Creating new money sources in credit crisis.

One year ago an ad hoc committee of the Real Estate Board, The Economic Development Committee, was established to develop new ideas to help solve some of the many problems plaguing the New York real estate market. The lack of willingness of traditional lending sources (e.g., banks, insurance companies and pension funds) to finance tenant improvements and capital needs, combined with the lack of availability of funds from developers, had reached an unprecedented level. The severity of the credit crisis led to the creation of the Credit Crisis/Financing Issues Subcommittee (herein "the Sub-committee"), which I have chaired since its inception.

Through extensive research with the Real Estate Board, we have identified two areas affected by the lack of available funds: (1) Tenant improvements and (2) financing or sales. Our committee decided to focus on the first area, realizing that the second would be resolved as tenant demand increased. In the words of Franklin D. Roosevelt, "These unhappy times call for the building of plans ... that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid."

Richard Burns, director of Aldrich, Eastman & Waltch stated, "Our pension funds will not put good money after bad. The economic returns must be there before we will support any tenant improvement funds."

As a result of lenders reducing the level of debt backed by improvements to the New York City real estate, small and medium-sized tenants may be unable to take advantage of the most favorable conditions in years in the rental market to expand or commence operations in New York City.

In order to increase the number of tenants and maintain the existing tenant base, there needs to be a source of funds to finance interior space improvements. The requirement of small and medium-sized firms was approximately $274 million in 1992, $300 million in 1993, and is projected to reach $370 million in 1996. Possible sources to finance these tenant improvements include the local and state pension funds. As a result of the subcommittee's efforts, the pension funds informed us that they would finance these tenant loans if a substantial portion was guaranteed by either the Small Business Administration (S.B.A.) or New York City.

We are in the process of developing a Guarantee Fund with the tenant acting as the direct borrower (instead of the developers borrowing money in the form of a second mortgage loan). The forms of guarantees include: (1) Small Business Administration (S. B.A. ) Loan Guarantee - companies who employ less than 100 employees may obtain a loan guarantee from the S.B.A. The S.B.A. insists on a personal guarantee by the owner; and (2) New York City Guarantee - companies who cannot give a personal guarantee might seek guarantees from some of the City guarantee programs that we are trying to develop.

The subcommittee believes that assistance from the New York City government in the form of guarantees of tenant loans could significantly enhance the local economy through new business starts and expansions.

After identifying some of the problems in the real estate industry, we are better able to focus on alternative solutions for each problem. In the words of John F. Kennedy, "It is a time for a new generation of leadership to cope with new problems and new opportunities. For there is a new world to be won."

The Credit Crisis/Financing Subcommittee primarily includes leaders from lending institutions, financial advisors, landlords, and attorneys (participating companies include Aldrich, Eastman & Waltch, Cooper-Horowitz, Inc., Eastern Realty, Inc., Galbreath Riverbank, General Electric Capital Corp., Glenwood Management Corp., Goldman Sachs Realty Corp., The Harlan Company, Inc., Jack Resnick & Sons, Inc., Jones Lang Wootton USA, Met Life Real Estate Investments, Newmark Real Estate, Inc., Paul, Weiss, Rifkind, Witanon & Garrison, Law Firms of Robinson, Silverman, Pearce, Aronsohn & Bennan, Travelers Realty Investment Company, Williams Real Estate Co., Inc., and York Claims).