Inventory Loans Are Gaining Popularity Among Borrowers and Lenders

In New York’s dynamic and fluid housing market, it’s not unusual for developers to hold unsold units for a variety of reasons. Given the volume of new construction in recent years and the subsequent inventory of condominium units, developers are turning to condominium inventory loans to repay maturing construction loans and hold units for sale at a later date.

Inventory loans are most often associated with mid-market condominium developments, which still make up a large portion of these deals, but there has also been a surge in the luxury sector. Morris Betesh, a Meridian Senior Managing Director, recently closed two loans in Manhattan that reflect this trend and speak to the expanding range of property types that inventory loans support.

The first of these is a $20 million loan for 17 condo units at a 52-unit property located on Wall Street in New York City’s Financial District. Betesh secured the 24-month loan from a balance sheet lender.

He also secured a 36-month inventory loan for a five-story luxury townhouse in Chelsea, which is currently on the market for nearly $30 million. “It’s typically harder to secure inventory loans for ‘super-luxury’ assets, but this is hardly a one-off situation,” says Betesh. “Right now, we’re working on several deals for similar high-end properties around New York City.”

Currently, he has 10 more inventory financing transactions in the works. “Regardless of the property type, lenders today recognize the benefits of inventory loans,” Betesh said. “These loans don’t require any visualization abilities; lenders aren’t looking at a hole in the ground. There are no delays in construction or budget surprises, and they receive interest payments every month capitalized through a reserve.”

Meanwhile, sponsors gain more time to achieve their prices for units and in some cases can recapture equity and lower their interest rates by 1.5 percent to 2 percent by switching from a construction loan.

Sponsors may also consider this a good time to hold onto unsold inventory. As the economy continues to grow and lucrative tech, media, and life sciences businesses expand in New York, more buyers will emerge.

With fewer acquisitions in the market, lenders have plenty of capital to finance creative deals. Inventory loans are one area where they have pivoted to earn attractive yields; the space has become more crowded and rates have compressed to the benefit of borrowers.

Morris Betesh, senior managing director at Meridian Capital Group, can be reached at (212) 612-0105 or mbetesh@meridiancapital.com.