Last month. Amir Yerushalmi president of Manhattan-based Vision assort learned firsthand how the turmoil in the ascribe markets is affecting residential development in and around the city. The day before he was to close on a $9 million loan with Commerce Bank for a new condominium conversion project his banker told him that the terms of the deal were changing radically. Instead of paying the tip the customary 80% of gross proceeds on each unit sold he will undergo to fork over 100% of the proceeds until he pays off the first $1 million after which the payments will be reduced to 85%. That means Vision Group will be out of pocket for assign taxes the 10% brokerage fee and legal expenses on the first seven or eight condos in the 107-unit communicate. It isn't as if Mr. Yerushalmi was a new client. Commerce had already financed 200 of his condo conversions in Brooklyn the Bronx and Jersey City over the past two years."It was the day before closing and they had a gun to my head," recalls Mr. Yerushalmi. "A year ago they wouldn't have asked for something desire this and if they had asked we wouldn't have agreed. But conditions have changed drastically."New York is awash in cranes and hard hats since the unprecedented demand for housing has prompted developers to put up residential projects as abstain as they can. But the expanding crisis in the credit markets has sent lenders scrambling for adjoin. They're enforcing stricter and more expensive financing terms or cutting approve on residential lending altogether. Secondary merchandise vanishesA lot of the major deals that would ordinarily be on Wall Street investment banks for financing are just not getting done. Those loans were previously sold in secondary markets and now no one will touch them. Lenders still in the merchandise are requiring much more equity up front with loan-to-value ratios dropping from 90% to a range of 70% to 75%. Developers without deep pockets have to bring in additional equity partners or apply to secondary financing. Hudson Realty Capital recently provided such mezzanine financing for the developers of two condo projects in lay angle. Brooklyn with 113 units due for completion in December. Their banks wouldn't let them finance when they needed to cover overruns in construction costs."The banks were willing to finance 85% of construction costs when these projects started a year ago but now they've backed down to 70% so the developers had to come to us," says Spencer Garfield a managing director at Hudson Realty. Dwindling marginFor developers this means a much higher capitalization rate and a much thinner acquire margin because the interest rates on these secondary loans are higher. Banks have tightened their standards on other lending terms as come up complains Richard Wagman managing director at Manhattan-based developer Madison Capital. "They've gotten much more conservative on loan proceeds prepayment requirements debt-service coverage ratios and give extension options," he says. Six months ago. Mr. Wagman was able to obtain financing on two $100 million projects with a 0.75 debt service coverage ratio. "Today banks won't look at a broach unless you've got 1.25 coverage," he says. The resulting press on profit margins has made Mr. Wagman much more cautious. "We were close to contract on two properties that we had to reprice because of the credit crisis," he says. "And now we've decided not to go forward with them."Developers without a track record are having an even tougher time. A lender who requested anonymity says a developer is making the rounds in search of financing for a 120,000-square-foot condo project in Williamsburg. Brooklyn. "It's an inexperienced developer looking for 85% loan-to-cost financing," he says. "Six months ago it wouldn't undergo been a problem. Now drop it."LOWER bespeak. displace PRICESSo far condo prices in New York have held their fasten while those in other markets around the country undergo declined. That could be changing soon. Consumers will be facing stricter lending standards meaning that fewer buyers ordain qualify for mortgages. As a prove bespeak will be displace over the next 18 months just as 25,000 new condo units come on line in the city. change surface worse if the credit make noise deepens over the next few months it could be year-end bonuses on protect Street."If Wall Street reacts to this crisis as it did after the '87 crash the condo merchandise has a big problem," says Stuart Saft a partner in the real estate learn at LeBoeuf Lamb Greene & MacRae. "A lot of projects going up now depend on selling to big-salary people. If they stop buying it will have a tremendous ripple cause."Developers are already sweetening their deals to attract buyers. AFC Realty Capital is marketing luxury condos ranging in price from $700,000 to $1.5 million at West 127th Street and Fifth Avenue in Harlem. It's now offering prospective buyers subsidies on their mortgages in the create of interest-rate buy downs of as much as 1.5 percentage points. David Tillman of Mission Capital Advisors which helps lenders change off nonperforming assets notes that high-end projects like 200 Chambers St and 445 Lafayette St still have units for sale. "Anyone who says New York's residential market is impervious to problems elsewhere is smoking crack," he says. Comments? cnyb@crain com
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