Developer Ron Moelis wants to finance an apartment building in Williamsburg, and he said the process has gotten tougher in the new credit environment.
His latest project may require more groundwork, so to speak, in the packaging of the loan that will make the building a reality. It’s called pre-syndication, and it’s now part of the conversation in nearly every deal for new construction.
“I’m not sure they’ll require it,” said Moelis, the chief executive officer of L & M Development Partners, discussing the lender requirements for the $60 million project. “The ones over $50 million I think the banks on the large deals are looking to syndicate.”
Although he is still in discussions with several banks, two have come back to him saying that another financial institution would need to be lined up as a partner before they would commit to the deal. And Moelis has plenty of company regarding loan syndication in nascent deals.
Loan syndication, or the practice of cutting up big loans into smaller pieces, is nothing new, but the process has changed as the securitization market has dried up and the credit crunch has spooked lenders.
As recently as a year ago, lenders were less concerned about spreading out the risk in order to get a deal done, Josh Zegen, co-founder of Madison Realty Capital, explained.
A single bank “would commit to take down the whole loan and worry about the syndication risk after the fact,” said Zegen. Today, “when a bank actually commits to a deal, it is committing subject to syndication.”
Richard Bassuk, president of the Singer and Bassuk Organization, said that pre-syndication is an issue he deals with every day.
“In virtually every single deal, banks are not willing to put themselves in a position where after they agreed to make a loan, they bear the risk of underwriting the loan,” Bassuk said. “The banks right up front say, ‘Look, what we’re going to do is, we’re willing to come in, we’re willing to work with you, we’re willing to help bring in other banks, but if we fail to do that, the loan won’t close.'”
Securitization of loans has dropped off precipitously, market participants say.
“That market is dead,” Bassuk said.
Lenders don’t want to get stuck with large, risky loans, said Steven Kohn, president of Cushman & Wakefield Sonnenblick Goldman. Most lenders don’t want to have loans bigger than $50 million on their balance sheet, he said.
“There’s just more concern over holding loans on sheet,” Kohn said. “Lenders would rather do more smaller loans than fewer larger loans. It just reduces their concentration of risk in one asset or market.”
Kohn said that while he didn’t have any numbers on how many deals were being done this way in New York City, it is substantial.
“Most large loans today are being syndicated — it’s sort of a given,” he said.
The most active players in syndication are foreign banks, offshore banks, large banks and insurance companies. Kohn said that insurers such as Met Life, New York Life, Western Mutual, Group Pacific Life and John Hancock were also involved in syndicated deals.
A decision to use a loan syndicate has more to do with the size of the loan than type of project. But they are more common with construction loans, which are generally more risky than permanent or acquisition financing and, as a result, provide more of a reason to spread the risk around. That very risk also makes it more challenging to put a syndicate in place, especially on a large construction project.
Moelis, for example, said he’s had “a couple” of deals under $50 million that closed in the past few months that did not require loan syndication, but that banks are increasingly looking to syndicate the larger new construction deals. He declined to go into more detail because the financing on his Williamsburg project is not yet secured.
Syndicates come together through brokers, banks and borrowers, but the process can be cumbersome.
Getting lenders together to syndicate a large construction loan before it closes can take between eight to 12 months, about twice as long as it would have taken to get financing without pre-syndication a year ago, Bassuk said.
“Today I would probably have to get several banks — all of whom you’d have to have in place, all whom you’d have to negotiate the terms, and the terms are going to be consistent from one bank to the next,” Bassuk said. “The process is very much slowed down, because you have to go to multiple sources in order to have one loan.”
Permanent financing and acquisition loans can take about 50 percent longer than they did a year ago to put together, Bassuk said.
Zegen noted, “It’s getting done in any which way it can. Traditionally it would be a bank would commit to that deal and then ultimately bring together their syndicate, but you can’t really do that in today’s market.”
Although lenders tend to stick with partners with whom they’ve done other deals, clashes can still occur due to differences in corporate cultures.
“The real pitfall is when you put together these deals, every one of these banks has their own way that they like things done,” said Zegen. “It’s subject to every bank’s credit officer and their timeframe. Some are in a rush, some aren’t.”
Jere Lucey, a managing director at the real estate investment banking group at Jones Lang LaSalle, said, “You’ve got to get numerous lenders to all agree. Everyone has to agree on the same leverage, the same price. There are numerous sticking points.”
Kohn said that when his firm is hired to raise capital for a project, they try hard to match parties.
“We will [partner lenders] as part of our effort to try to put lenders together that we think will work well together. Lenders themselves, though, will do it as well, as they know who they’ve co-lended with before and feel comfortable with,” Kohn said.
One area that has to be worked out in advance is whether or not the loan will be divided up on a pari passu basis, meaning that all investors get paid the same rate at the same time. Another option is to have senior and subordinate pieces of the loan, or tranches. Senior debt, often the priciest, gets paid first. Most syndicated deals tend to be pari passu, Kohn said.
Being the lead banker on a syndicated deal can add a small benefit. For example, if a banker agrees to a loan at 200 basis points over the London Interbank Offered Rate and then sells it at 175 over LIBOR, it collects a small profit, Kohn said.
Additionally, on a construction loan, where servicing the loan is more work than permanent financing, the lead bank will collect more.
The trend appears likely to continue in the immediate future, until the securitization market comes back.
“Basically, this is a way for borrowers to get a loan done,” Zegen said.