Mortgage Observer

In Development

Doug Stern had a real estate dream. In his early 40s, after years in private equity and managing his family’s commercial real estate properties, he longed for a career change and a development project on his own. His mission became clear in Bayonne, N.J., where, he said, he fell in love with the former headquarters of the intimate apparel company Maidenform. Located two blocks from the Hudson-Bergen light rail 22nd Street station, the four-story, 94,000-square-foot brick complex—over 100 years old—was familiar to generations of Bayonne residents, many of whom had worked there until the company moved to Iselin, N.J. in 2007. Mr. Stern saw the potential for the historic, vacant property into a Brooklyn-style 99-unit residential building.

Although he could buy the building, he figured that he needed upward of $20 million in construction financing to redevelop it.

11 In DevelopmentPrior the crisis, bankers would have been happy—or, at least, open—to helping Mr. Stern’s dream become a reality. After 2008, though, despite his plans, vision and real estate experience, in the banks’ eyes Mr. Stern was just another new developer.

In recent months, droves of would-be builders have been knocking at banks’ doors hoping to take advantage of the return of construction lending. But most lenders see a lack of demonstrable development experience as simply too risky. Mr. Stern faced many rejections, before finally finding a loan that will allow him to start construction by the end of 2012. Countless others’ ambitions run into more abrupt ends.

The last 18 months have gradually seen a return to construction financing in the tristate area and across the country. In the second quarter of 2012, commercial and multifamily mortgage origination volumes in the U.S. were up 25 percent from second quarter 2011 levels, and up 39 percent from the first quarter of 2012, according to the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Mortgage rates under 4 percent continue to provide more than ample incentive for borrowers.

Particularly in the New York area, according to the MBA’s report, small- to-medium-sized banks reported “a noticeable pickup in overall loan demand.”

Several bankers confirmed this trend to The Mortgage Observer.

“A lot of people are trying to enter the multifamily business in New York, to jump on the bandwagon,” said Joseph Orefice, senior vice president and head of Commercial Real Estate Lending at New Jersey-based Investors Bank. “We see tons of new developers.” The number of requests from new developers that pile up on his desk have increased by roughly 100 percent, he estimated. This doesn’t mean that the bank is willing to take risks, though. “Everyone can ask,” Mr. Orefice said. “The percentage that actually closes is very small—maybe less than 1 percent.”

“About 40 percent of the people that contact me are new developers,” said Shannon Eidman, a senior vice president with Chicago-based Builders Bank. “We are very selective,” he added. “Of these I may do two or three deals a year.”

Other representatives of small and medium banks will not consider providing financing for new developers at all. For instance, Christopher Deutsch, vice president with Doral Bank, said he would not consider financing new developers even for smaller renovations.

After the financial crisis, lenders raised the bar with respect to their requirements for developers’ experience, track record, development team, net worth, contingent liabilities and the post-closing liquidity, sources said.

“While in ‘the old days’ of 2006 or 2007, it was possible for a brand-new developer to qualify for construction financing, today even obtaining 60 percent loan-to-cost financing for a first-time developer can be supremely challenging,” said Gregg Winter, president of Winter & Company, a commercial mortgage advisory firm which focuses on sourcing debt and equity for new developments, and founder and managing partner of W Financial Fund, a Manhattan-based direct, private bridge lender that specializes in quickly closing time-sensitive loan requests.