasoned veteran in the business, Neinast moved quickly. She scrambled to find two banks â€" Wells Fargo and Countrywide Savings â€" that would write mortgages for the buildings despite the low presale number, and began the long and tedious process of pre-approving Lofts on Lex with them.

"It was a long process, but it was worth it," she said. "Now, people can come in and close without 51 percent."

The stricter requirements have made brokers' jobs much more difficult, she said.

Some developers are delaying closings while they scrounge up more buyers to meet the minimum requirements. "Some have been pushed back a week or two to get a couple more sales in," said Marc Nathan, a mortgage consultant at GuardHill.

Nathan is working to try to help find buyers at Columbia House at 238 West 108 Street, which has sold only one unit since coming on the market in June.

"I'm going through my database and helping them find buyers," he said. "It's a great product, and I think this will sell quickly."

Still, buildings that can't find buyers fast enough will have a difficult time, he said. "The environment has become a lot trickier," he said.

Other developers are timing their closings so that all-cash buyers close first, according to Steve Moran, a senior loan officer at Preferred Empire Mortgage Company.

"They're pushing hard to surpass that 51 percent," he said. "They're putting all the cash buyers up front, since they're not subject to the restrictions by the banks."

But some buildings are simply selling too slowly, like Horn's Hudson Hill Condominium at 462 West 58th, where only one of 67 units has been sold in the roughly six months it's been on the market. Horn said he has put sales and marketing on hold until December, and hopes sales will improve when prospective buyers can see more of the building. "What we've found is that we've gotten a lot of traffic when buyers are able to walk into the unit and see the buildings finished," he said.

For the time being, savvy brokers are still able to find lenders for most buildings, as long as buyers qualify. "I have a couple of banks that will do non-warrantable condos," Moran said, adding that those lenders often have more stringent requirements in other areas, such as minimum square footage.

At 271 West 122nd Street, only one of three units have sold after a year on the market, but Halstead's Julia Boland said she's confident the building will see more activity toward the end of the year.

However, as sales slow, it could get harder and harder to find flexible lenders.

"As things deteriorate, banks are going to look at things and react like they haven't before," Weinstein said.