As a developer with no experience about to finish his first project, Michael Kessner is a fortunate man.
Kessner, 28, is nearing completion on construction of a condo development, Casa Brava, at 232 East 118th Street in East Harlem. The building is rising thanks in part to bank financing of 70 percent of the cost of the project — about standard for a condo in today’s market, but especially good for a first-time developer.
A swelling number of condo units on the market and a slowing pace of sales mean cash for new projects isn’t flowing as freely as it was a year or two ago.
Lenders are scrutinizing more closely the break-even level on loans and making sure construction pricing is firm. Whereas during the recent boom lenders were prepared to finance up to 80 percent of developments, these days that number is closer to 70 percent.
Even so, veteran developers typically won’t have a problem getting financing for a deal. A successful track record means they might not even need to bring any equity into a development project. Less experienced builders, like Kessner, have to jump through more hoops, bring more money to the table or, sometimes, give up.
“They [lenders] want to have a tightly underwritten project, which frankly is what we’ve done with our clients anyway,” said Richard Bassuk, president of the Singer & Bassuk Organization, a firm that arranges financing.
In a 30-day period, Bassuk says he has assembled about $1 billion in financing for new buildings.
These include a $460 million loan for the Edge, a Williamsburg project with 557 condos and 347 affordable rental units by Douglaston Development, and a $305 million loan for 123 Washington Street, a mixed-used development with 227 condos and 217 hotel rooms by the Moinian Group.
Real estate professionals also speculate that many lenders now know their comfort zones for condo financing based on earlier experiences. Before making new investments, they are waiting to see how their current projects pan out.
In order to secure the loan for the 12-unit Casa Brava, which was designed by architect Peter Gluck, Kessner had to find a guarantor and put up about 25 percent of the cost, about $1 million, himself. The bank then provided its 70 percent. Kessner secured mezzanine financing for the rest from family members working in the real estate business.
“I was hoping for a little more,” said Kessner, who added he’s learned a lot about the business from working with his family on various buildings over the years. “My bank expected me to finance a good portion myself. If you go back a year to two years ago, banks were definitely willing to lend more.”
And just because he has family in real estate — they own and operate buildings in the city — doesn’t mean he got special treatment. His mezzanine loan is at market rate.
“I do owe the money back. I am paying interest on the money,” Kessner said. “They want me to learn the right way.”
The Casa includes lofts, one-bedroom apartments and two duplexes ranging in price from $465,000 to $695,000.
Gregg Winter, chief executive officer of Winter & Co. Commercial Real Estate Finance, says lenders continue to be interested in New York City condo developments that are well conceived. But like Bassuk, he’s seen increased scrutiny on deals.
“Both senior and subordinate lenders are more focused on the quality of sponsorship, the guarantees, the location and the business plan for sales and marketing,” Winter said.
While the pace of condo sales has slowed, Bassuk isn’t seeing signs of trouble yet.
“The velocity of sales isn’t what it was 18 months ago,” Bassuk said. “Now it’s less, but it’s very respectable and highly reasonable from a developer’s point of view.”
The challenge developers continue to face from increasing land and construction costs is also a concern for lenders.
“To make the margin he made 12 or 24 months ago, [a developer] needs to have a higher sales price to come out in the same place profit-wise,” Bassuk said. “No one that I am working with is assuming wild increases, but they are assuming the market has increased 5 to 10 percent depending on location.”
The wild card for developers and lenders alike is changes to the 421-a tax break program that encouraged developers to build new projects, provided 20 percent of units within Manhattan between 14th and 96th streets were set aside for affordable housing.
Albany is still debating changes to the tax abatement law, but new rules that extend the exclusion zones could be in effect by the end of the year. A new zone could include nearly all of Manhattan except a northern stretch of the borough; large parts of Brooklyn including Brooklyn Heights, Park Slope and Williamsburg; and the East River waterfront in Queens.
The city is also changing the plan to require that the affordable housing units be in the same location as the market-rate units — a change that some developers may not welcome.
All this could spur some condo development to get started before the new rules go into effect.
Like others in the real estate industry, Bassuk said he worries that the new rules could slow development.
But Winter is less concerned. It’s “very, very unlikely” that new development in the city will grind to a halt, he said.
“The best-of-breed projects will continue to be designed and built and sold successfully. The mediocre and also-ran projects will fail miserably. The 421-a tax abatement program expiration is only one of many crucial elements of a successful project,” Winter said.
“The meaningful developers with well-located, compellingly designed projects will continue to do well,” he added. “The wannabes and marginal developers will lose their shirts.”