Downtown Capital Partners, an alternative lender based in White Plains, New York, fired off a note to All Year Management and its founder, Yoel Goldman, last month: Cough up tens of millions of dollars of unpaid debt on a Gowanus development site or risk losing the property.
The note from Downtown Capital threatening to take over the vacant site is one of several signs of All Year’s broader financial problems.
The Brooklyn-based developer is also facing foreclosure on half of its massive Denizen luxury rental project at the site of the former Rheingold Brewery in Bushwick and was delisted from the Tel Aviv Stock Exchange in early January.
Representatives for All Year and Downtown Capital did not return requests for comment.
Downtown Capital is one of a growing number of nonbank lenders issuing warnings to struggling property owners. Others, including the Children’s Investment Fund, LoanCore and Eli Tabak’s Bluestone Group, have also sought to collect unpaid debts on high-interest loans.
Nonbank lenders, including private equity firms, real estate investment trusts and debt funds, swooped in after the 2008 financial crisis and provided large loans at leverage points that banks couldn’t touch. Many quickly became the go-to lenders for construction financing in New York and other big markets — at notably higher interest rates than what banks like Wells Fargo and JPMorgan charge.
But now a growing number of so-called hard-money lenders are facing a moment of reckoning with their troubled borrowers: Foreclose and take control of the assets, restructure the loans or find a new developer to finish the project.
Some industry experts say it’s not a surprise that the projects financed by alternative lenders are now struggling.
“There’s a reason that the regular banks don’t want to touch [many of these projects] with a 10-foot pole,” said Case Equity Partners’ Shlomo Chopp, who specializes in debt workouts.
At one point, during the market rebound from the last crisis, virtually every lender had been trying to get a piece of the billions of dollars pouring into New York City’s luxury condo market.
But few were thirstier than Children’s, whose lending arm is led by British financier Martin Fräss-Ehrfeld.
The London-based hedge fund provided a whopping $5.7 billion in debt on 11 real estate projects in New York between 2011 and 2018, according to an analysis by The Real Deal. Children’s is known for issuing huge loans with interest rates as high as 10 percent.
“They take more risk and they charge for that risk,” said David Eyzenberg, whose eponymous firm arranges financing for real estate projects around the country.
Children’s largest debt deal was a $1.25 billion construction loan to Ziel Feldman’s HFZ Capital in 2017 for its luxury condo and hotel project, the XI, along Manhattan’s High Line. It was an ambitious agreement for both parties. To acquire the land, HFZ reportedly paid $870 million — roughly $1,100 a square foot and one of the priciest land deals in city history.
The high acquisition cost and the hefty costs of financing left little room for error on profit margins.
But now the music has stopped.
Construction has come to a halt and the project is the center of lawsuits and liens, including one complaint by an affiliate of Children’s, which is seeking repayment of $160 million on two mezzanine loans it alleges are in default. Feldman and HFZ had personally guaranteed the loans, according to the lender’s lawsuit.
The lender is now looking to find a new developer to take over the project, sources previously told TRD. Crain’s, citing a letter sent to subcontractors, reported that Zeckendorf and Suffolk Construction were in talks to take over the project.
HFZ’s interim chief operating officer told Crain’s that HFZ was not talking with Zeckendorf and Suffolk about taking over the project. Representatives for Children’s and HFZ did not return requests for comment for this story.
If Children’s is unable to get a developer to take over the project soon and HFZ cannot bring the XI across the finish line, the lender could face losses.
Just weeks into the pandemic, some nonbank lenders were heading into crisis mode.
In late March, AG Mortgage Investment Trust faced margin calls from its own lenders, which claimed there was a sharp decline in the nonbank’s commercial mortgage-backed securities.
Others like San Francisco-based TPG RE Finance Trust, led by industry veteran Greta Guggenheim, faced demands for additional capital. The lender’s stock price fell from around $20 pre-pandemic to a low of $2.52 in April.
But then the Federal Reserve began pumping hundreds of billions of dollars into the broader marketplace by buying up mortgage-backed securities, and a handful of lenders were able to secure new funding from outside sources or sell off existing securities.
In the meantime, the initial panic had subsided.
AG Mortgage Investment Trust was able to reach an agreement with RBC to stop the margin calls.
TPG RE Finance, meanwhile, scored $225 million in new capital from Starwood Capital and was able to sell off nearly $1 billion in commercial real estate debt. With more cash on hand, its stock has risen back to about half of its pre-pandemic price, at $10.68 per share as of Jan. 12. A representative for the company declined to comment.
“There was distress for sure with margin calls,” said Brian Stoffers, CBRE’s global head of debt and structured finance. “But those were short-lived. And then we saw the nonbank lenders become quite active.”
The margin calls on nonbank lenders have dwindled since the spring. But some lenders still face the threat of financial losses, and in certain cases the value of the real estate may be less than the outstanding debt.
Debra Morgan of BlackEagle Real Estate Partners, which provides debt restructuring services, said that if lenders want to recover their initial investment, their best option is often to work with the existing borrower as opposed to bringing in a new developer.
“Ideally, working with [your] existing sponsor is the best recovery,” she said, “as long as your existing sponsor is a stand-up, good character dealing with a bad situation … Because didn’t you underwrite them and decide going in that they were creditworthy?”
Alternative lenders, however, can operate differently from banks. They are not subject to the same regulatory scrutiny, which would require the loans to be marked down or additional capital to be raised. Another advantage is that many nonbank lenders are also developers.
Firms like SL Green Realty, CIM Group and Mack Real Estate Group — which have all provided mezz loans on large New York projects — can complete the job themselves. In fact, these firms have all sought to foreclose on junior debt positions in distressed projects that would allow them to take over the properties.
Most banks are not thinking about overseeing development projects, according to workout experts. “For a bank, a successful outcome is a repayment, not a foreclosure,” Morgan noted.
To be sure, the distress in the marketplace is real. As of last November, more than 8 percent of all CMBS loans were delinquent by 30 days or more, up from 2.3 percent in the same period in 2019, according to Trepp.
The projected selloffs of assets and loans at huge discounts, however, have not yet materialized — although more could be on the way.
Josh Zegen, of the New York investment firm Madison Realty Capital, said many lenders have deferred loan payments instead of foreclosing on the assets. “There is a lot of hidden distress out there,” he said. “Borrowers are not being pushed to liquidate their properties, so you don’t have enough pressure to really know.”
Zegen, whose firm recently announced it closed a new $1 billion fund to provide financing to alternative lenders on top of originating and buying real estate loans, maintained that Madison Realty is not as highly leveraged as its peers.
Kingsley Greenland, CEO of the loan sale platform DebtX, said that while his company has seen an uptick in overall loan sales, many are trading at face value rather than at distressed pricing.
“The pricing [for loan sales] has been incredibly high, and that is because so much money was raised,” Greenland said. “The risk profile doesn’t match the oversupply of capital.”
For lenders like Children’s and Downtown Capital, this means the high-stakes game of making loans that banks wouldn’t touch in today’s market might not result in home runs, exactly. But it may not be the crushing loss that some are projecting, either.
“I am surprised by the depth of the nonbank market,” said Stoffers. “It was wounded [last spring], but it has quickly recovered from its injuries.”