Lawyer’s View: Construction and Development
Morrison & Foerster Partner in the Real Estate Department
How is the current market for construction financing?
From a couple of years ago, [now] you see a lot more activity in terms of constructions, lot more condos, multifamily and some retail. But you probably need around 75 percent preleased in order to get financing for a retail building. With respect to office, I don’t think we are going to see a lot of spec office buildings anytime soon. If we do, they will be structured with a lot of recourse, such as 51 Astor [Place], or they will be smaller buildings. But to see a typical high-rise in Midtown that is spec, like 12 Times Square, I just think it is pretty unlikely.
Who are the lenders that are competing for the construction market?
You have the very traditional Bank of America, J.P. Morgan, Wells Fargo and PNCs of the world, and then you have some nontraditional lenders like Starwood Property Trust and the Children’s [Investment] Fund. They appeal to lenders who are looking for deals with mezz financing.
How are traditional lenders facing competition from nontraditional lenders?
It is a challenge, because they have their requirements, which are lending at probably about 65 percent loan-to-value. In the last year or two years, you have seen traditional lenders willing to do mezz again. Reluctantly for the banks, but they have realized that if they want to be able to compete out there they need to permit mezz financing to the projects.
Are there other signs that lending is getting looser?
In most deals, you are still going to see principle guarantees, but I think that probably over time those will shrink in the requirements. Obviously, prerecession we were doing deals without any principle guarantees at all.
So we are not at the same point?
No, we are really not there yet. And I think that the other guarantees that you get—carry guarantees and completion guarantees—I think you are always going to have those. We did see a handful of deals—or actually probably a lot of deals—prerecession where they capped the obligations under the completion guarantee. If we ever got to a point where you start to see caps on completion guarantees for buildings that are not under way and/or without a very strong developer, I think that that’s a sign that things are getting a bit crazy in the market.
What are the other trends you foresee?
We will continue to see a lot of high-end condos. You will see some smaller projects by well-respected developers but not necessarily the huge Gary Barnetts of the world, Larry Silversteins of the world. Multifamily will continue to remain very busy. We will continue to see some of the nontraditional lenders stepping in the market, probably even more so than they have done already. I think you will see more traditional lenders who will agree to fund their own mezz loans. And you will probably see some other traditional lenders pre-agreeing with some of the mezz players out there and doing a package deal.
Interview by Alessia Pirolo