How JPMorgan plans to rule CRE lending in New York

Lender on 1 Wall, Central Park Tower is aggressively going after market share

From left: Rendering of Central Park Tower, One Wall Street, Gary Barnett, Jamie Dimon and Harry Macklowe (Credit: Getty Images)
From left: Rendering of Central Park Tower, One Wall Street, Gary Barnett, Jamie Dimon and Harry Macklowe (Credit: Getty Images)

With its competitors wary of the high-stakes construction market, JPMorgan sees an opportunity to become the dominant commercial real estate lender in New York. And it plans write its own rules along the way.

In the last month, the banking giant agreed to loan Extell Development $900 million for the construction of New York’s priciest residential project ever, Central Park Tower. It also agreed to loan $850 million to Macklowe Properties for the residential conversion of One Wall Street.

The loans are a sign of confidence in the city’s luxury condo market. And observers say they represent some of the biggest opportunities available for a bank looking to show developers that it’s the city’s lending king.

“I think they’re looking to buy market share in New York City,” said Michael Korine, managing director of the finance and capital markets group at Berko & Associates, who added that the bank is throwing out all kinds of incentives such as covering closing costs and appraisal fees as it moves aggressively into the market.

“They want to become the predominant bank in real estate in New York,” he said.

JPMorgan, which declined to comment, became the top CMBS issuer in the U.S. last year, underwriting $12 billion worth of loans as the overall market dipped roughly 25 percent to $76 billion. Its ascenion ended a five-year run atop the table for Deutsche Bank, which has been battered by the weight of billions of dollars in fines, including a $7.2 billion settlement related to toxic mortgage-backed securities.

And Wells Fargo is facing its own troubles in the wake of a fake-account scandal and will have to face litigation in federal court over its RMBS business.

All this leaves a big void, industry insiders say, for an opportunistic bank to fill.

“The lender pool for large construction loans isn’t deep. It’s no secret there is an inefficiency in the space,” said Jordan Roeschlaub, of the debt and structured finance group at Newmark Knight Frank. “JPMorgan is taking advantage of that much like Deutsche Bank Special Situations Group did earlier in the cycle.”

By being the only game in town, JPMorgan can essentially write the rules. The terms the bank sets on these construction loans will influence the structure of the permanent mortgages used to refinance them, and ultimately the way those loans are securitized and sold off to the bond market, according to Roger Arnold, chief economist for the California-based money manager ALM Advisors.

Arnold said it’s exactly what Wells Fargo did with the RMBS market.

“Wells Fargo just kind of made the rules, and everyone else had to abide by them. If the bond buyers determine they want something with the Wells Fargo stamp on it, they have to abide by the rules created by Wells Fargo,” he said.

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“[JPMorgan is] going ahead and trying to create their own rules,” Arnold added. “And what’s the path of least resistance now? Why fight Wells Fargo on the residential side? Go fight them on the commercial mortgage side.”

The New York lending takeover

Harry Macklowe and Gary Barnett both struggled to land construction financing before JPMorgan came to the rescue. Macklowe and his partners, including Qatari royal Sheikh Hamad Bin Jassim Bin Jaber al-Thani had initially sought $1 billion in financing before opting to pump a further $200 million in equity into the project and settled for a smaller construction loan at $850 million. Barnett spent 18 months searching for construction financing — and had to lock down short-term financing from several lenders — before JPMorgan agreed to the $900 million loan for Central Park Tower.

JPMorgan’s loan on that project is part of an intricate capital stack, and works out to about $1,800 per square foot.

“It’s not without risk, but I’m sure that they got a great risk-return,” Ackman-Ziff principal Marc Warren said. “There are so few people that could ever consume that piece of paper.”

Extell, though, is gearing up to launch sales at the development in the wake of foreclosures next door at One57, a troubling turn that could signal difficulties ahead.

Sources told The Real Deal that the loan deal was led by Brian Baker, head of the real estate division of JPMorgan’s investment banking arm. It was reported last year that the bank is taking on riskier construction loans by shifting them from its commercial lending arm to the investment banking side.

That gives it room to take on non-bank lenders that many developers have turned to in order to get their luxury condos built, such as the Children’s Investment Fund. And JPMorgan has much more firepower than the Arkansas-based lender Bank of the Ozarks, which has dominated the condo construction space.

“They have a massive balance sheet,” Eyzenberg & Company founder David Eyzenberg said of JPMorgan. “There’s not an over-allocation to construction loans. Bank of Ozarks has a large portion of their balance sheet. JPMorgan does not have that issue.”

In the last year, JPMorgan also issued a $500 million loan in partnership with Oaktree Capital to HFZ Capital Group to fund the condo conversion of four rental properties. It also lent $505 million to the Witkoff Group for its Marriott Edition Hotel at 20 Times Square.

If the bank is hunting for opportunities, it will find no shortage of Manhattan condo projects still in the market for construction loans. At 125 Greenwich Street, Bizzi & Partners and Howard Lorber’s New Valley have been seeking $500 million in construction financing. They were in talks with Singapore’s United Overseas Bank, but it’s unclear if that loan has closed.  At 45 Broad Street, Robert Gladstone’s Madison Equities and partners are looking for a $287 million loan. And Michael Shvo has yet to land a construction loan for his conversion of the upper floors of the Crown Building, though the status of the project is unclear following the developer’s indictment on tax-evasion charges last year.

Considering all the work JPMorgan’s done to change its internal structure to find a way to make these big-ticket loans, it’s likely that there are more deals to come.

“This process looks like [the] traditional Jamie Dimon way of doing things,” ALM Advisors’ Arnold said. “They’re not going to do this as a standalone. Nobody’s going to figure out the process to do it just one time.”

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