The Real Deal New York

Why the condo inventory loan is having
a moment

By Rich Bockmann | June 08, 2018 10:40AM

45 East 22nd, where developer Bruce Eichner
is looking for an inventory loan

(Editor’s note: Ian Bruce Eichner just scored a $167.5 million condo inventory loan for 45 East 22nd Street, his Flatiron condominium project. The loan is said to end a bitter dispute with his investors at the tower, and is the latest example of how developers are looking to condo-inventory loans in a shifting new-development market.

This February, The Real Deal took an in-depth look at the return of the condo-inventory loan, tracking all the players in the market for them.

The story is republished in its entirety below. (There may be changes in the status of some of the loans since the story published.)

MoMA Tower

From the February issue: When Hines landed $860 million in construction financing for its luxury condo project at 53 West 53rd Street in 2014, it was a born-again moment for the ambitious development, which sits just blocks from Billionaires’ Row. The project had been stalled for years by city bureaucracy and the recession and was finally getting new life.

But as the so-called MoMA Tower, designed by starchitect Jean Nouvel, rises toward a supertall height of 1,050 feet, Hines’ lofty expectations for the project’s prices are coming back down to Earth.

Amid the slowdown that’s hit residential developers citywide, Hines lowered the total projected sellout with the state attorney general’s office by more than 12 percent to $2.1 billion over the summer, and began lowering prices on a number of the building’s units.

Then, in October, Hines — which declined to comment — did something few developers hope they’ll ever have to do. According to publicly available loan documents, the developer and its backers — a consortium of Singaporean lenders led by United Overseas Bank — made the first amendment to their $737 million first mortgage to modify the minimum sales price on the building. (While the documents did not specify whether the developer dropped the prices, sources said that presumption is a more-than-safe one in today’s market).

“The expectation for the sales price on MoMA when it came out may be different from what it is today,” said David Karson, executive managing director of the finance group at Cushman & Wakefield, who is not involved in the project. “This is $4,000-a-foot type stuff, and this is the part of the market that’s really slowed down a lot.”

Karson added that with deep-pocketed partners like Goldman Sachs, Hines very likely has the flexibility to adjust its financing to meet the market.

“They may have enough equity cushion in that project that they can lower the sales prices, just to stay in line with the market,” he said.

But that’s not the case for all developers.   

With the new development condo market struggling, developers who landed construction loans three or four years ago are working to revise their finances to adapt to a market they didn’t predict.

“I think almost every condo loan in some way, shape or form is being reworked,” said the loan workout specialist Robert Verrone of Iron Hound Management. “I don’t think there’s a deal that’s not.”

And experts say that they expect to see even more of these kinds of restructurings in 2018.

“Most of the big projects that have gone up still have [loan] extension options available to them,” said attorney Timothy Little, head of the real estate practice at the law firm Katten Muchin Rosenman.

But, he added: “You’ve got to think that there are going to be a few more this year that are out of as-of-right options.”

Searching for wiggle room

This year may, indeed, be a particularly noteworthy one when it comes to developers modifying loans on New York City condo projects.

That’s because many of the construction loans that were issued postrecession — when lenders were just beginning to excitedly pull out their checkbooks after a long hiatus — are now nearing maturity.

Jeffrey Hines

And while construction loan terms depend on the amount of money being issued and the scope of the project, so-called 3-1-1 loans — those with three-year terms plus two one-year options to renew — are the standard. That means many of the loans made in 2014 and 2015 are either coming up on their first maturity date or already on extensions.

Squeezing New York City condo developers further is the fact that many of the active players in the construction lending space have been alternative lenders that charge higher rates. (A few years ago, those lenders were charging rates up to 400 basis points higher than traditional banks, which were focusing their lending on select top-tier clients.)

Add to that the increased presence of mezzanine financing — which allows the lender to snag an ownership stake in the event of a default — and developers quickly start to feel pressure when they are not hitting their sales projections. (Many NYC condo developers, sources said, have pushed their leverage to 80 or 85 percent in the last few years.)

In those situations, a borrower with an unfinished project would be hard-pressed to find another lender willing to refinance a loan.

James Murad, a director in the finance and capital advisory division at Eastern Consolidated, said the problem for a lot of NYC developers is that lenders (particularly traditional players with reasonable interest rates) are also shying away from risk in this market and often won’t touch a stalled project saddled with debt.

“In those situations, you either need to write an equity check if you have the capability … [or] the second option is to go back to your lenders and try to renegotiate for a longer term,” Murad said.

The situation becomes especially tricky for sponsors when sales slow, because they don’t have enough cash from preselling units to pay off loans that are coming due. And sales are undoubtedly slowing: The absorption rate — or time it would take to sell all available units — for Manhattan new developments stood at 8.2 months during 2017’s fourth quarter, according to appraisal firm Miller Samuel. That’s up more than 26 percent year over year.

Developers struggling in this market have few options. They can go back to their lenders and try to extend the maturity date, they can attempt to renegotiate the minimum sales prices with their lenders, or they can inject more equity into the deal. Or they can try a combination of the three.

But experts said lenders will want something in return for giving their borrowers more wiggle room.

At 11 Beach Street in Tribeca, for example, Ziel Feldman’s HFZ Capital and Howard Lorber’s New Valley amended the maturity date on their construction loan, agreeing in late 2016 to pay a fee of 0.25 percent of the $40 million loan, or $100,000. Buyers began closing on about half of the project’s 27 units soon after in 2017, and in July the developers landed a $53.2 million condo inventory loan from First Republic Bank covering a dozen remaining condos. It’s unclear whether the developers, who did not respond to calls for comment, had to inject more equity into the project.

In some cases, lenders will require sponsors to pay down a portion of the loan or replenish their interest reserves in exchange for an extension.

45 East 22nd, where developer Bruce Eichner is looking for an inventory loan

Morris Betesh, a financing broker at Meridian Capital Group, said that in virtually all situations borrowers are going to pony up more capital to “fund either extension fees [or increase] carry reserves.”

“So it’s a little more costly for the borrower to do that, but you get to obviously avoid all the transaction costs [of refinancing],” he said.

‘Becoming more negotiable’

The county clerk’s office in Lower Manhattan generally sees a steady stream of people popping in to pull property records.

Its shelves hold deteriorating volumes of bound records, their pages yellowed and spines cracked from age.

The office, which is located in the dark, cavernous basement of 60 Centre Street, is the clearinghouse for mechanic’s liens and loan modifications. Plug in a block and lot number on an ancient computer terminal, and a government employee will find a file on the property.

While developers are required to file loan modifications with the clerk’s office, those files are often incomplete. On a Wednesday morning early last month, many of the documents The Real Deal reviewed included only partial information about modifications that simply referred to information in original loans. The clerk’s office generally only keeps loans on file for two years before shipping them off to storage. So by the time a loan needs a modification, the paper trail has often vanished.

While these loan modifications may be hard to quantify, sources said they’re happening with more frequency in today’s market.

Tellingly, however, almost anyone in the midst of a modification keeps it under wraps because they don’t want to tip anyone off to the fact that there may be financial problems at a building. 

“Lenders and borrowers would probably like to hide the ball on some of this stuff,” said real estate attorney Joshua Stein. “When you modify a construction loan, that often tells you that there are issues. And that’s something the parties don’t necessarily want to share with the world.”

Robin Schneiderman, Halstead Property Development Marketing’s managing director of new business development, said banks are generally confident they’ll get paid back because they have low leverage ratios. As a result, they’re often willing to extend maturity dates.

The conversations going on now, he said, are more likely to be between developers and their equity partners over the promote — the high-profit portion of returns.

Steve Witkoff

“Several condo developers no longer have the ability to hit their promotes,” Schneiderman said, meaning they are not going to make huge profits, and their equity partners may want to redeploy their capital.

“At this time, they become more aggressive when it comes to reducing prices and increasing concessions and co-broke commissions to get deals done,” he added. “They can say, ‘Let’s become more negotiable.’”

Canary in the (lending) coal mine

It’s not just under-construction projects that are calling in financial reinforcements. Projects that are further along are facing sluggish sales and getting stuck with unsold units. 

However, those players — which are serving as something of a canary in the coal mine for what’s likely to come for their under-construction counterparts — actually have more financing options. 

Their go-to move, increasingly, is tapping a condo inventory loan — which uses unsold units as collateral and can replace more expensive mezzanine financing.

Meridian Capital Group’s Betesh, for example, said about 40 percent of his business now is working on so-called “takeout” loans, which are used to replace existing loans.

HKS Capital Partners’ Ayush Kapahi, who also works on these types of deals, said, “You would think that the majority of the condos are going to [be in] this situation.”

Kapahi added that in recent months he’s met with banking institutions that are rolling out inventory-loan product and looking for investment opportunities.

“They know that’s the natural progression of where the market is heading,” he said.

In November, Steve Witkoff, Fisher Brothers and New Valley landed a $650 million inventory loan and financing for their 800-foot-tall, 157-unit Tribeca tower at 111 Murray Street from the Blackstone Group. As of last month, the building had nine active listings, ranging in price from $4.3 million to $18.9 million, according to StreetEasy.

Meanwhile, earlier last year, Tessler Development secured a $164 million loan to cover the entire 72-unit project at 172 Madison Avenue from the private-equity firm TPG and Deutsche Bank, which had provided the project with its original $53 million construction loan in 2014.

And Bruce Eichner’s Continuum Company is looking for a $180 million inventory loan for its 83-unit condo tower at 45 East 22nd Street. Eichner declined to comment.

Developer Francis Greenburger’s Time Equities nabbed a $95 million inventory loan for 50 West Street from First Republic in November. The loan covered 46 unsold units at the 191-unit project, which Greenburger plans to hold as rentals as he waits out the market.

Greenburger said he paid off the construction loan in April using proceeds from sales, but then needed to decide what to do with a pair of preferred equity partners left in the capital stack.

“We were looking at how best to manage that,” he said. “These were really put in place in lieu of whatever remaining preferred equity was left in the deal.”

He added that the rates on the loans were in the 4 percent range. “Compared to the cost of preferred equity, they were very attractive,” he said.

That cheaper money, sources said, can also help developers to refinance or add more (lower-cost) leverage.

And with the investment sales market getting pummeled, many of the institutional players that would normally be lending on acquisitions or writing checks for construction loans have turned their attentions to the inventory market, increasing competition and bringing pricing down for those loans.

That gives the sponsors more time to wait for the market to rebound.

“What you’re seeing is the market trying to be intelligent,” said Kramer Levin’s Jay Neveloff, who is working on arranging these kinds of loans for his developer clients.

“Instead of having a fire sale and dumping [the unsold inventory] and causing chaos, what you’re having is lenders, owners [and] private equity investors saying, ‘We believe in the collateral, we believe in the product, and we don’t think they should slash the prices. We think these are the prices, and it’s just going to take longer to sell,’” he added.