New York Times



Money Tap Loosens, But Rules Tighten



Jan. 26, 1997


THE way developers and bankers tell the stories, Manhattan was like the Wild West during a good part of the 1980's: Bankers were lending developers money with flimsy pay-back guarantees; in some cases, without any money down. Loans were handed out based on inflated estimates. Approvals were taken for granted -- some developers started to dig foundations for their tall apartment towers before they even held the deed to the land. Money was flowing.


The tap was abruptly switched off after the stock market slide of 1987. But now, with a soaring rental market and a steadily climbing sales market, bankers and developers say the tap has been opened, to at least a trickle. But the lenders are, for the most part, different -- and so are the rules.


“My assessment is that the development community has changed fundamentally,” said Christopher M. Jeffries, a principal of Millennium Partners, the successful Upper West Side development group. “The 80's were about greed on Wall Street and in real estate; about money and the availability of money that caused real estate to be developed that should not have been built.”


Before they lend a nickel to a developer -- for new construction or the large number of major rehabilitation projects around -- banks now demand substantial cash commitments up front from the developers, sometimes as much as 40 percent. Banks are demanding “preleasing, precommitments” -- written pledges from retail tenants -- anything they can get to limit their risk.


If there are overruns during construction, Mr. Jeffries and other developers say, the banks are requiring that the amount of the overrun be made up -- right then and there -- from the developer's pocket.


This new rigor, they say, has resulted in a change in the way developers do business. The swashbuckler, the loner-with-a-vision, has now been replaced by the development team. Even Donald J. Trump says he has changed his style, accepting deals where he doesn't share the profits until the investors take back the money they put in, and even taking a commission as developer-for-hire. Ian Bruce Eichner, another major developer who ran into trouble in the late 80's, just formed a joint venture to develop two low-rise buildings in SoHo. Matthew Adell, who, along with his father, Leonard, owns sizable chunks of three blocks on Sixth Avenue in the 20's, is one of the few developers with a big site who has, so far, managed to hold out without taking an outside partner. Mr. Adell's focus for now is the first of three rental buildings that he plans to put up. “We're just putting on blinders and trying to move forward on this one alone,” Mr. Adell said last week. “Maybe for the others we'll go with a joint venture.”


For the largest development in sight, the massive 5,700-unit Riverside South project, Mr. Trump swapped a significant part of the project, including his ownership of the land beneath it in return for Asian money to build. An executive in his organization said last week he still retains 30 percent ownership of the project, with provisions to increase that percentage as certain rental and sales goals are met.


In a deal that became known two weeks ago, Mr. Trump has signed on in a joint venture with an Australian insurance company to turn the St. Moritz Hotel into million-dollar condominiums overlooking Central Park. In yet another new deal, Mr. Trump is the developer hired to transform the Mayfair Hotel into condominium apartments; he does not own a piece of the property.


In another new deal, Mr. Eichner, the developer involved in several of the most spectacular tailspins of the 1980's -- he lost both Cityspire and 1540 Broadway, now the Bertelsmann Building -- has formed a joint venture with Hank Sopher, who founded the real estate firm that bears his name.


Mr. Sopher had the land, two parcels across the street from each other in SoHo, on Houston Street between Mercer and Greene; Mr. Sopher's previous plan to build a hotel had gone nowhere. Mr. Eichner wants to build two low-rise apartment buildings, with 140 market-rate housing units. The $24 million for the project will come through conventional sources, he said.


Mr. Eichner had earlier persuaded the Union Labor Life Insurance Company (Ullico), a union fund manager that invests in projects that employ union labor, to commit $33 million in long-term loans for his almost-completed 25-story, 121-apartment condominium at 201 East 80th Street, called the Richmond.


SOMETIMES the partnerships and joint ventures merely signify that a wealthy lending institution or individual is brought in strictly to provide cash. But sometimes, as in the cases of Mr. Trump and Mr. Eichner, a partner is brought in to perform development services, in exchange for a percentage of the profits. In the same way, Millennium Partners has banded together, not only with some German lending institutions, but with Bovis Construction, a subsidiary of Lehrer McGovern Bovis, the building contractor, according to Mr. Jeffries. The construction company was given a share of some of the profits of all Millennium's West Side projects in a 1992 agreement.


Although the developers themselves tout the wisdom of such alliances, they do not disagree that the varying teams were formed out of necessity. The developers need what the partners can provide to satisfy the banks: land, expertise, credit and, especially, cash.


“The lenders are requiring much more cash from the developers,” said Alan Wiener, head of American Property Financing, one of the city's best known development finance consultants. “And they want to get out quicker; even in today's hot climate, banks are writing 'mini-' or 'bullet' loans; they want out in five years.”


“The banks finally got religion,” the financing consultant concluded.


The bankers agree.


“The bankers don't want to revert to the late and mid-80's when so much was overbuilt,” said Murray F. Mascis, head of the commercial real estate group at the Dime Savings Bank, one of the banks that is now starting again to lend to developers -- “with a lot of caution,” according to Mr. Mascis.


“Everyone's being a lot more careful,” said William C. McCahill Jr., executive vice president of Fleet Bank, generally considered a leader, if not a pioneer, in this generation of development finance. Mr. McCahill, who is in charge of Fleet's loans in metropolitan New York, formerly headed New York City development loans at Chase.


Led by Fleet, a number of banks and banking institutions -- some more warily than others -- have entered the development fray. One of the biggest names in development loans during the 1980's, Citibank, is, in the words of one developer, “conspicuously absent”; calls to the bank seeking comment were not returned.


To a large extent, the lenders most active now are different from those in the 1980's.


“You're getting the aggressive venture capital banks in the game now,” said R. Anthony Goldman, of Goldman Properties, a developer who helped to revive SoHo and then, as he says, “sat out the crash doing stuff in South Beach, Miami.” Mr. Goldman, who is currently involved with seven properties in the Wall Street area, said developers “are not adverse to going to Morgan Stanley, Goldman Sachs, Lehman Brothers, First Boston . . . These are the folks that are in the game now.”


The problem with this kind of lender, Mr. Goldman said, is that they don't just want to lend. “They put on the pressure,” he said. 'They'll only lend you the bucks you need for purchase and development in return for a piece of the deal: either a share of the profits or a piece of the deed. They want pieces.”


In New York City's nascent construction market, Fleet Bank has taken a leadership position. But so has Credit Suisse/First Boston, an investment bank, which has loaned over $800 million in New York City since April 1996.


William Adamski, a First Boston director who is co-head of real estate investment banking for the New York-based company, said his group was eagerly searching the city marketplace.


“We'll do it all,” he boasted. “We do joint venture, equity, permanent financing, interim financing. I guess you could say we're aggressive compared with three years ago, but compared with 10 years ago, we're conservative.”


A look at some of First Boston's current deals points out the diversity of financing methods now being used, some of them rare or unheard of a few years ago when lenders put up the money -- sometimes up to 100 percent of the costs of development -- and almost never took an ownership share of the property, according to financing experts.


But now, First Boston is a co-owner of 10 Hanover Square in downtown Manhattan, according to Mr. Adamski. “We're a partner with Stellar Management and a limited partnership of individuals,” he said. Like most of the downtown sites -- an area that has cheap property and new tax incentives but that is still unproven, according to most developers -- 10 Hanover will become rental units; “upwards of 375 of them,” Mr. Adamski said.


At 25 Broad Street downtown, a 21-story office-to-residential conversion developed by a new face in the New York development community, Crescent Heights of Miami, a partnership led by Bruce A. Menin, Credit Suisse/First Boston holds the second mortgage; Ullico, the labor union fund, holds the $53 million first mortgage. The project will create 344 rental apartments; construction is about 20 percent along. First Boston is also allied with Rockrose in its 576-unit rental project at 127 John Street.


Some German banks, notably Hypo Bank, (Bayerische Hypotheken-und Wechsel-Bank) have been lending in New York City for several years.


Goldman Sachs had a “significant” share in the third Lincoln Square building -- The Grand Millennium at 1965 Broadway, which has just been finished.


Colony Capital, a California-based real estate investment company that has acquired $4.5 billion in real estate since its founding six years ago, has recently started investing in New York City real estate. In the last seven months, Colony has bought three hotels, including the Mayfair and the Stanhope -- venerable institutions on, respectively, Park and Fifth Avenues. They are the financiers who have hired Mr. Trump to turn the Mayfair, at 65th Street in a prime spot of the Upper East Side, into 75 multimillion-dollar condominiums.


Richard H. Ader, chairman of U.S. Realty Advisors, was hired by Sun America, a California life insurance company, to investigate development possibilities in New York City. Sun America participated in the Brodsky Organization's latest project, the $150 million, 729 unit, 48-story rental, commercial and retail development between 58th and 59th Street on the west side of Ninth Avenue, a site formerly owned by St. Luke's- Roosevelt Hospital. “The deal was led by Fleet and Hypo,” explained Mr. Ader.


FOR a while, Mr. Ader continued, Fleet and Hypo, the German bank, seemed to be the only lenders seen in the marketplace. “I don't know if people thought the market wasn't going to go up, or what,” he added. Now, he said, he knows that some of the “major hitters,” banks such as Bankers Trust and Chase, are interested in lending again. “And we just got a call from Key Bank, an Albany-based bank,” he said.


Mr. Ader pointed to a fact of life for today's developers: the banks want a lot of cash up front -- and nontraditional lenders like Sun America can lend cash to the developers to satisfy the banks' requirements. Even developers who can afford the new cash requirements “still need partners,” he said. “They don't want to keep their capital tied up,” he explained. “They all need equity partners. We put up the cash, the developers put the building up and rent it out; we bring capital, they bring expertise. It's definitely a trend. It's how things will get built now.”


Bankers cheerfully admit that they are being much tougher now.


“We require more equity and we require guarantees of completion,” said Mr. Mascis, of Dime. “We may offer a 10-year loan with a 5-year review; if we don't like what we see -- if the engineer's report shows a building that isn't being maintained -- we may not renew the loan for the other five years. It gives us a little more control.


“Instead of lending 100 percent, as they did in the 80's, we're now only lending 70 percent,” explained Mr. McCahill, of Fleet. This puts pressure on the developers, he added, to “check and recheck their figures before closing.”


All this is paying off, according to Mr. McCahill. “We haven't had any problems in this new generation of loans.”


In the last two years, Mr. McCahill's bank has become increasingly active in residential development lending, including backing the $45 million Siena luxury condominium, at 186 East 76th Street -- a joint venture between Rose Associates, the Brodsky Organization and Robert Quinlan -- and a 192-unit rental project built by Donald Zucker on a vacant lot on the fringes of SoHo, on the northwest corner of Elizabeth and Houston Street.


Fleet is also financing two of the major development projects of Stephen M. Ross, chairman of The Related Companies, LP: his Union Square retail/residential development and his rental tower at 84th Street and First Avenue (both with Hypo Bank). Both projects are the so-called 80/20 projects, in which developers trade 20 year tax abatements and low-interest, government-guaranteed financing for their commitment to rent 20 percent of the building to low- to moderate-income tenants, who pay approximately 30 percent of their income as rent.


To many developers, the 80/20 approach is still the approach of choice; that or participating in the substantial amount of conversions from office to apartments in the financial district, where the Mayor has implemented other tax incentives.


“Rentals, especially 80/20 rentals if you can get the financing, are still the safest way to go,” said Mr. Adell, who, with his father, Leonard, has waited 17 years to start construction on what they call the Center Six development on both sides of Sixth Avenue between 25th and 28th Street in the Flower District. Last week, Mr. Adell said construction on the 200-unit, $50 million first phase -- on the west side of Sixth Avenue between 25th and 26th Streets -- would start sometime this spring; a financial adviser familiar with the deal was doubtful that ground would be broken so soon. The other two buildings are planned for the east side of the avenue, between 26th and 28th Streets, now used for outdoor flea markets on weekends.


Right now, the total project is budgeted at $200 million, with 670 more rental apartments to come. Mr. Adell is now planning for 80/20; but said he might decide to switch to condominiums for the last two phases.


“The problems with huge projects -- projects with 'phases,' “ said a financial consultant involved in many of the deals going on right now, “is financing: whether they're market rate, condos or rentals; 80/ 20, downtown -- whatever they are. If they're too big it causes trouble.”


Mr. Mascis, from the Dime, agreed. “We only finance projects under $20 million,” he said.


The biggest project of all -- an estimated $3.2 billion if all 17 buildings are finished -- is Riverside South, Mr. Trump's phased project on the Hudson River between 59th and 72d Streets.


Mr. Trump said he had changed his approach for the first phase: from 1,800 80/20 rentals to 490 large condominiums in a $175 million building at West 69th Street and 500 large rental apartments in a $140 building between 68th and 69th Streets.


The first plan was for several rental buildings to stretch between 64th and 68th Streets. The development, Mr. Trump said, is being financed by a consortium of Hong Kong partners, including New World Development Company Ltd.


Like the other developers, Mr. Trump said the atmosphere for financing development projects in 1997 was far different from what it was in the 80's. “They're more conservative,” he said, “and also more sophisticated; there's foreign money and pension money; there's a very different kind of lender.” General Electric Pension is behind the joint venture that rebuilt Trump International Hotel and Tower at 1 Central Park West, formerly the Gulf & Western Building; the Ullico is financing Mr. Trump in his $35 million rehabilitation of 40 Wall Street, which, he says, will have a completed lobby in three weeks.


Mr. Trump prefers to build market-rate housing, preferably condominiums in blue-chip locations, without any kind of governmental restrictions. So does Trevor Davis, head of Davis and Company, whose joint venture market-rate $40 million, 103 unit rental at 300 East 64th Street is now rented out.


SEVERAL weeks ago, Mr. Davis closed on the land at the northwest corner of 33d Street and First Avenue, the site of a now-demolished Mobil station. There, he and his German partners have begun foundation work for a 22-story, 227-unit rental tower, made up of studios, and one- and two-bedroom apartments.


Part of being a successful developer, according to Mr. Davis, is knowing what to build in which location. “I wouldn't build three- and four-bedroom units on 33d Street,” he said. “That's not the market.”


Mr. Davis put his finger on another of the difficulties facing today's developers: finding a good site.


With the new bank restrictions -- which almost always include a prohibition on lending money to assemble parcels of land for a building site -- developers are searching for already assembled sites; sites with tax incentives, primarily the downtown sites; sites that are owned by someone else but somehow vulnerable, like the site owned by Mr. Sopher in SoHo.


Mr. Wiener, the financial consultant, pointed out that because the banks are refusing to fund assemblages of small sites, much of the development that is going forward in 1997 -- and most of what has happened in the last couple of years -- is taking place on sites that already exist.


The Adells have owned their site on Sixth Avenue between 25th and 28th Streets for years. So have the Manocherian family, who have had their architect, Costas Kondylis, draw up several renderings for a building on the massive site they have long owned at the southeast corner of 23d Street and Sixth Avenue.


According to real-estate consultants, Leonard Litwin, head of Glenwood Management, has purchased a site at 38th Street and Second Avenue that was the site of a never-built condominium project, and Joel Pickett of Gotham Development recently closed on a site on 43d Street between 10th and 11th Avenue -- a parcel he bought at a bank foreclosure.


According to Mr. Eichner, whose own development disasters were well publicized, the lenders should keep some of the restrictions, particularly those on the percentage of cash required from developers up front, but should loosen restrictions allowing the purchase of assemblages. In fact, he said, the banks should generally loosen their purse strings.


But, the developer was asked over a cup of coffee, aren't developers like him the main reason banks are so wary?


Mr. Eichner, temporarily taken aback, paused before answering.


“Yes,” he said cheerfully. “Definitely.”

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