CREFC New York: rock star US developers have more lending options, but it comes at a cost

A panel of heavyweight US real estate developers took center stage for the opening session at the CRE Finance Council’s annual conference at the Marriott Marquis in New York City today, discussing a range of lending options that have proliferated as the real estate cycle heats up.

A panel of heavyweight US real estate developers took center stage for the opening session at the CRE Finance Council’s annual conference at the Marriott Marquis in New York City on 8 June, discussing a range of lending options that have proliferated as the real estate cycle heats up.

The massive influx of capital into the US markets has led to a litany of post-recession regulations imposed on banks, leading to a range of alternative lending options, particularly on large-scale developments.

‘The Nerds’ rock the CCRE party

The options are almost as diverse as the the artists covered by the band at the Cantor Commercial Real Estate (CCRE) after-party: from 50 Cent to Prince, Bon Jovi to Santana.

But it comes at a premium. And it could lead to overbuilding, as inexperienced developers also call upon less traditional lenders, the developers said.

Top developers shaping US cities are turning to hedge funds, public mortgage real estate investment trusts, private equity firms, foreign capital, as well as EB-5 financing, which encourages foreigners (mainly Asian in this real estate cycle) to invest in the US and create American jobs in exchange for US green cards, among other options.

Related Companies, which is spearheading the massive Hudson Yards project on Manhattan’s west side, has about $7bn in construction financing in the pipeline in 2015 alone, said Stephen Ross, the firm’s founder, chairman and CEO. Yes, $7 billion.

But it is “very, very hard today to syndicate construction loans” with the banks, the executive noted. And while there are plenty of alternatives, “with all the non-traditional lenders getting involved… the demand is great and the fees are great” too.

A company involved in a large-scale development — the type that could reshape major swaths of cities — will bring in a range of “banks, foreign funds and domestic non-traditional resources” to achieve the right mix of reliable financing at a favorable cost, Ross said.

There’s an “awful lot of money available,” he went on. But, he added, one-stop-shop type of financing is “not available for the mega products like Hudson Yards… and trying to get construction financing in those large dollar amounts is almost impossible.”

Additional “concerns” go along with the fact that large banks have been pulled out of the game.

“It’s a real cause for concern” in fact, another panelist said, as less experienced developers are now able to obtain financing from non-bank entities who are not traditional real estate lenders.

“The quality of projects and developers is much less than, say, six months ago,” he said. “We have to look at that to see if there will be overbuilding.

“You wonder: will there be overbuilding again because of the [declining] discipline in lending?” he asked. “There is so much money available today.”

Some major New York City developers have turned to EB-5 financing amid the fog. Through EB-5 immigrant investors and their families get permanent-residency visas (green cards) for creating at least 10 full-time jobs. A majority of the visas however go to immigrants investing $500,000  or more.

One delegate on hand turned heads when he asked if that might not be the “most undisciplined source of capital?”

“Not really,” one developer shot back.

“It is a source of cheap capital and ends up costing around 4% and the sponsor has ability to use the money as sees fit,” he said. “There have been a small amount of abuses… but it has been a very good program to get people with the skills we need into this country. It’s not just for wealthy foreigners.

“It’s been good for the real estate industry.”

As the 9pm denouement to the CCRE party approached, ‘The Nerds’ continued to belt out a few choice numbers. The puns between the lyrics and the commercial real estate cycle felt irresistible. “You don’t have to be rich…,” and, “Oh, we’re half way there, livin’ on a prayer,” stuck out. But many delegates had moved on to a new party.