Mortgage Observer

In Development

Doug Stern was fully aware that pursuing his Maidenform complex project on his own would have been almost impossible. In 2009, he reached out to his friend Leon Cohen. An architect and developer with over 30 years of experience and a principal in CSR Construction Corp., a New Jersey design and construction company, Mr. Cohen had met Mr. Stern when working on a renovation of Mr. Stern’s family’s buildings.

By this time, the Maidenform complex had dropped in price from $5.8 million to just $2.2 million.

Mr. Cohen immediately saw the property’s potential and agreed to partner with Mr. Stern. “He bought the building and as a part of my investment I produced the construction drawings and the budgets,” Mr. Cohen remembered.

Mr. Stern, Mr. Cohen said, had financial knowledge and a knack for dealing with banks, but he needed an experienced partner. “Banks today are so sensitive to the possibility of a failed project that they want to see previous development experience,” Mr. Cohen said. “It’s beside money—there are many people who have money.”

A guarantor or a partner are “mitigating conditions” that banks might consider in dealing with new developers. “In some instances we have found a mitigant in the ‘new developer dilemma,’ where someone is willing to join the new developer on guarantying the loan,” said Builders Bank’s Mr. Eidman, who offered as an example developer parents who act as guarantors for their children’s first developments. Obviously, having such a guarantor in the family is a huge help.

Others might look for a guarantor among people with whom they have done business. “If the additional individual is willing to back up the new developer with their guarantee, and that person has experience developing projects but may not necessarily want to take the lead on this particular deal, we could conceptually consider their strength,” said Mr. Eidman. “In the event something started to go sideways on the deal, the experienced person could step in and correct the issues, and would want to do so because they have a vested interest in the success of the project as a guarantor.”

Firms such as Winter & Company, Mr. Winter said, often arrange joint ventures between new and more experienced developers. This is a great way, he said, “to learn the business faster and to avoid the countless—and often very expensive—errors that new developers often make.”

Another factor that banks like Builders Bank might consider is a new developer’s previous experience in managing developments for others. “If you are a GC [general contractor] who has never built [on his own], this is a deal I would look at,” Mr. Eidman said. “This is an easy one.”

Investors Bank’s Mr. Orefice recently closed two deals in New Jersey. His tips to new developers are “to make sure that they have plenty of equity” and “to begin a relationship with the community of investors.”

In the struggle to obtain financing from banks, new developers often look for alternatives among private lenders, hedge funds and private equity firms. However, these alternatives often come with higher costs.

“We are currently financing new developers,” confirmed Steven Parrinello, a vice president with Hudson Realty Capital, a real estate fund manager. Currently, the firm has over $1.5 billion of assets under management; it provides loans in the $5 million to $50 million range. Since the formation of its two initial funds in 2002 it has closed over $3 billion in transactions.

“There is still a lack of capital for development in general,” Mr. Parrinello said. “In the middle market, we see even less capital, so we have been busy with development financing.” In New York, the hotel and multifamily markets are very attractive for smaller developers, he added, but obviously, for them, the costs are different.

“Hudson offers higher advance rates than traditional banks, while our cost of capital is slightly higher than banks,” Mr. Parrinello confirmed.

Coming from private equity, Mr. Stern was well aware of these variations in costs. “I like being the hard money lender, not the borrower,” he said. “I’m a very low-risk kind of guy.” With hard money, he realized, his cost of money would be severely higher.

After closing on the Maidenform complex in November 2009, it took almost three years and discussions with 11 other banks before Mr. Stern obtained a $12.3 million construction loan from M&T Bank. Construction is due to start soon, but for now the former factory sits empty. In one small room, serving as an office, renderings sit among faded 1960s Maidenform ads. It will have rental units from studios to three-bedrooms, live/work units for artists, a gym and community spaces. An outdoor space between the factory and a former warehouse will be turned into a common garden, and a brick industrial chimney transformed into a pizza oven for the tenants.

“New developers must have an edge in some respect,” theorized Mr. Winter. “This might be a great location acquired at a better-than-average basis, or a partner with very deep pockets and strong liquidity that is willing to co-guarantee the construction loan.”

“I think you have to know your limit,” Mr. Stern posited. As a new developer, he said, he had to be realistic about the fact that there was only so much he could negotiate. He also had to be willing to ask for help when needed.

“I didn’t know if I was very smart or very stupid,” he said of the risk associated with his first development project. “Now I hope that this will be just the first of many future developments.”