CRE Industry Worried Over Impact Of Development Application Freeze
Developers with projects set to begin their journey through the approval process are in a state of flux, as land-use approvals in the city have come to a temporary stop in an effort to slow the spread of the coronavirus.
Since Mayor Bill de Blasio suspended the city’s Uniform Land Use Review Procedure in a March 17 executive order, there has been widespread frustration throughout the development industry. Some argue that the city’s system of approval could be done online, and that its resistance to do so has cost developers and lenders time and money. Others lauded the city’s decisions, saying it was the only thing that could have been done.
Land-use experts with knowledge of the city’s processes said the city decided against holding public hearings virtually because of the undue burden it would pose on members of the public to weigh in on decisions made about their neighborhoods.
Developers have been hit with a one-two punch: the city freeze on the ULURP process and the city clerk closing its office, which means construction loan applications can’t be filed. That has set off a chain reaction, one that will ultimately reduce the amount of development that New York will have in the next few years, sources told Bisnow.
The freeze particularly affects three types of applications: Those that have just been certified to begin the ULURP process, those that were about to become certified and those that are still in the process of becoming certified, said land-use attorney Kenneth Fisher, a member at Cozen O’Connor.
“These applications are in a state of limbo,” Fisher said.
'Buying Into The Unknown'
One of attorney Eric Orenstein’s clients was in the last stage of certification, set to begin the ULURP process within 30 to 45 days when de Blasio signed the order halting the approval process on St. Patrick’s Day, he said.
Now, his client will have to wait months to begin the seven-month process, impacting the timeline of its development plans tremendously and costing lots of money in the process, said Orenstein, a member of Rosenberg & Estis' transactional department.
“You’ve got extra taxes, extra insurance, extra interest,” Orenstein said. “You probably have a loan, the loan had a term on it, it was all predicated on how long it was going to take you to get through this process.”
The effect of these costs may chill the overall market, he said.
“Unless you have a deep pocket and you’re willing to ride out the storm and pay the extra carrying costs, you’re sort of buying into the unknown right now,” Orenstein said.
The freeze will also cost development in areas with pending rezoning. Ariel Property Advisors Investment Sales Professional Sean Kelly has two clients with properties about to enter the ULURP process for rezoning, he said. They planned to close their deal in April, but the buyer has now delayed.
“They’ve been building out their model as if it will be rezoned in 200 to 240 days,” he said. “It costs [them] every single day.”
The practical effects of the coronavirus outbreak — not only the land-use freeze, but also the state banning most construction last week — will affect deal-making in the short-term and in the years to come, Kelly said.
“The fear is: If I am selling something for $10M, is this asset worth $10M if I give them three months?” Kelly said. “Chances are the answer is probably no.”
Longer term, it could change the demands of the entire market, Kelly said.
“It’s not a ripple,” he said. "It has the potential to be a tsunami."
Kelly blames one thing for the impact any virus-mitigation efforts will have on the market: the virus itself. He disagrees with the criticisms lobbed at City Hall over development applications.
“This is a once-in-a-lifetime event, and the city has done a really good job,” Kelly said.
Fisher has clients located in the Gowanus rezoning area in Brooklyn that will now have to set aside development plans for the time being. They can’t file for construction loans and they can’t move forward in the process, he said. All of a sudden, everything that seemed certain to them is uncertain.
“They are revving their engines at the starting gate, because we were anticipating we would be entering public review by today,” Fisher said Wednesday. “And that is all on hold.”
Developers could apply for extensions with their lenders, but these will come with even more costs and interests because their projects won’t be producing income. So far, Newmark Knight Frank Vice Chairman Dustin Stolly, the co-head of NKF's debt brokerage and structured finance department, said he hasn't seen a lending impact yet, less than a month into the virus' community spread.
“From a financing perspective, it is fairly inconsequential,” he said. “You can’t finance anything that is going through land-use review anyway.”
In terms of whether lenders are going to pull out of deals given the uncertainty of the economy when all of this is over, Stolly said no one knows for certain, but he thinks lenders are putting most things on pause.
“The reality is unless you were alive in 1918, no one really knows what’s going to happen,” Stolly said.
What Happens Next
Rosenberg & Estis attorney Frank Chaney, who specializes in land-use law, said during the Great Recession, he kept relatively busy for a while after the financial markets collapsed as his clients who had already invested in their projects continued to finish them.
“I had a number of matters that were in the pipeline even though the bottom had fallen out," he said. “The clients felt like they had invested so much money, time and effort into this already that it just didn’t make sense to pull the plug.”
But many property owners dropped projects that were not as far along because the economy was bad, he said. Input dried up.
“Land-use review takes a very long time,” Chaney said. "Property owners are generally reluctant to commit to a process that will take one-and-a-half to two years to complete unless they feel fairly confident that economic conditions are going to be maintained or even get better."
While many in the industry say there will be short-term effects and a change in what the market may look like as a result of the pause, in the long term they have little doubt that the market will survive and eventually thrive again.
Out of all the things to be happening for developers as a result of the pandemic, the freeze is not the worst, Hornig Capital Partners Managing Partner Daren Hornig said.
“We just gotta be patient and get through it and look back on this and say, unfortunately, it was a 30-to-60-day life hiatus, and hopefully we don’t get out of this with that much pain, individually and collectively,” Hornig said. “Not easy, for sure.”
While a crisis like this could be permanently devastating to other markets around the country, New York City’s resiliency is unmatched, Kelly said.
“Our rebound will be a lot quicker than others,” he said.
Orenstein said he has no doubt that the market will come back strong, despite the immediate pain his clients and the industry will feel, he said.
“I do think New York City is resilient,” Orenstein said. “Every 10 years we have one of these cycles, but the city always bounces back.”