Money for something: equity kicks for a price

Real Estate Weekly, May 22, 1996 by Lois Weiss

"It's 1996 for everything you are buying except real estate," said Norman Sturner, a general partner in Murray Hill Properties. "There are good properties out there but you have to come in with this tremendous traunch of equity."

To combat financing problems about 80 lenders heard an upbeat view of New York City's real estate economy from brokers, tenants and city boosters at an exclusive breakfast meeting held at the Harvard Club earlier this month.

The meeting was organized by Leslie Himmel, a partner in Himmel + Meringoff Properties, and Michael Cohen of Williams & Co., under the auspices of the Real Estate Board of New York's credit crisis sub-committee.

REBNY chair, developer Bernard Mendik told the group - that included some property owners hoping to tap a financial spring - that the city has cooperated by committing to holding the line on real estate taxes and by working with owners to create economic development programs such as the one that targets Downtown Lower Manhattan's outdated office properties.

With every single dollar increase in rents going directly to the bottom line, Mendik told lenders, "Your collateral will be safe and you can lend more money."

Other speakers included Peter Hauspurg, chairman of Eastern Consolidated Properties; Rosemary Scanlon, deputy state controller for New York City; Brian Schwagerl, head of real estate for Hearst publishing; and Robert L. Freedman, a Williams broker.

Himmel said that afterward, they got feedback from these major lenders that they weren't aware of the changes being made in the city's business community.

"The lenders are seeing there is all new capital and all new lenders coming in to take their places," Himmel added.

Money for the most part is available at higher interest payments and for shorter terms, but above all, more equity is required, either through an equity participation-type loan or an equity partner.

For bankers like Atwood "Woody" Collins, 3rd, president and CEO of East New York Savings Bank, owners with equity at risk become good loan prospects.

"The problem comes when the banks cross that line and have so much of the financing they become the equity owners," he explained.

There is also money available through the securitization process, but investor Allan Riley notes, "the problem with it is that it's not always so quick."

Because of tax law and other changes, capital is also no longer coming from unsophisticated investors as it did in the 1980s.

"Lenders are not giving loans to one-time buyers who are not established," said Himmel, glad, she says, to have survived the downturn and to be in an established company filling out applications for loans again.

"There are no more dentists and doctors, and no more syndications," agreed Bernard Bushell a partner in the Bernard Financial Group. "Those days are over."

Bushell says foreigners, so recently a source of cash, are cautious and want more visible types of properties, but "the big win is usually in the backyard 'B'-type properties."

Due to the proliferation of vulture and opportunity funds along with private sophisticated investor capital, there appears to be no shortage of equity available for the well - positioned project, as long as you are willing to pay for it.

"We are not in a credit crunch. That has turned for most segments of the market," said real estate attorney Fred Weber, a partner with Weil Gotshal & Manges whose firm represents a number of institutions and conduits as well as investors and has introduced clients both ways.

Weber agrees that office product still lags but on the residential, industrial and retail "it is once again a liquid market."

The biggest problem, buyers say, is finding viable projects.

Bushell says everyone wants a building that doesn't have a steady return but has potential.

"You have to have things in the pipeline," said Adam Rose of Rose Associates, one of the prominent real estate families in New York.

"There is financing - both debt and equity is available - although the percentage of equity required is certainly larger than it used to be," said Rose. "But we have investors who were happy in the past and don't have that problem. The difficulty is finding viable projects."

Major real estate families like the Roses are getting loans based on their balance sheets while real estate investment trusts (REITs) can write checks. But for most investors, that "viable project" also has to be through the lender's eyes, complained Sturner.

"Walking in for $25 million, and hoping to get a 70 to 80 [percent loan] is out of the question. It doesn't exist," Sturner said.

When the lenders run the numbers, he explained, "If you have a $5 million NOI [net operating income], which should get you $40 million, they say they will only give you $20 [million]. There is a discount for vacancy, a discount for rollover, a discount for everything."

The lenders also worry about the next mortgagee taking them out in the future and end up getting neurotic about the current borrower's lease expirations.

"If it's New York and commercial and not triple A credit and not 57th and Park there are more discounts," Sturner said. "You have to come in with more and more equity or a deep pocket partner or you can't buy property." There is also no such thing as a non-recourse loan, said real estate attorney Jeffrey Moerdler, a partner with Lowenthal Landau Fischer & Bring, who is also a member of the New York State Banking Board.