Doing Deals in Any Economic Climate: TF Cornerstone

In 1968, K. Thomas (called Tom) and his brother Henry began building and redeveloping residential properties in New York City. First they renovated brownstones on the Upper West Side, before fabricating a model where they redeveloped buildings, sat on them for about a decade, and then sold them as co-ops. Later, they zeroed in on what was then an underserved asset class: rental properties. And it was with large, luxury rental projects, often in up-and-coming neighborhoods, that the Elghanayan family became a household name in New York City real estate.

Fast forward 25 years, and TF Cornerstone is one of the most respected and most prolific builders in the city. The company has built steadily through a recession that crimped lending for any but the best-credentialed borrower. Their EastCoast project in Long Island City, Queens—a 21-acre, seven-building behemoth on the site of a former Pepsi factory—is now complete. And the company is hard at work on three more megabuildings set to rise in the next five years.

While there were interpersonal and economic bumps in the road along the way, the secret to their success is simple: consistency, honesty and a simple business model.

“We don’t have any investors, we don’t take out any mezz,” TF Cornerstone principal and founder Tom Elghanayan told Mortgage Observer during an interview at his office overlooking Park Avenue. “It’s contrary to the current methodology, where there are a lot of funds and private equity. These people are IRR-driven, and therefore they always want to get as much leverage as they can.” His company takes a different, old school approach.

TF Cornerstone has a take on underwriting that its head of finance and acquisitions, Jeremy Shell, admits is decidedly conservative in the current context. “We are not raising outside capital, we are not promoting . . . not feeing,” he said. “We aren’t going to get rich on fees.”

The approach is also contrary to developers who focus on the brands of buildings rather than the fundamentals, or who J.V. with numerous partners, many of whom aren’t spending their own money.

A major reason why TF Cornerstone has access to capital even in a downturn is because “it’s their capital,” Mr. Shell said. In fact, for the final building at the massive EastCoast, the firm did not take out any construction loans, opting to build with their own cash.

Mr. Elghanayan’s take on construction loans is blunt, as is his reputation: you shouldn’t use them if you don’t have to. And with construction funds running about 200 points over Libor for New York City projects, according to a prominent financer who asked not to be named, it’s easy to see why the whole costly endeavor should be avoided.

“When you figure out, really, what it costs you for a construction loan in terms of the legal the points up front . . . it’s very expensive,” Mr. Elghanayan said. “I think we figured it out once, and a loan that was nominally 5 or 5.5 percent on a real basis cost about 9 percent.”

At the last of the seven EastCoast buildings, the developer will still do a “take-out,” meaning when the project is stabilized, they will close a permanent mortgage with a 10- to 15-year term and low interest rates, likely from a life company or a GSE, Mr. Shell said. The project, at 4610 Center Boulevard, just began leasing.

The approach echoes the financial philosophy TF Cornerstone has used for the whole EastCoast development: take out construction loans, if need be, and refinance at a low rate long-term as soon as possible. For instance, in March, the developer closed a $300 million permanent loan from Prudential Mortgage Capital Company and AXA Equitable Life Insurance Company for 4545 Center Boulevard. The 15-year, fixed-rate mortgage refinanced a $265 million construction loan on the 42-story rental tower.

“They have the credible ability to build on budget,” Mr. Singer said of the developers, who are known for paying bills on time and remaining candid with everyone involved in the process. “They let you know when they are happy and when they are not.”

Part of Prudential’s willingness to lend in that instance was the borrower’s profile and history, but the quality of the product was also a factor, said Justin Levitt, a director with PMCC. “This project just had so much more in terms of amenities than anything I’ve ever seen. It made it a more attractive transaction for us,” he said.

Some combination of life, pension, insurance and GSE funds have been the norm for TF Cornerstone’s take-out loans in recent years.

“Lately the insurance companies have been far more aggressive on 15-year money than have Freddie and Fannie,” Mr. Singer said, but TF Cornerstone “doesn’t need the last dollar and they rarely choose to take it.”

The company, called TF for Thomas and Frederick (who joined up with his brothers in the 1970s), relies on a stable of lenders including Wells Fargo, Bank of America, M&T Bank, Capital One and Helaba for construction funds, Mr. Shell said. Sometimes, as with the construction loan for 4545 Center, originated in 2012, they have used up to five lenders on a single loan. They also vary their portfolio, taking some floating-rate and some fixed-rate loans.

The developer has even taken out recourse construction loans from time to time, to stem the cost of capital when rates were high, said Mr. Shell. “Many developers don’t have the stomach to offer recourse on a construction loan,” he said.

The Elghanayan brothers ended up in real estate by accident. After graduating from Harvard, Iran-born and Queens-raised Tom Elghanayan, with his brother Henry, started a fund that invested money from their father’s friends in Iran in a variety of businesses.

“We were young and it was stupid,” Tom Elghanayan said. When the funds tanked, their accountant told them to invest in some Upper West Side townhouses his friend was renovating. Unfortunately, the accountant was skimming from the proceeds, so the pair ended up back at square one. After splitting off from the underhanded accountant, they were left with half-completed properties and a need to realize upside, and quick. So the duo set about learning the construction industry.

“We renovated them into rental buildings, and then ten years down the line sold them as co-ops,” Mr. Elghanayan said of projects such as 140 West 74th, 31 West 16th Street and 173 and 175 Hicks in Brooklyn Heights. At the time, the Upper West Side was very different.

“‘Needle Park’ was right down the street and we had to vacate the tenants,” he said. “They were all transvestite junkies.”

Slowly, the pair built more and larger buildings, before opting to focus on rentals. The prevailing wisdom was that office buildings couldn’t be converted to residential because of thick concrete floors, but with the redevelopment of 801 Broadway, Rockrose proved the critics wrong, pioneering a procedure that’s now regular practice.

But, there were more trying times. In the late 1970s, stagflation and looming city bankruptcy brought interest rates up to 15 percent. When Rockrose needed to refinance, the banks saddled them with huge prepayment penalties. But the company continued steadily building, which has always been part of its strategy.

“It’s sort of a contrarian bet,” said Mr. Shell, of building through economic cycles, and it is something they will continue to do.

In 2009, after building many hulking—and hulkingly successful—projects together, Henry Elghanayan opted to split off from Tom and Fred. He kept the Rockrose name. Tom and Fred kept most of the Long Island City parcels, which they’d negotiated new zoning on a few years before in exchange for deeding them to the city, from whom they technically lease the land for $1 a year per parcel.

The ground lease has created some added legal complications, but nothing that kept them from building. They started with the aim to get a new building in the ground every six months at EastCoast, so that they would stagger the buildings but reach a sort of “critical mass,” which Tom said has now arrived.

“We have restaurants, liquor stores, cafes,” now, in the once-blighted area, he said.

But there were formidable hiccups, even at the transformative EastCoast, during the Great Recession. The View, the only condominium building in the EastCoast complex, premiered in 2009, when pricing and lending were at a recent nadir. “We built [The View] all cash and it came out in the middle of the Lehman collapse, so we were in a very poor market,” Mr. Elghanayan said. They had figured they would get $1,400 a square foot, and therefore had to lower prices dramatically to get the first 15 percent of condos sold so that the building could be declared effective.

Even after that, TF Cornerstone needed to sell 50 percent of units before many lenders would be comfortable providing mortgages at the building. In the end, not having a lender was a blessing, because they likely would not have let the developer lower prices as far as they needed to in order to get the building sold.

Following the success of EastCoast, lenders are more willing to lend for multifamily projects in Long Island City. Mr. Levitt of PMCC said his firm would now look at lending to developers in the area other than TF Cornerstone and Rockrose. “Long Island City will be one of the better submarkets moving forward,” he said.

But it’s also hard for anyone to keep building when land prices are rising so quickly—which is why TF Cornerstone bought up a lot of it when prices were low. “They don’t pay for land at these crazy prices,” said Mr. Singer. “They have inventoried land.”

In a city where many developers have had second acts—Michael Shvo and Harry Macklowe, for instance, to merely skim the surface—the Elghanayans haven’t needed one.

“We had a pretty big margin and we knew the construction business,” when the brothers started in real estate, Mr. Elghanayan said. “What you see now is people coming in with no expertise and paying huge prices. And it all seems to work out.” But that may not be the case indefinitely, as evidenced by the many defaults in the last market correction.

Moving forward, TF Cornerstone is looking to build three huge rental projects: a Manhattan building offering 1,189 units, a 700-apartment Downtown Brooklyn development and the architecturally significant Hunter Point South project in Queens, which won’t be complete until at least 2018.

The Manhattan project, at 606 West 57th Street, will be the largest apartment building in Manhattan once it is complete. But Mr. Elghanayan said the Midtown West project, which will use the so-called 80-20 program to mitigate costs by building affordable housing in exchange for tax credits, could still run into hurdles if Mayor Bill de Blasio mandates more affordable housing than he can economically build.

“It’s a test of de Blasio’s ability to facilitate construction, while at the same time maintaining affordable housing,” he said of the building’s ULURP. The project may end up a 70/30, but there are limits to the amount of affordable housing the company can include. Mr. Elghanayan is willing to kill the project if the financials don’t add up.

At 33 Bond Street in Downtown Brooklyn, where TF Cornerstone bought a parking structure from Joe Sitt’s Thor Equities, the company also plans an 80/20 project.

Both projects will be financed by New York State Housing Finance Agency bonds. When construction is done they will again seek take-out funds, likely from Fannie or Freddie, Mr. Shell said.

Meanwhile in Queens, if all goes as planned, TF Cornerstone will end up revitalizing yet another swath of now-industrial waterfront. The developer won the bid from the city to develop Hunters Point South, a mixed-use project with 1,200 residential units, in December. The residential component will be 66 percent affordable housing, but geared towards middle-income renters. It should overtake the 57th Street undertaking as the city’s largest building, upon completion. Construction is set to start in 2016 and will take about two years.

The firm remains committed to rental projects with affordable housing when feasible, for economic and ethical reasons.

“It’s a difficult product to build and it’s not the highest return out there … but we recognize it’s important for a thriving middle class,” Mr. Shell said. Still, he hopes the mayoral administration will continue to treat affordable housing quotas as a “carrot, not a stick.”

And while TF Cornerstone’s success might be hard to replicate, perhaps if more developers could, the next economic downswing might not swing so low. As Mr. Shell points out, TF Cornerstone has “never walked away from a project, never handed the keys back to the bank. We are a bit of an anomaly.”