Developers going back to the bank.
Potential buyers are musing about why -- in light of the new market landscape -- some developers of new condo developments haven't dropped their prices.
"Seems like [Williamsburg condo development] 80 Metropolitan is another building that's stubbornly clinging to the pricing they set before things dropped," wrote one poster on the real estate Web site StreetEasy.
What incredulous buyers often don't realize is that across-the-board price cuts have not been easy for most developers to make, because price reductions must be cleared with lenders.
Yet with price cuts the must-have amenity of the moment, discounts have become increasingly important to the survival of many projects. As a result, sponsors and lenders have recently started coming together to make those cuts happen. Indeed, some formerly obstinate lenders are now loosening their restrictions so developers can reduce prices below previously agreed-upon minimums, known as "release prices."
"One of the elements that has changed dramatically is the flexibility of lenders with respect to the floor on pricing in developments," said Josh Guberman, CEO of Core Development Group and the developer of new Upper East Side condominium Lux 74. "This is a dance that's being danced every day between lenders and developers."
For developers, these discounts don't come cheap.
In an environment in which banks' balance sheets are under intense stress-test scrutiny, lenders are asking developers for painful concessions, such as more cash and personal guarantees, in exchange for reducing release prices.
The term "release price" refers to the amount of loan repayment required by the lender before the developer can obtain a partial release of the lien that covers the apartment being sold. For example, a condo could be on the market for $750,000, but the developer may have agreed to pay $650,000 of that to the lender for loan repayment, explained David Behin, an executive vice president at the Developers Group.
Frank Sullivan, a principal at Gallin Glick Sullivan O'Keefe, a New York-based real estate consultancy, said lenders are flexible only "if the borrower is willing to give something to get something."
While the concessions are more than some developers are willing (or able) to pay, others are biting the bullet and opting to make them, in order to save their projects from being returned to the bank.
"In September, [developers] weren't willing to see there was going to be this type of negotiation," said Jacqueline Urgo, president of the Marketing Directors. "They are much more open now."
However, as time has passed, the market standstill has become more evident. According to a market report released by the Corcoran Group, the number of closed sales in new developments dropped 67 percent in the first quarter of 2009 from the first quarter of 2008.
As a result, developers have realized how important reducing prices are to their survival, brokers say.
"[Developers] have realized that the current market situation is such that if they don't lower their prices, they're not going to sell," said Behin, who is handling sales at the new Bedford-Stuyvesant condominium 111 Monroe Street, where prices were revamped before going on the market this spring.
"We totally re-evaluated what prices were going to be launched at, from where we were a year ago," he said. Prices also have been reduced at the Developers Group project NV at 101 North 5th Street in Williamsburg. One unit, for example, is now priced at $659,000, down from $755,000 when it went on the market a year ago, according to StreetEasy.
While Behin said the Developers Group did not have to go back to the bank to change prices at 111 Monroe or at NV, many lenders are becoming aware of the need for new pricing and are becoming more willing to restructure agreements.
"The banks see it. They get it, and they're willing to work with them," Guberman said.
When prices were slashed by roughly one-third in March at the iconic Upper West Side condo conversion the Apthorp, it was the result of months of back-and-forth between the project's lenders, Anglo Irish Bank and Apollo Real Estate Advisors, and the newly restructured Apthorp ownership team.
Units at the project, originally priced at nearly $3,000 per square foot, had failed to sell. By October 2008, four months after the attorney general approved the offering plan, not a single apartment was in contract, and the two sides became enmeshed in a legal struggle that resulted in a new managing agent, the Feil Organization.
Lenders had rejected a proposal by one of the owners for a bulk sale of 78 units at the project at $1,000 per square foot, but they eventually compromised with the new ownership team on revised prices averaging $1,950 per square foot.
The difficulty of selling out the building helped convince the project's lenders that prices needed to change, said Andrew Gerringer, managing director of the Prudential Douglas Elliman development marketing group, which is handling sales at the Apthorp.
"The pricing was set when the market was much stronger, and it was aggressive for those times," Gerringer said. "Now, the [lenders] are based in reality. They're willing to listen."
Brooke Jacob, CEO of mortgage company Everest Equity, said she is working with a developer on the bulk sale of 12 deeply discounted units in a Battery Park City condo to a group of Irish investors.
Selling the project's lenders on the idea "took some convincing," she said. "There was some explaining to do."
But because of the difficulty of selling new condos in the current climate, "everybody is willing to talk," she said. "More and more, we're getting cooperation for things that were unthinkable before."
One reason lenders are willing to work with developers is they want to avoid foreclosing on properties and being saddled with the expense and inconvenience of running them.
"They don't have the reserves on hand to manage and run these projects," Gerringer said. "They are first working it out with the owners."
In addition, banks realize that "refinancing is difficult, if not impossible, to get," Sullivan said. "If the developer has been a good guy and through no fault of his own the market tanked, and he is endeavoring to preserve the value of the property, the banks are probably willing to work with [him]."
Gerringer noted that in many of his developments, lenders and developers are renegotiating prices on a unit-by-unit basis.
"What's going on right now is they will look at things on an individual basis, but they won't make any overall cuts," he said.
In part, that's because an across-the-board release price restructuring is particularly unsavory for lenders.
"If [lenders'] reserves are inefficient, restructured loans could inhibit their balance sheet," Sullivan said. "If they have loans that are nonperforming or restructured, that can change their reserve requirements and force them to put up a lot more capital. They don't want to experience that."
And for some lenders, accounting rules say that if a lender allows the terms to be changed for one loan, they should be changed in other, similar loans. That could create problems for a lender's balance sheet.
For example, Sullivan said, if two sides agree that a cap rate on a multifamily property is now 8 percent, it would be difficult for the bank to argue that the cap rate for another, similar property is 7 percent.
As a result of these risks, lenders who allow condo prices to be reduced below release prices generally do so in terms that are quite unfavorable to the developer, such as requiring a personal guarantee or more cash.
Moreover, while developers usually take a cut of the profits from each unit sold, that changes once the lender allows prices to be reduced below the release price. Under those circumstances, the sponsor usually agrees to give all or most of the purchase price of each apartment directly to the lender, taking almost nothing for himself, until the loan is repaid.
"The developers are giving them 100 cents on the dollar for every sale that's made," said Guberman.
Some sponsors, unwilling to take that step, are seeking alternative options to survive and hang onto their projects, said Guberman, who found a solution that allowed him to adjust prices at Lux 74 without seeking bank approval.
"What I did was pay off a huge chunk of my loan early out of proceeds from another project," he said.
"When you have a lender, they're dictating certain development choices around price. I don't want to sit there and have [the bank] tell me how to run my business."