Lenders Demanding More Personal Guarantees, Tougher Terms From NYC Multifamily Borrowers

As multifamily distress spreads across the city, many lenders have wound up with losses on their books from borrowers who handed them the keys to underwater assets.

Some wish there were more consequences for borrowers, who have been able to wipe their hands of the troubled buildings. So they’re creating them.

Lenders are adding more recourse provisions into newly originated loans in order to make it harder for multifamily landlords to simply relinquish ownership, finance insiders said Thursday at Bisnow’s New York Multifamily Development and Investment Conference. 

“We structure our deals around that, whether it's a personal guarantee or a corporate guarantee, just so whoever the potential borrower is knows that they do have some skin in the game,” Northern Trust Bank Senior Banking Officer Chris Mitchell said onstage. “So if the asset becomes distressed and they want to walk away from it, it's not as easy.”

Recourse debt allows lenders to recoup losses by seizing additional assets from borrowers. Some major office landlords, like Charles Cohen, are currently battling their lenders in court as personal guarantees in loans signed years ago have come back to haunt them. As property values have disintegrated, creditors are eyeing seizures of luxury vacation homes and superyachts to cover their losses.

In Manhattan, multifamily property values have dropped from $940 per SF in 2019 to $679 per SF in 2024, according to a report from Ariel Property Advisors. In that time, cap rates have ballooned from 4% to 6.2%. 

“Banks are coming and approaching [sponsors] directly for short sale opportunities, where the sponsors just don't have the capital, the equity, to put it in,” Mitchell said. “A lot of those deals that come to us, they did not have any recourse provision built into them back in 2019, 2020, so it's much easier to hand back the keys when there's nothing on the back end that they can come after you.”

Despite a desperate need for housing in New York City, a huge chunk of the city's multifamily market has been destabilized since the passing of the Housing Stability and Tenant Protection Act of 2019. The legislation substantially limits the amount landlords can raise rents on rent-regulated apartments, making it difficult for many to keep up with mortgage payments and operating costs.

Nearly 1 million apartments in the five boroughs are rent-stabilized. Outside Manhattan’s core, 61% of pre-1974 buildings are 100% rent-stabilized, according to New York Apartment Association statistics previously shared with Bisnow.

Handing back the keys to those buildings may come with an additional set of problems, Dansker Capital Group CEO Andrew Dansker said at the event held at the Marriott Marquis in Times Square.

“There is definitely not a lot of recourse in the New York market, but there's a lot of 1031 exchange money,” Dansker said, referencing the tax break that allows investors to defer capital gains taxes by reinvesting the proceeds into a similar property.  

“That means that if you give back the keys and you dispose of that asset, you've got a real problem, especially if you did so at a loss.”

Foreclosures on 1031 properties could result in debt forgiveness, for which the IRS could treat the canceled debt as taxable income. If the borrower does receive some proceeds, those may then become subject to the capital gains taxes that the borrower was attempting to avoid in the first place. 

Creditors typically don’t want to have to deal with a property once it’s turned over to them, especially when its income isn't covering expenses. 

To avoid that fate, banks and other lenders have begun shopping certain highly leveraged loan portfolios. Pimco recently sold a package of loans backed by six Bronx properties for 45 cents on the dollar, PincusCo reported. In the largest transaction, PH Realty Capital paid $16.6M for a note with an original principal of $38.2M. 

Community Stabilization Partners — a partnership of Community Preservation Corp., Neighborhood Restore and Related Fund Management — bought Signature Bank’s rent-stabilized loan book for 59 cents on the dollar. It filed its first foreclosure lawsuits against borrowers in that portfolio last week.

Still, the broader market reset many are waiting for has not yet happened. Asland Capital Partners Managing Partner and CEO James Simmons believes it will be another two to four years before values truly bottom and the true level of distress emerges. 

“No one wants to do it voluntarily. It's going to be forced,” Simmons said. “So those banks that have these assets on their books are going to have to, at some point in time, get them off their books, recognize the losses, and the individuals that have them on the balance sheets are either going to have to hand in the keys, or the keys will get taken and they'll either have to pay their taxes or find some other way to deal with it.”

For those looking for new financing in the meantime, loan terms that would typically be considered red flags for borrowers, like a personal guarantee, might be unavoidable considering the dearth of lenders in the market.

“Five years ago, you needed to borrow money against that multifamily asset, you had a half-dozen people who wanted to give you that money, somewhere between three and three and a quarter, and they were fighting over five [basis points],” Dansker said. “Today you've got one person who wants to give you 6.75%, and they want a 10% compensating balance. It's a very different environment.”