Lenders now hinge decisions on proof of developers’ wealth

In the easy lending climate of recent years, it seemed almost anyone, no matter how much money they had in their bank account, could become a real estate developer. But in the post-boom world, lenders are hinging much of their decision-making on something that was previously off-limits: a developer’s personal wealth.

Real estate financial experts say sponsors now must display evidence of tremendous riches to qualify for a loan, as lenders examine everything from borrowers’ cars to their vacation homes and their kids’ college tuitions. As a result, real estate development has transformed from a great equalizer, an industry offering opportunities for a wide range of entrepreneurs, to the exclusive province of the rich and famous.

“This is the wrong time to start out with nothing,” said Gregg Winter, principal of W Financial, a direct private lender, and commercial mortgage broker Winter & Co.

These days, lenders are willing to go to surprising lengths to ensure they’re dealing with extremely well-capitalized individuals, Winter said. They now perform “deep background checks” that scrutinize not only the buyer’s real estate experience and portfolio but personal assets. “They’re looking much more carefully to see that the developer or owner has enough liquidity outside of his real estate life to handle difficulties,” Winter said. “Lenders are more attentive to that than ever.”

That means the borrower must produce personal financial statements and proof of investments and assets, from retirement accounts to vacation homes. And those documents are then double-checked against public records.

“If you own a summer house with no mortgage and it’s an asset, [lenders] absolutely care about that,” said Jeff Bernstein, a partner at real estate investment banking firm Guild Partners.

He added: “Banks always had personal financial statement requirements. But these criteria are being looked at much more closely and weighted much more heavily.”

Lenders are even evaluating a borrower’s car and jewelry, looking for evidence of deep, long-standing wealth, experts said.

“If you’re a real estate lender, you’re going to notice whether your client has a Bentley or a Ferrari,” Winter said. “Nothing’s off limits.”

This mentality represents a vast change from recent years, in part because recourse loans, in which the borrower can be held personally responsible for repayment, are increasingly common these days.

When credit was easy and the real estate market was on its speedy trajectory upward, rookie developers regularly emerged from other fields, drawn by the notion that “anybody who could fog up a mirror could borrow money,” said Frank Sullivan, a principal at real estate consultancy Gallin Glick Sullivan O’Keefe.

At the time, it also was possible for developers to get up to 95 percent financing. But with institutional capital and mezzanine lending now largely at a standstill, “you’re lucky to get 40 to 50 percent,” said Robert Knakal, chairman of Massey Knakal Realty Services.

Two years ago, he said, a developer could probably have done a $20 million deal with only about $400,000 of personal equity. Today that same developer would likely be asked to put up around $8 million.

Not only is more equity required, but full or partial personal guarantees are becoming the norm, said Knakal.

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“The banks want to know that if the property is not successful, they’re secured by the personal assets of the borrower,” he said. “There are some non-recourse loans out there, but they’re more difficult to get.”

The new requirements are a direct response to what lenders view as mistakes of the boom. Developers all over the country secured non-recourse loans at the height of the market — and they now have the option of simply handing troubled properties back to the bank.

In March, for example, Crain’s reported that an office building at 475 Fifth Avenue, owned by the Moinian Group and financial partner Westbrook Partners, would be returned to its lender, Barclays Capital, after the owners defaulted on loans.

Banks want to avoid such an outcome this time around by ensuring not only that the borrower has skin in the game but also can pony up more cash if necessary.

“If something gets screwed up, they want to know this guy has $10 million in the bank that they can go after,” said Guild Partners’ Bernstein. “They want to know every nickel this guy has isn’t in this, that he can have some ability to carry this through some chop.”

He added that some banks even demand that a borrower do all of his personal banking with them, including checking accounts and mutual funds.

And lenders aren’t easily fooled. Homes, cars and other outward trappings of wealth only work in a developer’s favor if the borrower can truly afford them and is not overleveraged, Winter said.

“You don’t want to see someone with too many obligations that are expensive to maintain,” said Winter, who recently made a loan to a borrower with holdings in the diamond industry after carefully assessing the prospects of a De Beers mine in South Africa.

“The college tuition, the Bentley, the Ferrari, the diamond business, none of those are going to create a ‘yes’ or ‘no’ on their own,” Winter said. “You’re going to look at them in context. The savvier the lender is at looking at the big picture, the more likely he is to get the loan repaid.”

In fact, some say lenders are now more focused on the qualifications of the sponsor than on the merits of the real estate deal in question.

“It’s always the case in a down market — sponsorship is prioritized,” noted Keith Braddish, an executive vice president at CB Richard Ellis Capital Markets. “[Lenders] want to align themselves with borrowers who are financially well-heeled, the guys who are going to walk the walk when the market gets tough.”

As a result of these factors, “we’ve had a very tangible shift in the profile of the buyers,” Knakal said. “The buyers are high networth individuals and/or old-line families who have been around for decades.”

That category includes players like the Muss Development Organization and the LeFrak family, who are rumored to be in the process of banking land in the New York area, as well as the city’s many under-the-radar “real estate families” who own large amounts of property and are very well-capitalized, Bernstein said.

“There are dozens of those guys whose names you wouldn’t have heard of,” he said. “They’re conservative and they have substantial assets, and they can afford to act during tougher times.”