Real Estate

Spiking land prices complicate commercial financing

There is no question about it — land prices are up and that is causing some angst to bankers as they add up just how much money they can lend on a deal.

“We are looking at the cost basis, and we have to agree with that value,” explained Jenna Gerstenlauer, founder and managing partner of Sound Mark Partners. “If someone is buying a building and paying several hundred dollars a foot and knocking it down, it adds to your cost.”

Sound Mark, based in Greenwich, Conn., is raising funds and then investing in debt in mortgages.

“The deals that make the most sense,” she added, “are where they acquired the deal in last five years — those tend to work.”

A year ago they closed a transaction where the pro-forma for the future residential condominium sales was $2,000 a foot. They got comfortable with the numbers and later sales came in at $2,500 to $3,000 a foot. “It’s a granular analysis,” she said. “You have to know the buyer” — that is, the developer/sponsor of the condominium site.

She also frowns on potential borrowers who provide an analysis that predicts the sales three years later at numbers never before achieved.

“You want a mix of units and want it affordable so that you are not counting on the 1 percent of the 1 percent to be the buyers,” Gerstenlauer explained. “For a builder, you need to sell them, and if you are long with seven units selling for $7 million each, you have a problem.”

At a Crain’s forum in November, Alan Wiener, managing director at Wells Fargo remarked, “We forget what happened four and five years ago. I scratch my head about rating agencies and what they didn’t learn.”
He said Wells Fargo has to price competitively, and because of the size of the deals, they sometimes have to be syndicated. “We will do loans up to $150 million so we will have to syndicate to button them up,” he said.

“They have to have reasonable returns to make sure other banks will come in and do business with you.”

The chief investment officer for developer Taconic Partners, Kevin Davis, said at the same forum that construction loans require recourse — which means if the developer defaults, someone’s piggy bank could be on the line.

For a $300 million project with $200 million in debt, the lender will require a lot of equity and a repayment guarantee. “If we can’t pay it back you have to go into our personal checkbooks,” Davis said.

Ari J. Hirt, Director in the Debt & Equity Finance Group at Mission Capital Advisors, said the company arranges financial partners that could be institutional investors, such as opportunity or pension funds, or even families with cash, to provide the debt and equity needed by his client developers.

He says CMBS lenders are now very active and have become more aggressive in locking down deals in New York. “You can get 70 to 75 percent LTV,” he said of the loan-to-value ratio.

“Clients are coming to us because we are out in the market and can find the right lender for the right deal,” Hirt said. Their TriBeCa office has no walls and is set up “like a newspaper office” so employees can cross-pollinate to make matches — such as bringing in new banks to the city.

But it is hard to forecast ahead because there are so many variables. “We just hope interest rates are low and the world situation remains stable so we can continue to do deals and there are no economic or military crises,” Hirt said.

“Tread lightly, because if there is a condo boom and the music stops, the first to suffer will be those projects in not a great location; the others will eventually sell out,” Davis warned.

Gertenlauer notes they are making investments “on a very cautious basis” in the major US food groups of office, hotel, retail and industrial, with a small appetite outside the US. “We could slip back into a downturn in a month or this cycle could last for years,” she added.