March 29, 2024

New York Developers Find Construction Loans Easier to Get

While lending for multifamily rental buildings, with its steady income flow, has been popular for the last 12 to 18 months, a growing number of lenders are now looking at condominium projects, hotel developments and certain office and retail buildings.

“There is plenty of debt capital available and as we bid on transactions there is a lot more competition than there was 12 months ago, and certainly more than 24 months ago,” said Bill Cotter, the northeast division manager at Wells Fargo Commercial Real Estate.

As the real estate market continues its slow recovery, land prices have been rising, enabling borrowers to pay back their construction loans or refinance. That has pushed down the default rate and spurred more lenders to make new loans. In the third quarter of 2012, the most recent number available, the default rate on construction loans was 9.5 percent, the lowest it has been since the end of 2008, according to Chandan Economics, a research firm.

Construction loan commitments are trending up, the firm found. Because developers draw on construction loans as building progresses, they are not recorded until the funds are deployed, so the increase in commitments is anecdotal. “We know they’re up, but we can’t say exactly how much,” said Sam Chandan, president and chief economist of Chandan Economics.

With default rates declining and the market improving, competition among lenders to make construction loans is intensifying. In New York City, more projects are being financed, and for the strongest borrowers, the equity requirements and other terms are softening. Helping to drive the trend is the limited amount of construction in recent years, which has led lenders to believe there is sufficient demand for more building. Construction loans also offer more yield than other loan types and so are appealing in a low-interest-rate environment.

Lenders generally see construction loans as riskier than other loan types, in large part because if a project falls apart, the lender is left with a partly finished building that does not generate revenue. To make up for some of this risk, lenders typically charge borrowers higher rates.

“Interest rates are generally so low that lenders are focused on how they can improve yields, and construction lending usually has higher yields, so it is a way to improve their return on funds deployed,” said Andrew A. Lance, a partner at the law firm Gibson, Dunn Crutcher.

With more lenders looking to make construction loans, the types of properties they are willing to finance have expanded. Hotel development, for example, is typically considered a riskier property type but is nonetheless being financed at a fast clip.

Abraham Hidary, the president of Hidrock Realty, for example, is negotiating with lenders for loans to build a 317-room hotel at 133 Greenwich Street and a 200-room hotel near Rockefeller Center. The banks are offering to finance 60 to 65 percent of the cost of the projects, and are requiring that he personally guarantee 15 to 20 percent of the loan, he said, with interest rates that range from 3.25 to 3.75 percent.

In late 2010 and 2011, Mr. Hidary was negotiating the loans for two other hotels that he is developing — a 173-room Springhill Suites and a 168-room Courtyard by Marriott, both in Midtown South. At that time, banks were willing to lend only 55 percent of the cost of the projects and were requiring that he personally guarantee as much as 30 percent of the loans. The interest rates then ranged from 3.75 to 4.5 percent, he said.

“It has definitely helped us that there is more competition among lenders,” Mr. Hidary said.

In recent months, banks have also begun looking at financing condominium developments. That is partly because many of the projects that are looking for financing are new, rather than precrash developments that have been dusted off and repurposed. “Pre-2008 we were doing a lot of condos, and land prices were elevated and the cost of construction to build them was high,” said Abraham Bergman, a managing partner and co-founder at Eastern Union Funding, a mortgage broker. “But when you look at a new project today, the land has been recently purchased and it is being viewed in today’s dollars so it makes a lot more sense.”

Article source: http://www.nytimes.com/2013/02/13/realestate/commercial/new-york-developers-find-loans-easier-to-get.html?partner=rss&emc=rss

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