Banks tighten lending to build condominiums
Tuesday, November 29, 2005
By Christine Haughney and Ruth Simon, The Wall Street Journal
Some of the nation's largest lenders are cutting back on financing and are tightening standards for condominium projects, a sign that banks, which helped to fuel the run-up in real-estate prices with cheap debt, may be growing more skeptical about the prospects for residential properties.
In recent months, lenders have been requiring developers to put more of their own money into projects, sell units faster, and prove that they have experience completing these condos. Many banks have cut back on loans in markets where there has been the most building and investors already have bought up a large number of new condominiums.
"Lenders are looking toward more worst-case scenarios," says Dwight Dunton, president of Bonaventure Realty Group LLC, a real-estate developer based in Arlington, Va.
The condo market has been booming. So far this year, the number of existing condo and co-op units sold has risen 37 percent since 2002, and median prices have risen 53 percent, according to the National Association of Realtors. The median price of an existing unit increased 15 percent in October from a year ago to $229,800, the association says.
But the number of units sold declined for the second month in a row, a hint that the market might be cooling.
Some banks have stopped lending entirely in particular areas. "We are definitely slowing down and charging a lot more for it," says Brian Harris, managing director and global head of commercial real estate at UBS AG. "We are out of Las Vegas. We are very much out of Miami, and we are hesitant in New York City."
Merrill Lynch & Co. is concentrating on lending to condo developers it has worked with before. Commercial-finance company CapitalSource Finance LLC now requires condominium converters to sell about a third of the units in advance compared with about 20 percent previously. Bear Stearns Cos. recently cut the share of the total cost of a project for which it would lend to about 75 percent to 80 percent from 80 percent to 85 percent a year ago.
"We want to make sure that the borrower has skin in the game and is as motivated to sell the units as we are," says Christopher Hoeffel, a Bear Stearns senior managing director.
In some cases, developers are rethinking their plans. Dan Kodsi, president of Royal Palm Communities, a developer in Boca Raton, Fla., says his firm is taking a more conservative approach to its next project, a 60-story, 500-unit condo tower in the hot Miami market. Typically, the firm would try to sell units before going to lenders with the sales numbers to lock in financing.
Now, Mr. Kodsi says he wants to make sure he can get financing before he starts selling units he then would be committed to delivering. Mr. Kodsi says he has been approached by brokers representing developers who have presold condo units and now don't want to see the project through in the face of tighter lending standards and higher construction costs.
Tighter lending standards are squeezing out new developers who benefited from the recent largess of these financial institutions. Matthew Texler, a vice president with commercial mortgage brokerage Meridian Capital Group LLC, says developers who want financing have to show what their target market is, how they will get marketing support from local brokers, and how deep a sponsor's pockets are.
"What we saw in the last 12 to 24 months was so many people who had never done a condo deal in their lives getting into the condo market," Mr. Texler says. Now, "it's becoming very difficult for the newbies to get their deals done."
Bonaventure's Mr. Dunton says lenders are looking more closely at risks, worrying that projects may take longer than expected to sell out, analyzing what would happen if sales prices fall by 10 percent, 15 percent or even 20 percent and calculating what the project's value would be if all of the units had to be rented. Mr. Dunton says his firm has shifted its focus away from Washington and has put it on markets such as Charleston, S.C., where the economics make more sense.
While scores of developers risk going bust when they can't get financing, tightening lending standards ultimately may help the condo market. "To the extent that supply is slowed down, that's a good thing," says Timothy Martorella, managing director of Miami-based Madison Capital Group, a real-estate investment bank.
Only better-quality projects are likely to be financed and completed, says Howard Michaels, chairman of Carlton Advisory Group in New York, which has arranged $2 billion in financing for its condominium projects across the U.S. in the past 12 months, including an $840 million condominium-conversion project on Manhattan's Upper East Side. "The easy money is over, and our business is getting stronger," he says. But inexperienced developers may "have trouble on their hands," he says. "They could get stuck holding the bag." Those who paid high prices for land or buildings may have to refinance their loans or turn condominium units that don't sell into rental apartments.
Many lenders say that with lots of projects under way, they already have a lot of loans on their books. General Electric Co.'s GE Commercial Finance Real Estate division estimates that the number of new condominium units planned, under construction or for sale nationwide jumped to 100,000 a month in January, from 10,000 to 20,000 units a month from 2003 to 2005, leading the firm to limit lending in areas including Las Vegas, Southern Florida and Northern Virginia. Although the company still will lend in cities such as Washington; Phoenix; Jacksonville, Fla., and Manhattan's Upper East Side, it has less than 10 percent of its $36 billion real-estate portfolio in condominium loans.
"There's just nervousness that we're going to end up with too many" units, says Michael Pralle, president and chief executive of GE Real Estate.
post-gazette.com |
