It”™s been a long, cold winter for real estate investors. For nearly three years, banks have restricted loans for multimillion-dollar real estate construction and acquisition deals. But we have begun to see a thaw.
Although cash-poor investors remain frozen out of the market and construction loans are still hard to get, money is available to investors with their own cash to invest, sufficient cash flow to cover the debt and expert help in negotiating terms.
So, if you”™ve been sitting on the sidelines, now might be a good time to consider getting back into the market. While interest rates have inched upward from six months ago, they are still near historical lows. In addition, lack of easy money has driven out most of the speculators, so prices are good.
Several interesting trends have emerged in both local and national transactions:
Non-recourse financing is available again. With a non-recourse loan, an investor is not personally responsible for making loan payments. The money is lent to finance a specific project, whose cash flow will be used to cover the debt. Very little non-recourse financing has been available in the past three years.
However, investors should be prepared to assume some risks. Because this market is just returning, bankers are asking for loan carve-outs, e.g., “bad boy” guarantees, which give rise to personal liability if certain acts occur, such as a bankruptcy filing and misappropriation of funds.
Pure construction loans are still hard to come by. Builders are managing to secure construction loans but the process is slow and takes a great deal of effort. A personal guarantee of the loan is almost always required. Lenders clearly prefer projects with existing occupants and cash flow.
More banks are lending to co-ops. Co-op associations are taking advantage of relatively low interest rates to refinance their underlying mortgages, particularly if their mortgages were written many years ago. Until recently, only a handful of lenders would consider such loans. The field of potential lenders is much wider now.
Cash continues to be king. Investors are supplying at least 30 percent of project equity.
Investors are cashing in on debt. Investors with cash are buying non-performing mortgages and working with the mortgage holders to convert the debt into equity. Lenders are willing to sell poorly performing mortgages at a discount so they can remove them from their balance sheets. If investors have enough cash to acquire the debt, they have a good chance of generating an internal rate of return of 20 percent to 30 percent when the loan is restructured or ultimately foreclosed and the property is sold.
It”™s best to resell the property quickly, since its value may be at risk if it remains unoccupied too long.
Although no one can predict when a robust real estate lending market will return, clearly spring is in the air. There are good opportunities for experienced, savvy and entrepreneurial real estate investment companies. Money is available to investors with solid track records and cash flow.
Stuart Berg is a real estate attorney and partner at Kurzman Eisenberg Corbin & Lever L.L.P. in White Plains. Reach him at sberg@kelaw.com.
