There have undoubtedly been less fraught times to be a banker approving construction loans far north of $100 million.
But back in the summer of 2010, when Steven Kenny was promoted to head up commercial real estate banking for New York and New Jersey at Bank of America, the world of lending was even darker. That year, Kenny estimates he was still spending 50 percent of his time dealing with distressed loans, and the bank’s commercial lending unit, as one market participant put it, was “very much out of it.”
But in the two years since assuming the job, the soft-spoken Long Island native with rimless glasses and salt-and-pepper hair has hardly sat still.
Edward Minskoff
In recent months, he’s put BofA’s name behind two of the most high-profile speculative projects in the city: a $165 million loan at Edward Minskoff’s 51 Astor Place, a flashy 400,000-square-foot, 13-story office tower in the heart of Astor Place, and, perhaps most noteworthy, on a $700 million construction loan at Gary Barnett’s 90-story, under-construction condo-hotel One57. At the latter project, the bank signed on as the administrative agent — making it responsible for parceling out the funding after evaluating the project’s progress at each phase of development — and led the syndication on the loan.
And, Kenny — whose official title is commercial real estate banking region executive for New York and New Jersey — says he is not done lending yet.
“Make no mistake, we want to grow the balance sheet and we want to grow it smartly,” Kenny said in a rare sit-down interview. “The vision is relatively straightforward. First and foremost, we want to grow the book.”
Gary Barnett
But while BofA is “growing the book,” Dan Fasulo of Real Capital Analytics noted that “most other banks are playing it safe.” When they do issue construction loans, Fasulo and other industry experts said, they are often doing so at projects where tenants are already in place and a certain degree of cash flow is locked down for the long term.
Only a small group of banks have the capital and the risk appetite to do speculative lending in today’s environment, industry experts say.
In addition to BofA, that select club includes regional banks like New York Community Bancorp and M&T Bank, along with bigger industry players like JPMorgan Chase and — perhaps the most active participant — Wells Fargo, which The Real Deal profiled in last month’s issue.
But some argue that of all of those banks, BofA has the most to lose. That’s because its loans were issued at a time when other areas of the bank still remain in relative disarray. Indeed, along with Citigroup it is widely recognized to be facing the most challenging legacies from the subprime crisis.
BofA, said Paul Miller, an analyst at FBR Capital Markets & Co., an Arlington, Virginia–based investment bank, is a “dysfunctional bank,” trying to get out of several lines of business.
He noted that BofA was hit particularly hard in the residential market thanks to its ill-timed acquisition of mortgage giant Countrywide Financial, among other things. Unlike JPMorgan and Wells Fargo, the bank has been unable to issue a significant dividend or buy back stock in recent months. In 2011, the Federal Reserve rejected a modest dividend increase requested by CEO Brian Moynihan, a stinging embarrassment.
This year, the bank announced it would not seek to buy back stock or increase its dividend, focusing instead on building capital and absorbing mortgage-related losses. These efforts appeared to pay off in March when the bank passed a federal stress test, confirming that it had significantly improved its capital levels. But when the Fed considered a hypothetical worst-case scenario — that included a spike to 13 percent unemployment nationally — it found that BofA stood to lose the most through 2013 out of all 19 banks it analyzed. (Citigroup was second.)
In addition, Moody’s downgraded BofA in June, a move that could hit the bank with a reported $2.7 billion in extra borrowing costs and collateral requirements when it secures derivative positions — though Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley also saw their ratings cut.
BofA was the lead bank on One57’s $700 million syndicate loan.
In the game
Still, commercial lending remains a growth area for lenders. It hit $300 billion nationally at the end of 2010 and $314 billion at the end of 2011, Miller noted.
According to a BofA spokesperson, the bank issued $39 billion in loans nationally in 2009, $45 billion in 2010, $36.5 billion in 2011 and $8.9 billion through the first quarter of this year. New York numbers were not available, but the bank has been involved in a number of high-profile deals in the city in addition to One57 and 51 Astor Place during the past few years.
It was behind a $467 million loan to Google, which helped the tech firm purchase its office building 111 Eighth Avenue in December 2010 (the total price was about $1.7 billion, making it the largest deal of the year), along with loans at 510 Madison Avenue and at other buildings.
BofA CEO Brian Moynihan
In addition, the bank has financed “at least half-a-dozen ground-up multi-family construction transactions,” and has even financed two large land purchases, which some consider the most speculative type of deal. But Kenny would not release the location or any other specifics.
It’s also backed several residential term deals in Manhattan and Fairfield County, Conn., as well as office and retail deals. Those deals involve more traditional loans for preexisting assets, where all of the money is lent on Day One and interest begins accumulating immediately — instead of being doled out piecemeal as construction benchmarks are met in riskier speculative projects.
In the months ahead, Kenny said, the bank will continue to finance construction projects, but also intends to “originate and balance our portfolio” with a greater number of less risky term debt.
“If you look at our portfolio now, it’s a little inverted,” Kenny said. “We are a significant construction lender, and we’re going to continue to be a very active and big construction lender, but we will balance that more wisely with term debt. We will look to balance our portfolio with more bridge, opportunistic term debt and complement that with construction lending.”
That sort of risk analysis is arguably more essential than ever. And Kenny has plenty of experience in that arena.
111 Eighth Avenu
Forged by crisis
Kenny got a big break during the savings-and-loan crisis. The son of an elevator mechanic and a nurse, he grew up in Holtsville, Long Island, majored in accounting at SUNY Plattsburg, and after a stint doing auto finance, took a job reviewing the books at a small Brooklyn-based thrift bank in 1986.
One Monday morning, he arrived back from vacation to discover that all but one of the bank’s lending staff had been dismissed, and that the bank had been served a cease-and-desist order by the FDIC.
The bank needed somebody to produce a comprehensive report for regulators. Kenny, then 27, volunteered. It took him several months to analyze the bank’s 200 problem loans. But in the end, he made a presentation to the senior executives of the company that won him attention, and ensured he would remain in the center of the bank’s efforts to recover.
More importantly, he said, the experience taught him about risk.
With his boss, Kenny helped write new policies and recruit staff to make sure the bank performed more stringent due diligence on both clients and the projects they hoped to finance, he said.
In 1997, he left for Bank of New York to work as a lender, focusing mostly on income-producing commercial real estate assets from $2 to $60 million. There, he rose to become risk manager for all new deals.
In that job, as well as in his current one, the factors Kenny and his team consider before lending aren’t especially surprising: client selection, location, business plan and amount of cash or equity the borrower is putting into the deal.
But Kenny remembers that during the S&L crisis, “many of [those] things were not done.”
Some of the properties bankrolled by the bank’s lending officers, he suspected, had never been inspected. How else to explain assets located off major highways, but nowhere near an off-ramp? “If you couldn’t access it off of Hempstead Turnpike, how valuable was that?” Kenny said.
Those jobs, and another that followed at Fleet, drove home the importance of the fundamentals.
“[In lending,] the facts will generally lead you to the right decision,” he said. “So you have to do your due diligence, and that takes time.”
“There are times when all of us have made lending decisions and lent money where we thought we had all the facts — and we did have all the facts and we still made the wrong decision,” he added. “That’s part of the nature of lending money. It’s not a business where people bat a thousand and we all recognize that. But it goes back to the fundamentals: If you choose your client well, they will likely work with you when you’ve made that mistake.”
Working with the known
In keeping with that philosophy, most of the clients BofA is backing on speculative properties today are long-time clients with strong track records, Kenny noted.
That was certainly the case at Barnett’s One57, where public records show at least two loans issued on the project — a $536 million building loan to pay for construction, and a $163 million project loan to pay for other costs, such as purchasing development rights from neighboring properties. As the syndicate leader, BofA retained an undisclosed portion of the loans on its balance sheet, but also sold portions of the loan to the New York branch of Banco Santander, S.A.; Abu Dhabi International Bank; Capital One; and the Bank of Nova Scotia, according to news reports.
Kenny said the deal made sense once the loan terms were hammered out.
“We had been talking to the developer partner for a long period of time, trying to give them advice on how we thought the transaction could get done,” Kenny said. “We felt like we could continue to advise them on what structure could make sense in the marketplace, and mitigate the risk to ourselves by putting that structure in place.”
“I’m not surprised that people do view the transaction as risky,” he said, adding that, “What I always say to people is, ‘I know all of the details,’ and … we did our due diligence. We gathered the facts.”
In addition to closely evaluating the marketplace and the location, Kenny said, the bank was reassured by deals worked out between the borrowers and those committed to run the hotel portion of the development. Those factors and others reduced the risk that the project would fail to reach the levels needed for BofA to break even on the loan, and, in fact, left Kenny confident the bank would turn a healthy profit.
Kenny would not release details of the deal, and Extell declined interview requests.
But Gino Martocci, regional president for New York City and Long Island for M&T Bank, noted that the amount of equity lenders are requiring borrowers to put into speculative deals has increased significantly over the last five years. Back in 2006, the market would have supported a deal with 80 percent senior debt, 10 percent mezzanine and 10 percent equity. Today it is 35 to 45 percent equity.
In addition, personal guarantees — in which developers commit to finish the building on budget, on time, covering cost overruns and delays — are always required, Martocci said.
“The art of lending is gauging the character and financial wherewithal of the individual to actually put money in, if push comes to shove,” Martocci said. “When you have got a track record with these guys, and they have done it in the past, you can make a pretty safe bet they’re going to do it in the future.”
BofA issued a $165 million construction loan for 51 Astor Place.
At 51 Astor Place, Minskoff, who’s received significant loans from BofA over the last 25 years, chose to find the lead lender by putting it out to bid.
The outcome, said Minskoff, was “very, very close,” with more than one lender vying for the deal as the final hours ticked down.
“We knew it was close,” Kenny said. “We needed to make a final decision on one or two key points and [Minskoff] needed to make a final decision on key points. We were able to make the decisions that we felt were prudent and win the deal.”
The “biggest drama,” he added, “was not an individual transaction. But if you go back to that point in time, we were working simultaneously on three or four major transactions, and they were all coming to a head.”
BofA’s business drive might well pay off down the road.
Real Capital’s Fasulo noted that many of the banks currently playing it safe may “later come to regret it,” especially if interest rates rise, and their money is left tied in safer-term loan deals pegged to low-risk, low-interest loans, rather than speculative constructive deals that tend to carry far higher profit margins for the lenders. Anthony Polini, an analyst at Raymond James & Associates, downplayed the speculative risks faced by BofA.
“I would literally characterize the market as hot right now,” he said.
“They definitely pulled back extensively on construction lending for a while [after the 2008 financial crisis]. But I don’t think this represents Bank of America ‘jumping in’ as a speculative lender. I think it’s more that the market has bounced back and it’s actually attractive.
“Its capital position is much stronger than it was,” Polini said.