Developers Dish On The 2 Banks Doing The Most Construction Deals In New York
There are two traditional lenders in New York City right now that have not succumbed to the widespread commercial real estate pullback in the financial markets, and neither one is based in the Big Apple.
Arkansas-based Bank of the Ozarks and CapitalSource, owned by Beverley Hills, California-based Pacific West, are the lenders bidding on most construction loans, Wonder Works Construction Chief Operating Officer Eric Brody and Silverback Development Vice President Amy Pearl said at Wednesday's Bisnow Construction and Development event.
Terra Capital Partners Managing Director Dan Hartman said despite the departure of Dan Thomas, the head of Ozarks' lending platform, the Little Rock bank is poised to keep funding new projects. The bank's shares fell 12% on the Nasdaq following Thomas' resignation.
"We do a lot of business with Bank of the Ozarks. They definitely have some secret sauce," Hartman said. "CapSource we do a lot of business with. They can write big checks. Both of these guys are now doing deep into nine-figure-size deals, and they're picking up smaller stuff, too."
At this point in the cycle, banks that were active in funding the development boom of 2014 and 2015, which is coming to fruition with staggering amounts of supply hitting the market, are wary of lending more of their balance sheet into the same asset class. So Ozarks and CapSource have stepped in.
"The storm came through, and these are the last two shrimp boats that made it," Hartman said.
Brody said of his last four construction projects, CapSource was the senior lender on two of them — Terra Capital provided mezzanine debt for Wonder Works' project at 114 Mulberry St. with CapSource — and Ozarks lent on a third. Bank Leumi out of Israel, another source of capital with traditional lenders few and far between, was the fourth lender.
While Bank of the Ozarks' lending spree has raised eyebrows around New York City, Brody said Thomas allayed any concerns about overexposure in its portfolio.
"When you speak to Dan Thomas, who left, he said, 'Everyone’s talking about Ozarks, but our full portfolio leverage is 50%,'" Broday said. "Maybe in New York we’re leveraging more, but overall, when they’ve deployed the money, it’s been relatively lower risk."
The low-risk profile for lenders is key. Pearl said banks have not pulled out of the market entirely, their terms are just less favorable than they were two years ago. Some require builders to put up as much as 45% equity or find other sources of capital, not exactly an easy pill to swallow for developers who are already heavily leveraged.
"Leverage points and cost of capital is a big sticking point with Ozarks, as well as a lot of the major banks you are getting lending from," Pearl said. "The point is your leverage is not where you want it to be for the capital stack and not for the cost of capital either ... I think there are [deals] out there, it’s just not where you want it to be."
The gap has caused a huge proliferation of developers becoming lenders themselves. Rather than take on construction debt at unfavorable prices, firms like The Moinian Group, Related Cos. and Madison Realty Capital, which just closed on a $300M construction loan to Ceruzzi Properties for a condo project last week, are offering loans instead.
While the developers are happy to provide debt and make money off someone else's projects, their terms are more aggressive than traditional banks, and the developers taking debt from their competitors should be wary of ulterior motives.
"Some of the money is getting so cost-prohibitive, developers are looking to take your position," Brody said. "If you’re in New York City construction and development, it’s not if something will go wrong, it’s when. So you know inherently that you have some issues, and it’s about how will these alternative lenders react."
Pearl and Hartman expressed the same observations. Some developers are happy to work with their borrowers, but other are "circling around, looking to steal" a project, Hartman said.
"So many developers are entering into the mezz space as these hawkeye players waiting for people to fail," Pearl said.
CORRECTION, AUG. 11, 11 A.M. ET: Capital Source, a subsidiary of Pacific West, which is based in Beverley Hills, is an active New York City lender. A previous version of this story misidentified the lender as CapSource, a Nevada-based lender. This story has been updated.