Commercial Real Estate Financing Becomes Needle in Haystack

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

It is getting increasingly difficult to secure financing for commercial real estate, and the crisis in the credit market and dislocation of the capital markets is having a dramatic effect on investment sales.

Through the second quarter of this year, sales activity for Manhattan properties worth at least $10 million dropped 59%, to $13.8 billion, compared with the period a year ago, according to a report by the New York Capital Markets Group of Cushman & Wakefield released last week. The sales volume would have been considerably lower if the sellers didn’t provide financing for at least 40% of these transactions.

The report also noted that foreign investors purchased many of these assets, replacing the high-leverage buyers who once dominated the market. In addition, the financing levels for these buildings were at a loan-to-value ratio of 50% to 70%, down from 70% to 90% in 2007.


The reduction in sales volume is directly correlated to the dislocation of collateralized mortgage-backed securities financing. For the first six months of this year, the total CMBS issuance was $12.1 billion, a 91% decrease for the same period.

The general consensus of industry leaders is that finding financing is becoming next to impossible. “We have a stalemate because the lenders are not willing to lend under terms that I am willing to borrow,” the chairman of Douglaston Development, Jeffrey Levine, said. “At some point the economics of the deal may change, that they may be willing to lend or I will be willing to borrow. It is unclear as to when it will resolve itself.”

The chairman of the board of Signature Bank, Scott Shay, said: “As I have been saying for a while, we are not even at ‘the end of the beginning’ when it comes to difficulty in financing commercial real estate. In the same way that the residential real estate crisis started on the West Coast and Florida and then infected the rest of the country, the process has begun for commercial real estate outside of the multifamily sector. I expect 2009 to be much tougher than this year. New development will be extraordinarily difficult to finance. However, good income producing stabilized properties will continue to enjoy access to debt capital, albeit on more realistic terms and spreads.”


The executive vice president at one of New York City’s most active affordable housing developers, who requested anonymity, said: “The affordable housing lending world is in flux. The banks and government service enterprises that once willingly provided long term credit enhancement for tax-exempt debt will either not do so anymore, or if they still do, it is only at substantially higher fees and premiums.”

The source pointed to an example where “one major money center bank, which credit enhanced several of our bond deals in 2007 and early 2008, will no longer offer that product. Just this past week, both Freddie Mac and Fannie Mae announced that they would no longer credit enhance variable rate tax-exempt bonds issued to finance affordable housing. A day later, Freddie apparently changed its mind but increased its fee from one-tenth of 1% to 1% and its annual guarantee fee by a quarter of a percentage point. It may not sound like a lot, but on a potential $50 million loan, it will require a borrower to come up with an additional $1.5 million to $2 million in equity.”

The source added: “While the GSEs may still agree to credit enhance plain vanilla long-term fixed-rate bonds, the rates on those bonds are so high now that most projects are not feasible unless the city or state is willing to provide substantially greater subsidies. In an era when tax revenues are down, it may not be realistic to think that the government can fill the larger gaps.”


If a developer is seeking to secure financing for a new condominium, it must be ready to submit a request to at least 20 lenders and be aware that during the negotiations, the terms for the financing are subject to significant changes and modifications.

The president of the City Investment Fund, Thomas Lydon, gave an example: “A client was attempting to build a small condominium project in Upper Manhattan with a total development cost of under $40 million. In February, a major New York City commercial bank verbally committed to finance 75% of the total costs with full repayment guarantees from the developers at 250 basis points over Libor. By the time this bank went to committee, they were out of the construction loan business.

“The next commitment was from a well-known mortgage banker at 70% of the cost and 300 basis points over Libor. A written commitment was received subject to the syndication of 50% of the loan. After 30 days, the investment committee backed out.

“The current lender started out at 60% of cost and 300 basis points over Libor, but after going to its loan committee are down to 50% of cost at the same rate. The developers are currently evaluating the feasibility of increasing equity to this amount and also evaluating a rental strategy with a presale to an institutional investor. However, it does represent a good example of the evolution of the lending market for construction loans over the past six months,” Mr. Lydon said.

The president of W Financial, Gregg Winter, said: “I won’t say that quite a few major construction lenders haven’t pulled out of the market — they have — or that it’s not geometrically more difficult now than it was even six months ago to negotiate construction and bridge loan extensions, modifications, increases, etc., because it is. The low-hanging fruit on the financing tree is gone, and now only the tallest and most resourceful giraffes can still eat.

“Some large New York City condo developers, whose construction loans have matured, are having a difficult time recapitalizing these loans to fund budget overruns. This is in spite of the developer having already signed lots of hard contracts to sell the majority of the units, and having achieved a significant level of completion. This is true even when the current loan-to-cost and loan-to-value characteristics of the deal have improved since the deal was originally underwritten,” Mr. Winter said.

“While today’s challenges are significant, development deals are still getting done, albeit with structures that are more bank-friendly than developer-friendly,” he said. “For example, we are working with a seasoned, successful, well-known development company that would like to get a $39 million construction loan for a new 100-plus-unit condominium project. Eighteen months ago, this developer, with their impeccable track record of repeated success, would have been able to obtain the entire requested loan amount (consisting of a construction loan along with mezzanine financing) from multiple lenders, on a non-recourse basis, with only the subject property as collateral. Now, the same high loan-to-cost loan amount will be achievable only if the developer also pledges another valuable cash-flowing asset as additional support for the loan, and agrees to provide some level of recourse. The point is that the developer can still get the desired level of financing and the project can move forward; however, they must now pony up more collateral and be willing to offer guarantees.”

Mr. Winter added: “As painful as this period of tight credit may be, an undeniable silver lining will be that less new product will hit the market, facilitating the absorption of unsold product still in the pipeline.”

The president of the Troutbrook Companies, Marc Freud, said the supply dynamics of construction debt has changed in the past three months. Balance sheet lenders and life insurance companies are tending to conserve capital for the remaining five months of the year and are very slow or simply not interested in doing business with new clients, regardless of the real estate asset class or deal structure. “Relationships are very much back in vogue,” he said. “The banker and borrower are now much more interdependent, with the lender only creating deals that they feel comfortable holding on their books, because securitization and the syndication of loans is becoming increasingly limited. The problem over the past few months is that accepted risk from a lender’s perspective just got a lot more conservative. With mortgage applications at its lowest level in a year and regional unemployment trending upwards, rules of game are getting attenuated.”

The investment director at Principal Real Estate Investors, Robert Dirks, said: “I can tell you that we have been busy and doing deals. We have done nearly $2 billion so far this year on all types of properties all across the U.S. Terms have ranged from 3 to 30 years, and deal sizes range from $1 million to $90 million, with the strike zone that we prefer to lend being between $5 million and $50 million. All have been 65% loan-to-value or less, generally 30 years amortization (some have been offered with interest only for loans less than 55% of loan-to-value), and pricing has ranged from 230 basis points to 325 basis points over Treasury notes, depending upon deal quality and term.”

He added: “There continues to be a flight to quality. With the economy and the markets coming under more pressure, investment committees continue to be more selective and conservative. Under no circumstances are we providing construction or bridge loans right now, only stabilized properties with solid operating history. Yes, this is a changed world, but there is liquidity for the quality deals.”

A principal at W Financial, David Heiden, said he believes “this real credit crunch differs from the prior severe crunch of the 1990s. In the 1990s, credit was unobtainable for a period of time on almost any type of collateral. This caused a general price collapse and contraction within the market. Today, many lenders are still active, and thus there appears to be a support floor for specific types of real estate. The savings banks and about half the commercial banks are still very active and are lending for multifamily, office, retail, minor rehab, mixed use, light industrial, and most traditional commercial deals. However, this does not apply for all types of loans, and I have seen funding for land, new condos, second mortgages, mezzanine loans, hotel deals, and construction loans dry up. Some of this is a direct result of the slower sales prices and velocity of new condo sales, which undermines the underwriting for construction and land loans.”

Secured financing “remains available from mostly European portfolio lenders and some life companies,” the managing director and president of ING Real Estate Financing USA, David Mazujian, said. “Flight to institutional quality sponsors and projects remains. Leverage is now trending down to 60% as lenders are concerned about rising cap rates.”

He added: “Mezzanine funds are being formed at a furious pace to bridge the gap. Though unlike prior mezzanine funds, leverage will probably not exceed 70% to 75% with senior and mezzanine financing. Interest-only loans are still available, though only for 2 to 3 years with amortization thereafter. Senior lender pricing is in the 200 to 250-plus basis points over Libor range for stabilized or near-stabilized projects, with lodging loans at 350-plus basis points over Libor. Recourse is back, cash flow is paramount, and lending is done less on projections.”

A senior vice president at a local savings bank who asked not to be identified said: “We have too many people looking for financing and not enough money to lend for many more projects. The bank regulators are making it harder and harder to do ‘out-of-the-box’ deals. I don’t need any more inquiries or financing requests. We are trying to digest what we have in the pipeline without getting indigestion.”

Nevertheless, even though it is very gloomy this summer, I concur with Mr. Winter when he says: “It is important to note that all is not doom and gloom, financing is available for borrowers of plain-vanilla, low-leverage cash flow, multifamily, and mixed use properties. In any market these refinances will always need to be done, and even now, they are still getting done quite efficiently by lenders from all over the United States.”

Mr. Stoler, a contributing editor of The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at

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