Developers get creative as land prices climb.

Development of residential real estate projects in New York and the volume and velocity of financing transactions associated with such developments, continues at a frenetic level.

Within 12 months, I will have arranged approximately $1.4 billion in acquisition, mezzanine, bridge, construction and permanent loans, reflecting the robust nature of the ongoing residential development boom.

While the tempo remains steady, the development and financing score has changed. Three emerging trends became increasingly evident this year. Since they are driven by rising land prices, the abundance of capital aimed at real estate investment, and the growing sophistication of developers and lenders, these trends will certainly continue and becoming increasingly important into 2006.

Rentals Give Way to For-Sale Condominiums

The first trend is the switch from luxury high-rise housing development of rental apartments to the development of for-sale condominium projects. The reason for the recent switch from rental to condominium development is the rapid and dramatic escalation in land and construction costs. At present, the construction of high-rise luxury rental apartments in many cases is not economically feasible, despite increased consumer demand and rapidly rising rents.

Consider these facts: There was a 25% increase in construction costs in the first six months of 2005; and land costs more than doubled between 2004 and 2005 to well over $300 per FAR square foot in parts of Manhattan. At the same time, the average sales price of a residential condominium apartment in Manhattan exceeds $1 million, more than covering the rapidly escalating land and construction prices. These factors are causing developers to commence for-sale condominium projects from the get-go, replacing previous plans for high-rise rental apartment buildings.

Given the cyclical nature of the real estate market, this recent sea-change may just be a shifting tide. Apartment rentals are approaching $60 per square foot at some locations. If rents continue their rise, as expected, within several years this factor may begin to shift the scales back to rental development. In the mean time, however, we see most construction cranes on the New York skyline dedicated to the development of for-sale residential condominiums.

Banks Compete for Permanent Financing Business

A second important trend of 2005 is the precedent shattering entrance of banks into the business of permanent financing for multifamily real estate development projects. Banks that until now would only originate construction loans are offering permanent financing for the next ten years after the completion of construction--and with proceeds, structures, and pricing that are highly competitive with Fannie Mae and Freddie Mac, the traditional lending agencies. Banks are also becoming amenable to underwriting permanent loans in flexible, creative ways providing benefits not available with agency financings.

With the profusion of capital earmarked for real estate investment, this trend is generating increased competition between the banks and traditional lending agencies. This, in turn, results in ever more favorable loans for borrower/developers.

This trend has become a significant factor in the 80/20 rental apartment markets. Generally developed by the premier owner/developers in New York and usually of substantial size, these developments have rightly long triggered competition among banks and agencies for construction loans.

But only this year has the competition extended to the arena of permanent financing. As the agencies have just begun to lose transactions to their new competitors, we can expect all contenders to sharpen their pencils further to the benefit of the borrower/developer into the new year.

Bridge Loans Gain Prominence

Another important trend seen this year is the rising prominence of bridge loans. Bridge loans provide financing for property assemblages, site acquisitions, and development expenses, typically for terms of 12 months or less, with spreads ranging upwards from 225 over 30-day LIBOR, dependent upon a number of factors. They provide the breathing room a developer needs to acquire a site quickly, or create the architectural designs and analyses for new construction projects. Equally important, bridge loans offer an opportunity to refine the developer's property repositioning or acquisition plan in the case of an existing project.

Developers are also finding other strategic uses for bridge loans. By enabling construction to commence before a formal construction loan is in place, a developer may time construction to avoid a heavy winter schedule with the attendant extra costs, or plan the completion of construction to coincide with the primary rental and sales months beginning in the spring and continuing into the summer.

As the real estate development world becomes even more sophisticated and 'creative in its employment of highly advanced financing tools, I expect bridge loans to play an increasing role in New York financing. I see a further trend where lenders providing the ultimate financing for a project's development will provide bridge loans in order to cement the business and the relationship at an early stage in an increasingly competitive market.

Clearly, 2005 has already brought exciting change to the world of New York real estate finance. As borrower/developers keep their fingers on the pulse of this vibrant market, we will work with their financial advisors to help them reap the benefits of these new situations and others as they develop.

RICHARD BASSUK, PRESIDENT

THE SINGER & BASSUK ORGANIZATION