If you’re a newbie developer looking for financing to build in New York, fuggedaboutit. But uncertainty over a key financing program and a major tax incentive has made it very tricky for even seasoned players to fill out their capital stacks.
Much of the tightness springs from the precarious futures of EB-5 and 421a and the increased conservatism of traditional lenders, panelists said at Anchin, Block & Anchin’s Construction & Development Forum on Thursday.
“You can either sit on the sidelines and say screw this,” said David Dishy, president of development at L+M Development Partners, referring to high land prices and skittish lenders. “[Or] you have to just sort of accept it because it is what it is.”
Drew Fletcher, president of Greystone Bassuk Group, an active lender on 80-20 projects, noted that it’s unclear if the state legislature will sign off on Gov. Andrew Cuomo’s proposed replacement for 421a. On top of that, he said, many of the projects grandfathered into the program — accomplished in a flurry of permits filed before it expired — are struggling, and look like they won’t secure a temporary certificate of occupancy before 2019, as required by the legislation approved in June 2015.
Fletcher also noted that EB-5, the controversial visa program that has helped New York developers raise billions in cheap debt, is set to expire in April and may be overhauled, particularly under a new president who’s been “antagonistic about relations in China” and increased restrictions on outbound capital in China. Developers need to stop viewing the program as a silver bullet, he said, and cautioned that the fundamentals of their project need to pencil out without it.
“The last five to seven years has been a bonanza for developers,” he said. “If you are relying on those dollars Day One to close, it’s going to be a little problematic.”
Timothy Haskin, of AECOM’s investment arm, said banks are ramping up recourse on loans (from 15 to 20 percent) and often require sponsors to have net worths of at least $150 million and $25 to $50 million in liquid assets. AECOM invests between $10 million to $30 million in projects, coming in as a co-general partner. The arrangement also guarantees that one of two of the company’s construction outfits — Tishman or Hunt Construction Companies — works on the project as a construction manager. But even AECOM, a deep-pocketed engineering giant, is finding the lending environment challenging.
“We have the balance sheet, but even for us, all the lenders have gotten more conservative, the rates have gone up the spreads have gone up,” Haskin said. “They are really stressing the numbers.”
Fletcher noted that banks are focusing on long-standing relationships when deciding where to deploy capital.
“Banks want to lend to people they know,” Fletcher said. “If you’re a new entrant to the market… you’re not going to be able to access conventional capital, period.”
Richard Browne, managing partner at Sterling Project Development Group, said that banks are also increasingly relying on completion guarantees.
“Until the last six or 12 months, it was just a box to sign,” he said. “Now they are certainly going to have more teeth.”