Since the woes of the credit market accelerated last summer, multifamily and office building deals in Manhattan’s commercial market have come to a near standstill. But while Wall Street takes a breather from financing the city’s biggest deals, savings and loan banks and insurance companies that financed smaller deals in the past may be stepping up to the plate.
Large mortgage-backed securities from Wall Street are being shunned, at least for now. As a result, the city’s Harry Macklowe-size developers are saddled with debt and desperate to refinance nine-figure properties. And prospective buyers in the market are running into a severe lack of liquidity.
Some capital advisory experts The Real Deal spoke with said that one group in
particular, balance sheet lenders — a bank or fund that keeps all of its debt on its own books without packaging it into securities and selling it off, as the big Wall Street
lenders did — has begun to fill the gap
left by Wall Street’s secondary commercial mortgage-backed securities (CMBS)
market wizards.
“With a balance sheet lender, they keep your debt, so you just owe them money,” explained one commercial mortgage broker. “And if you don’t pay them, they just come take your real estate.”
Balance sheet lenders, also called portfolio lenders, include local savings and loan banks as well as life insurance companies. In New York, players include Capital One Bank (formerly North Fork Bank), Bank of Smithtown, New York Community Bank, Signature Bank, MetLife, Prudential and Royal Bank of Scotland.
Michael Campbell, a partner at capital advisory firm Carlton Advisory Services, said he is closing a mortgage deal for a Manhattan office building where a balance-sheet lender will provide about two-thirds of the equity for a $300 million purchase. Campbell did not wish to identify the property.
Other larger deals are also being financed by balance-sheet lenders, according to the advisory firms contacted by The Real Deal,
although none would disclose the lenders or the properties involved until the
deals closed.
It should be noted that the investment sales market’s smaller deals remain fairly unaffected by the CMBS drought. Purchases of small to medium-size properties, ranging up to $50 million for commercial buildings and up to $100 million for multifamily residential buildings, have always been financed by balance-sheet lenders, said Paul Massey, CEO of Massey Knakal Realty.
Balance sheet lending is nothing new — it was the norm before mortgage-backed securitized loans began driving Manhattan’s commercial market with eight- and nine-figure loans.
“The balance sheet lenders have always been there; they’re just taking advantage of being the only ones available now,” Campbell said.
Originations of CMBS loans nationwide are expected to fall dramatically throughout 2008, according to the trade publication Commercial Mortgage Alert. And mortgage brokers here said such loans have come to a flat halt in New York City. The biggest loans written for commercial investments in New York last year came from CMBS lenders, including Goldman Sachs, Bank of America, Lehman Brothers and Morgan Stanley.
For big loan borrowers, the exclusive niche balance sheet lenders now enjoy adds up to higher costs in the near term, as portfolio lenders no longer facing competition from big CMBS lenders can charge higher rates than they have in the past. They can also be more selective in their investments.
Campbell said that because balance sheet lenders these days typically only provide an average of around 65 percent of the equity in a purchase — compared to the average 85 percent CMBS lenders would have given a year ago — building purchases virtually always require a mezzanine loan as well, further adding to the cost.
Wall Street lenders would provide a higher percentage of financing, because they were willing to accept the projected value of a property if, for example, a landlord planned to raise rents on a multifamily property.
“Wall Street was telling borrowers, ‘If there is aggressive management, and you’re going to roll your sleeves up and make more profit, we’ll lend to you based on forecast,” said Matt Albano, a senior associate at GCP Capital Group.
“[With] savings and loan banks, it’s old-school lending. It looks like a Polaroid: You have this much money and expect this much debt; this is what we’re giving you,” Albano said. “So now, borrowers have to bring a lot more cash to the table.”
In addition to this shift in who provides the equity for big commercial deals, a change in how the loans are structured is now pending.
Since balance sheet lenders simply do not have the capital for the $500 million loans made by Wall Street lenders like Morgan Stanley or Bank of America last spring, the biggest loans structured for Manhattan commercial building purchases are now coming as amalgamations of equity from several different lenders.
Although this means big deals can continue to happen in a world without CMBS lenders, they are — and will continue to be — happening at a much slower pace.
Down the road, a borrower or its capital advisory firm may find itself courting several banks or insurance companies in order to attain the volume of financing it could have achieved with one big CMBS loan.
“Most of the deals we are doing right now involve
syndicating loans from several balance-sheet lenders — $100 million from one, $75 million from another, $50
million from two others, etc. — to make a larger mortgage,” said a member of a capital advisory firm who wished
to remain anonymous. “Now that every deal costs a
couple hundred million bucks, the deals are just taking so much longer.”