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The Subprime mortgage mess and the resulting credit crunch have acted as major stimulants to our commercial mortgage advisory business. Established owners and developers who previously would have picked up the phone and called one or two friendly bankers are now finding that the landscape has changed, and in order to get things done effectively in a banking environment still reeling from the Subprime mess, they need an experienced and capable jungle guide.

What are some of the biggest differences in today’s lending landscape? Back in early 2007 competition among lenders for development deals was so intense that the focus on Borrower experience and expertise, net worth, liquidity, and track record was diminished, and it was possible for “rookie” developers to get 80% or even 85% loan-to-cost construction loans. On large deals with an added layer of mezzanine financing, it was even possible to leverage up to 90% or 95% of the total project cost. Now, not only has leverage rolled back to more typical historical levels (70% - 75% in most cases), but  scrutiny of a developer’s credentials has been ratcheted way up. Now lenders REALLY want to know that a developer will have the CASH to lubricate the wheels of progress when cost overruns hit, or when it ends up taking another year to sell off or stabilize a project. Some lenders are now underwriting new condominium construction deals with a 2 ½ year interest reserve (rather than 2 years), in order to give a greater cushion if the sellout takes longer than expected. Predictably lenders are focusing more on a credible rental fallback scenario for condo deals, and they are underwriting the deals with higher debt service coverage ratios (in some cases looking for 1.3 rather than 1.2 DSCR). Of course, more than a few lenders have exited the condo market altogether.

For ground-up development deals: A meaningful track record, real liquidity and net worth are back at the center of lender’s radar screens. And did I mention liquidity? I cannot emphasize that enough!  Non-recourse construction loans are fabulously rare but still available for strong developers with compelling, larger deals. However these days most construction lenders are looking for full recourse, and they are focusing on real liquidity to back it up. Even for large, established developers the noticeable effect of this more stringent credit market is the need to inject additional equity.

“Journeyman” developers and those that are “jumping levels” (for example going from doing 10-unit jobs to doing 40 or 50-unit jobs) must be prepared to pony up a minimum of 25% and in many cases equity of at least 30% of the project cost for mixed-use and multifamily deals. Exceptions will be rare and will usually revolve around the imputed land value for sites that have been held for some time.

Our firm has always focused on the capital stack from the top down: meaning focusing first on the equity and the quality of the development team then moving down the stack to arranging the debt. We have long viewed the mortgage as only one component of the capital stack. Because Winter & Company focuses on “high touch” challenging deals with a lot of moving parts, we are quite prepared, if needed, to bring a developer together with equity providers and joint venture partners. One of the refreshing aspects of today’s environment is that we are finding that developers are more willing to listen when we suggest beefing up their own equity and expertise with equity participations and joint ventures. Of course joint ventures are about much more than just money: J/V’s can also be a very effective way to address weaknesses in a development team and make a project stronger and more likely to succeed in these challenging times.

Here are some examples of recent deals that we’ve placed as well as an indication of how various lenders are pricing different kinds of loans these days.

At the end of December we closed a $14.5M construction loan for a new ground-up, 7-story, 38-unit rental building with indoor parking on Berry Street in Williamsburg. This deal was priced at LIBOR + 285 b/p for 85% loan-to-cost limited-recourse financing.

We recently closed 2 construction loans under $10M in Cobble Hill, Brooklyn. Both were 75% loan-to-cost deals. On Dean Street between Boerum Place and Smith Street the pricing was 250 b/p over LIBOR for a 10-unit condo development loan, and on Bergen Street the pricing was 200 b/p above LIBOR for a 4-unit ground-up condominium development between Court Street and Boerum Place. The pricing for the Bergen Street deal was particularly good based on the strong liquidity and net worth of the developer  and is about as good as pricing today gets for deals under $50M. All three of the above-referenced loans were full recourse.

In Fort Greene we arranged 2 condominium construction loans for the same developer: $4.2M for the construction of 10-unit, mixed-use condominium on Vanderbilt Avenue priced at LIBOR plus 285 b/p, and the borrower has also accepted a term sheet for an $8.6M construction loan on an 11-story, 19-unit 34,000SF condominium project on Adelphi Street, for which we were able to obtain pricing of LIBOR plus 190 b/p. Based on the general trading range of today’s 1-month LIBOR rate, the developer’s initial rate will be just above 5%. Not too bad for a construction loan in the midst of a credit crunch!

Across the border in Jamaica Estates, Queens, we closed a $40.650M loan to finance the construction of a 485-bed student housing facility. This 90% loan-to-cost construction loan was priced at LIBOR + 180 b/p structured with a forward commitment for a permanent loan upon completion. Today the leverage available for this deal would undoubtedly be lower.

In Manhattan on East 84th Street, we arranged $22M in financing for an ultra-luxury condo development comprised of a $19M construction loan along with $3M of mezzanine financing.  The 24-month construction loan was priced at 225 b/p over LIBOR and the mezz was priced in the mid-teens.

Just last week we had a $31M construction loan approved for the development of a cutting-edge, glass and steel 14-story, 11-unit ~33,000SF mixed-use condominium with retail/gallery space adjacent to the High Line in West Chelsea. In fact, this exotic and expensive design cantilevers up and 18 feet over the High Line. While this loan may have been financed at 70-75% loan-to-cost nine months ago, in today’s cautious environment the loan closed at only 65% LTC.

Then and now:

A great example of the “pre” and “post” Subprime loan pricing levels is our loan on a 75,000SF family-owned creampuff of an office building on East 57th Street in Manhattan. The $14M closed just before the Subprime story began to break. The 29% LTV loan was priced at 79 b/p above the 10-year Treasury for a 10-year fixed rate, interest-only loan resulting in a rate of 5.4%. Today the same conduit lender would still be willing to offer a 10-year fixed interest-only loan (given the superb location and the minimal LTV), but the spread would be 190 b/p above the 10-year Treasury, an increase of 111 b/p. Of course the increase in spread has been largely offset by the drop in the 10-year Treasury, so the rate the borrower would get is actually the same.

While there are fewer active lenders in the marketplace, money is still available to acquire and refinance cash-flowing apartment buildings, mixed-use, office and retail properties. All the local banks and thrifts that not long ago seemed so dowdy in comparison to the sleek and powerful Wall Street CMBS players are looking pretty good these days to anyone trying to get their deals financed. Multifamily is having an easier time of it these days than the other asset classes because Fannie Mae and Freddie Mac are still very much alive, well and lending at very reasonable spreads. All lenders are underwriting each loan more painstakingly looking for real debt service coverage, and, like the construction lenders, seeking more conservative leverage.

Strategic use of Private Lenders is an important tool in today’s environment:

In addition to our brokerage business, I manage W Financial, a 5-year-old private mortgage lender that makes bridge loans in the $2M - $25M range. As you may have guessed, W Financial has been very busy of late. With many Wall Street lenders sidelined, bridge loans are being utilized more than ever. Land is tougher to finance, therefore borrowers sometimes choose to close with private money for a few months while putting the finishing touches on their construction loan application. Especially now, with no time to lose before the expiration of 421A benefits, private money can be the key to jump starting a project and meeting rather than missing the 421A deadline.  Although more expensive than bank loans (typically 12% or so), most borrowers use bridge loans for brief time frames to accomplish a strategic and frequently time-sensitive goal.

W Financial recently closed a $5M bridge loan for a vacant property on West 86th Street near Riverside Drive in Manhattan. The bridge loan will fund pre-development expenses while terms of a bank construction loan are being finalized and additional equity for the project is being sourced. The bridge loan will be refinanced upon the closing of the construction loan.

A few days ago W Financial provided $10.25M for a land acquisition and construction loan on a 62,000 buildable SF development site on a corner of Third Avenue in the teens in Manhattan. Given the upcoming 421A deadline the developer chose to close rapidly with a bridge loan rather than cut it too close by waiting to close a construction loan in May or early June. The bridge loan was priced at 12% with 2 points. The time frame from executed term sheet to closing was less than 2 weeks.

Gregg Winter is the president of Winter & Company | Commercial Real Estate Finance
Gregg Winter is the principal of W Financial Mortgage Fund, LLC