Post-crash, community banks remain a force in multi-family financing

Even as national banks and insurance firms reenter the lending arena, community banks are hanging onto the foothold they established in the multi-family market when larger institutions backed away during the financial crisis.

Local banks such as New Jersey–based Investors Bank and New York Community Bank are doing record volumes of lending, spurred on by the strength of New York’s multi-family market, sources told The Real Deal. For the most part, their staying power is thanks to the relationships they built during the dark days of the financial crisis and their willingness to both invest in up-and-coming areas and create customized loans for tricky deals.

“These days, a good deal with upside is very hard to come by,” said Adam Mermelstein, a partner at Treetop Development, which owns various multi-family portfolios in New York and New Jersey. “The deals we come by that are good and have upside oftentimes also have hair on them. The local banks are able — and willing — to work through that and come up with solutions. A lot of times, the larger players have much more of a rigid checklist that they’re not willing to work through.”

In June 2012, Investors Bank produced its strongest loan volume in its history, said Kevin Cummings, the institution’s CEO.

The company — which established a real estate lending office in New York in January 2009 —has a total portfolio of commercial real estate loans valued at $3 billion, up from just $700 million in 2008.

Meanwhile, New York Community Bank, a rival, is active in the space. According to the bank’s most recent Security and Exchange Commission filings, it had $18.2 billion in multi-family loans on its books in June 2012. The bank did not respond to a request for comment. (note: correction appended)

According to data provided to TRD by research firm Real Capital Analytics, regional banks have been growing their portfolios since 2007.

Their market share of New York City commercial property loans by dollar value was just 6 percent in 2007, but has now reached 19 percent, the data shows. By comparison, national banks’ market share has remained consistent at 23 to 24 percent after dipping to 10 percent during the financial crisis.

The RCA data also shows that, by loan count, regional banks have 48 percent of the city’s market share, up from 35 percent in 2007. By contrast, national banks’ market share on a loan count basis has decreased to 13 percent from 24 percent in 2007.

As a group, community banks have significant capital reserves, making them a reliable source of financing in a market characterized by uncertainty, said Joseph Orefice, senior vice president and head of commercial real estate lending at Investors Bank.

“All the big banks ran for the hills in 2009, and the community banks were the only ones left. To me, that was the tipping point,” he said.

Understanding the market

Community banks have always played a larger role in the multifamily sector in New York than in other U.S. cities because they understand the financial realities of the market here well. New York rent regulations can also be difficult for national lenders to comprehend, said Bob Knakal, a founder of commercial brokerage Massey Knakal Realty Services.

“It can take a while for out-of-town banks to get their arms around [them],” he said.

Still, bigger banks such as Wells Fargo and JPMorgan Chase started lending in the multi-family sector again last year, Mermelstein noted. What’s more, Chase is being even more aggressive now than it was before the collapse of Lehman Brothers, Knakal said.

Part of that is because in 2008 Chase bought Washington Mutual, which, until the crash, was one of the most active real estate lenders in the area.

“They’re being as aggressive [as Washington Mutual was], but still maintaining a smarter risk-reward ratio than WaMu,” he said.

Jason Pendergist, the east regional head of commercial term lending at Chase, said the New York City market has been a huge focus for expansion for the bank in recent months. The commercial-term lending team has tripled its staff in the last 18 months and, leveraging WaMu’s platform, has increased its loan production this year by 100 percent, he said.

The bank is primarily seeking opportunities to invest in stabilized cash-flow assets, which do not require specially constructed deals. And Pendergist said Chase is happy to allow regional lenders to dominate in customized deal-making.

“[The community banks] are really good at the unique deals,” Pendergist said. “They can get a lot more hands-on than our model allows. Our strength is not in customizing deals.

Contrary to Mermelstein’s assertion that deals are getting hairier, Pendergist said he sees the opposite trend.

“Prior to the recession, every deal required a little structure,” he said. “Now it feels as though there are an infinite number of [stabilized cash-flow deals to choose from]. Value-added [deals] have become a much smaller piece of the equation.”

While community banks’ rates can often be slightly higher than those of larger institutional lenders — usually no more than 0.25 percent — the value of the relationship with their lender often outweighs the difference in rates for borrowers, Orefice said.

“[Larger banks have] got to focus on relationships now, and the community banks just do that a heck of a lot better. This is our backyard,” he said. “A guy with a couple of million dollars in our bank is somebody we pay a lot of attention to. I’m 100 percent sure that that level of attention does not happen at the bigger banks.

“They’ll not even know your name for that balance.”

Mermelstein agreed: “I know the chief lending officer and I know the president [of Signature Bank],” he said. “I know that I can call any of these guys and say that I need something and, as long as it’s reasonable, they’re going to do their best to work something out for me. One of the only competitive advantages I have over the next guy is that I’m able to say I can close a deal in six days. That’s because of the relationship I have with my bank.”

Roni Abudi, a managing director at commercial brokerage GFI Realty Services, said he hasn’t been that surprised at community banks’ post-recession staying power.

“I’m getting a lot of calls from other banks right now because everyone’s trying to get a piece of the cake, but when you already have a relationship with one bank, why should you start all over again?” he told TRD.

Abudi, who has dealt mostly with Investors since the bank entered the New York market, said he sticks with the lender because he now has personal relationships with decision-makers at the bank.

“If I have an issue with a loan, I can call someone and get an answer right away,” he said. “I don’t have to wait for a committee of people to sit down and make a decision.”

Customized agreements

In one of its largest transactions this year, Investors provided $42 million in financing to the Kushner Companies, which purchased two multi-family properties in Hasbrouck Heights, N.J. Together, the properties have 338 units. Kushner did not respond to a request for comment.

Meanwhile, earlier this year, Treetop closed on a portfolio of 17 upper Manhattan buildings in a deal valued at $52 million. Mermelstein said he secured a customized loan from community bank Signature for the transaction. The nine-year deal had three different rates starting with 3.25 percent for the first three years and increasing by one percentage point for the second and third three-year terms.

“We look at it as a six-year deal with a three- year insurance policy,” Mermelstein said, indicating that the company will likely refinance the property before the nine years are up.

This customized agreement is typical of community banks, which typically lend only for fixed periods. On the flip side, community banks will generally lend only for a period of up to 10 years, while larger banks will offer a hold of up to 30 years.

However, the willingness of community lenders to work around the quirks of a specific deal and even invest in more untraditional and upcoming locations can be appealing and engender future loyalty, sources said.

“Signature Bank is not a bank known to lend in urban New Jersey, such as Newark and East Orange, but they go outside of their box and have lent to me [there]. I’m probably the only borrower that they have in East Orange. I don’t think Chase would be willing to go out of their comfort zone like that in order to please a client,” Mermelstein said.