Specialty lenders keep developers afloat

By Michael Stoler | November 05, 2008 04:43PM

In these difficult financial times, specialty lenders, or what are called “hard-money lenders,” have found a niche by providing funding to real estate investors and developers buckling under pressure.

Developers looking for financing can only expect a limited number of specialty lenders to provide financing collateralized by unsold condominium units.

Last month, in the Williamsburg section of Brooklyn, where thousands of condominium projects are under way, a developer of a 64-unit condo sought financing to pay off his existing lender, a publicly traded capital and finance company.

Over the past year and half since the sales office opened, the developer sold only 26 units in the building. Due to the credit crisis, none of the traditional commercial or savings banks was interested in providing financing to allow the developer to pay off the construction loan.

As the sales market for condos has basically dried up, the developer hoped to rent the 38 remaining units.  

But, the terms of the original financing agreement prohibited the developer from doing so. Fortunately, this developer (and some others in similar situations) was able to secure bridge financing for the unsold units from Manhattan-based private bridge lender W Financial, paying off the construction lender and allowing for the developer to rent the unsold units.

Not too far away in Jersey City, thousands of condos are in various stages of construction. One developer of a high-profile development was looking to obtain financing from a specialty lender to offset the costs of carrying unsold condominium units. In this case, the terms of the deal with Palisades Financial, a commercial real estate lender and advisory firm, were rather harsh, offering financing at a cost of 19 percent per annum, plus a fee of three points for origination. But, the financing allowed the developer to retain ownership of the property rather than face foreclosure or bankruptcy.

These borrowers were in need of non-traditional, short-term financing. Even though the cost of financing for these projects ranged from 12 percent to 19 percent plus origination fees, interest reserve and full recourse, these lenders are making it possible for developers to maintain ownership of their properties.

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” on CUNY TV and “Building New York” on 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 the NYU Real Estate Institute and a former columnist for the New York Sun.