Scarcity of funds for small properties threatens NY

Real Estate Weekly, Jan 27, 1993 by Donald L. Shapiro

The past year wasn't a good one for small-property owners in need of financing, and 1993 doesn't figure to be much better. In fact, with property values having fallen a little lower, the new year could be worse.

The small owner, typically, has a short-term mortgage that may well be up for renewal within a year or two. Interest rates are down, of course, which is terrific. But can a new loan be found under acceptable terms?

In too many cases, the answer is no. Consequently, a crisis may be brewing that will rob the local economy of jobs, weaken the tax rolls and damage the "grass roots" property owners on whom the city vitally depends.

The problem with small-property financing is three-fold. First, many institutions either want to, or have to, reduce their real estate exposure. Therefore, a borrower may find that even if he or she has been making mortgage payments on the first day of every month since the loan closed, the bank simply doesn't want to retinanee.

OK, so there are plenty of other lenders around, right? But the search for a new loan from other banks usually leads to a dead end. Who wants to make a loan for, say, $600,000 on a small apartment house in Queens or a loft building in Brooklyn? Banks that are still in the income-property lending business want the efficiencies of scale that go with multi-million dollar transactions.

But let's suppose the borrower's bank is willing to refinance. Another glitch often arises. The existing loan was made five years ago. A new appraisal shows the value of the property has declined in the interim, and so the bank wants a paydown of principal before giving a new mortgage. Can the borrower contribute additional equity under current conditions?

For every glamour building in midtown Manhattan there are thousands of small properties in the five boroughs that lenders would rather ignore. Yet this category of real estate is vital to the health of our city. The following is a case in point:

Not long ago, two brothers, neither of whom are real estate professionals, inherited a crumbling and all 'but' abandoned Manhattan loft building on West 25th Street near 11th Avenue. Nearby, on 28th Street, a sign manufacturer was looking for a permanent home for his growing firm and the metal fabricating company with which he shared space and did business.

Helped by a $500,000 mortgage commitment from New York Federal Savings Bank, the parties came together to strike a deal. With an option to buy in five years, the two small firms moved into the building and are committing hefty amounts of their own capital into more improvements.

This arrangement has transformed an empty eyesore into a rejuvenated, productive and taxpaying property where 65 people are now employed. But it could not have happened without an institution willing to transact the kind of mortgage that so few are willing to make today.

Fortunately, there is a number of local lenders that are structured to accommodate mortgages under $1 million. New York Federal Savings Bank is among them. But that number is painfully small. New York's vast community of small-property owners needs a far bigger commitment from the lending industry than it is receiving today. Without it, a true economic recovery may be further off that we think.