March 26, 2023

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.”

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DealBook: Earnings at Wells Fargo Jump 22%

A branch of Wells Fargo in New York.Shannon Stapleton/ReutersA branch of Wells Fargo in New York.

2:15 p.m. | Updated

At the height of the financial crisis, the mortgage business was a millstone for the banking industry. Today, it is a profit center.

Wells Fargo on Friday reported $4.9 billion of profit in the third quarter, a 22 percent jump largely led by a booming mortgage business.

The San Francisco-based bank continues to churn out record profits, with 11 straight quarters of net income gains. The results of 88 cents a share narrowly beat the estimates of analysts polled by Thomson Reuters, who forecast earnings of 87 cents a share.

The bank increased revenue as well, sidestepping a common sore spot that has plagued most all of the nation’s biggest banks. Wells Fargo recorded $21.2 billion in revenue, which surpassed the $19.6 billion figure from a year earlier but was slightly below expectations.

The bank’s lending division drove the growth, as consumers refinanced their mortgages amid record low interest rates. Wells Fargo, the nation’s largest mortgage lender, snared $188 billion in home mortgage applications, an 11 percent jump from the third quarter of 2011.

But the bank’s chief financial officer, Tim Sloan, underscored that “it’s more than just the mortgage business.”

The strong results, he noted, were spread across the bank. The wealth management unit improved. So did the sales and trading business.

“We just have the great benefit of this diversified model,” Mr. Sloan said in an interview.

But investors weren’t fully impressed. By mid-afternoon, the bank’s shares were down more than 3 percent, reflecting concerns about net interest margin, an important measure of the bank’s investment moves. The metric declined in part because the bank’s own investments suffered from the low-interest rate environment.

Wells Fargo, along with JPMorgan Chase, kicked off bank earnings season on Friday. The nation’s other big banks, including Goldman Sachs and Bank of America, will report their results next week.

The Wells Fargo story line – that a deep lending effort breeds success – is rooted in broad federal stimulus efforts that have propped up the mortgage industry. A Treasury Department initiative is spurring refinancing activity. And the Federal Reserve has introduced a long-term plan to buy large batches of mortgage-backed bonds, which should help keep rates low.

Wells Fargo, more than five years after the mortgage crisis, has seized the opportunity. The bank now creates roughly a third of all mortgages in the country. Total outstanding loans jumped slightly in the third quarter to $783 billion while the bank’s home mortgage originations soared 56 percent to $139 billion.

The demand for credit came largely from refinancing, which accounted for 72 percent of all home loan applications. The Treasury program produced 14 percent of the mortgage volume.

Like other big banks, Wells Fargo makes home loans before turning around to sell most of them to investors after attaching a government guarantee. Those gains totaled $2.61 billion in the third quarter, up 225 percent from $803 million in the third quarter of last year.

The refinancing boom is fueling profits. Wells Fargo’s profit in the community banking division, which includes Wells Fargo’s retail branches and mortgage business, climbed 18 percent to $2.7 billion.

Despite the gains, the mortgage crisis continues to haunt Wells Fargo. The bank this summer agreed to pay $175 million to settle Justice Department accusations that it discriminated against certain minority homeowners from 2004 to 2009. Wells Fargo, which denied the charges, was also sued this week by federal prosecutors in New York, who said the bank defrauded the government and lied about the quality of the mortgages it handled under a federal housing program.

Still, the legal troubles will barely nick the bank’s bottom line.

Like JPMorgan, Wells is experiencing growth beyond mortgages. Wholesale banking, which includes the sales and trading business along with the corporate lending division, increased its profit by 11 percent to $1.9 billion. While the unit operates in the shadow of the Wall Street investment banks, Wells Fargo has gradually extended its reach in that area.

“There are a lot of underlying positives that will continue to drive the earnings of this company,” said Ed Najarian, a senior bank analyst at ISI, a New York research firm.

Peter Eavis contributed reporting.

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