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Evolution or revolution? Banks signal willingness to compete for more permanent financing business.

If the principles of Darwinism extend to the capital markets, then nothing less than a precedent shattering evolution is taking place in the way that borrowers and lenders are now dealing with permanent financing for multifamily real estate development projects.

In the last few years, as rents have declined from pre-9/11 levels, owners have been forced to invest more equity into their development transactions.

For example, if starting rents today are $45 psf and these rents either decline or remain at this level during a project's construction period, lenders will require a greater percentage of permanent equity than borrowers have previously been required to provide.

To deal with this phenomenon, lenders and their advisors are coming forward with new strategies.

Dealing with these changed circumstances, SBO has required seller/servicers with Freddie Mac and DUS lenders with Fannie Mac to compete for the right to represent an owner seeking permanent financing for a project--an unprecedented event.

At the same time, banks have entered the fray and are going head-to-head with these lending agencies that have dominated the market for decades on the basis of their pricing and the absence of other financing alternatives.

Banks that until now would only originate construction loans are now beginning to offer permanent financing for the next 7 to 10 years after the completion of construction--and with proceeds, structures, and pricing that are highly competitive with Fannie Mac 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. This bears repeating. Construction lenders are now willing to provide permanent loans at very competitive prices.

This is the start of a significant trend. As more banks enter this market, increased competition between the banks and agencies will generate ever more favorable loans for borrower/developers.

As a case in point, in arranging the recent $80 million loan for Chelsea Tower, a 228-unit luxury apartment building in Manhattan, for affiliates of the Steinberg and Pokoik Families and The DeMatteis Organizations, our firm initially created strong competition between Fannie Mae DUS lenders and Freddie Mac seller/servicers for the right to represent the owners with Fannie and Freddie to provide permanent financing for the project.

After we selected Fannie and Freddie representatives, Fannie, Freddie and various securitized and portfolio lenders actively competed for the fight to provide the financing. AIG, a portfolio lender, was selected to provide the financing which exceeded the borrower's original expectations. The proceeds and structure of this financing was more favorable than that available with agency financings.

This trend is also becoming a significant factor in the 80/20 rental apartment markets.

In New York City, demand remains strong for the development of rental housing, especially housing with an affordable component. For a new development to qualify as an 80/20 project, a developer must set aside 20% of the units for tenants whose income does not exceed 50% of median income.

80/20 projects are generally developed by the premier owner/developers in New York and are usually of substantial size.

Major lenders compete for construction loans for these projects, but these same lenders have been absent in providing permanent financing which has traditionally been provided by Fannie Mac and Freddie Mac.

But times are changing, and a new generation of lenders is demonstrating that they are capable of providing both construction and permanent loans for these owners. Perhaps this is a revolution after all.
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Title Annotation:Banking & Finance
Author:Bassuk, Richard
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Jun 9, 2004
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