Developers become lenders

On its Web site, the marketing pitch for the Fitzgerald, a condo in Harlem, has a decidedly pre-recession ring: “Where the living is grand and the financing is easy.”

The mortgage terms sound that way, too: 5 percent down, with no worries about pesky approval requirements from a nitpicking bank. “The developer … will give you up to a 95 percent mortgage at favorable rates with reasonable conditions,” the Web site reads.

But the reason buyers don’t have to concern themselves with a bank is very much related to the recession.

The building began offering its own loans over the summer. The sponsor had started offering units for sale in 2007, but as the recession storm clouds gathered and banks tightened lending standards for prospective buyers, 257-117 Realty decided that offering financing itself was the best solution.

About eight of the 46 units for sale in the building have been sold with sponsor mortgages, and the sponsor expects to make more loans as 2010 unfolds.

“We decided to do that to facilitate sales and have buyers know for certain mortgage money is available to them,” said Bob Friedman, the head of 257-117 Realty. “We’re a lot more liberal than banks today.”

Friedman is one of a small cadre of residential developers in New York jumping into the mortgage business to unload apartments in the tight credit climate. These developers either have deep pockets or access to inexpensive credit that allows them to cut a loan (often a risky one) to a buyer and make a tidy return.

Samson Management, the sponsor for 905 West End Avenue, jumped into the lending game last year to reach the critical “15 percent sold” threshold the state attorney general requires for a conversion plan to be declared effective. Even now, after achieving that marker, Samson continues to offer mortgages on a case-by-case basis.

Mortgage broker Eric Appelbaum of Apple Mortgage Corp., meanwhile, has worked on a handful of deals in Manhattan in recent months, including two buildings in Chelsea, in which developers provided second mortgages for 10 to 20 percent of the units’ purchase price. The buyers made small down payments and took first mortgages for about 75 percent of the purchase price.

Many of the sponsor-financed deals in Manhattan that sources told The Real Deal about typically feature five- or seven-year loans and interest rates of around 5 percent, with balloon payments at the end of the term. However, the loans usually have 30-year amortization schedules. This particular loan structure makes loans risky and difficult to refinance (to facilitate refinancing, Friedman offers no prepayment penalty).

Crunching the numbers shows just how big a bill a buyer can face when this kind of sponsor loan comes due. For a $500,000 mortgage with a five-year term and a 30-year amortization schedule at a 5 percent interest rate, the buyer will have paid off roughly $40,000 of principal and will owe $459,000 on the loan, which must be refinanced or paid off (unless there is an option for a renewal in the agreement).

“It’s conceivable that these people could put money down and take seller financing and in five years not be able to refinance due to the value [of the apartment] or market conditions or collateral,” said Jeffrey Appel, vice president at Bank of America Home Loans. “Then it’s going to be difficult.”

While few residential developers have the financial muscle to make these kinds of loans, this is not the first downturn in which developers have offered them. In the early 1990s, sponsors including Friedman wielded this tool to get apartments sold.

The current downturn was, however, spurred by lax lending standards, so this new wave of deals for buyers who can’t get conventional loans with today’s tightened lending standards is raising red flags.

“Desperate times call for desperate measures,” said Richard Bouchner, owner of Bouchner & Co. Real Estate. “[Sponsors] do this because it’s a measure of last resort.”

Sources say these deals have many risks, from the pressure on buyers to refinance to potential foreclosure if the loans go bad. Unlike when a bank is the lender, these deals don’t usually escrow property taxes, so sponsors could get slammed with tax bills if the homeowner walks away.

Beyond these risks, sponsor-financing deals underscore the continued weakness of the market.

“It doesn’t really go to the heart of the matter, which is making sure buildings can ultimately get conventional financing,” said Appel.

Louise Phillips Forbes, executive vice president at Halstead Property who is marketing 905 West End Avenue, noted that sponsor financing can work well for buyers of multi-room homes who plan to live there for the long term.

And, at 905 West End Avenue, sponsor financing is evolving. Instead of 10 percent down, Samson has now increased the threshold to 25 to 30 percent, and is only open to mortgages for resident-owners, not investors.

Phillips Forbes said private banks have started extending mortgages to buyers interested in the $2 million-plus apartments in the building, and the sponsor is willing to step in for smaller loans that don’t interest these banks.

“He is basically picking up a portion of the market that private wealth won’t,” she said.

Friedman insisted he is thoroughly vetting buyers. He also boasts that there were no foreclosures on the 15 to 20 mortgages he extended to buyers of a West 22nd Street co-op in the early ’90s.

Yet even he acknowledged the danger. “I agree there is more risk, but we’re willing to take it,” he said.