While banks can be very aggressive with their underwriting for stabilized condominiums, they are usually more cautious when it comes to new builds. Since there are a number of risks that can delay or even stop development, including securing claims, manpower, or materials, they understandably require more from borrowers to develop from scratch.
But in this market where multiple players are offering debt for housing projects, lenders need to get a little more competitive.
“Typically, the banks’ construction loans are 60%, 65% or maybe 70%. [loan to value]says Steve Rosenberg, CEO of Greystone. “However, a borrower just came to us looking for 90 percent mortgage lending. You got it. It wasn’t from us, but they got it. We have hardly ever seen that before. “
If you look at this one anecdote, it might seem that developers have to put less skin into the game to build new housing projects. But that doesn’t mean that lenders necessarily make irrational decisions.
Although more and more new groups are joining and running into debt, Rosenberg does not see the blinking red lights on multi-family loans – in construction or other forms of debt.
“I don’t see anyone doing something that makes me shake my head and say, ‘Well, that’s really idiotic,” says Rosenberg. “I don’t see that, but you can see where the lenders are pushing the envelope. Do I see a yellow light there? I do not know. It doesn’t feel like it. I don’t see any unsafe lending. I don’t see anything like we saw in the subprime market. “
Still, there are concerns about development costs that could put projects at risk.
“They’re putting some of the plots that should be built on the sidelines,” says Rosenberg. “So no question. Costs are rising and equity may not get the returns it needs to move forward. “
The issue can be even more critical for affordable housing projects where margins are already tight. “We even see it on the affordable side,” says Rosenberg. “These deals are pretty tight, and with construction costs rising, we’re definitely seeing some projects that aren’t working right now.”
Rosenberg is pleased to receive some home finance products, particularly loans from the Commercial Property Assessed Clean Energy (C-PACE) program. These loans help commercial property owners make their buildings energy efficient, water efficient and renewable. Greystone is introducing a C-PACE division for these loans.
“I am very happy about it [C-PACE loans] because of course we want to promote energy efficiency and green investments, ”says Rosenberg. “I like the idea of the C-PACE, where a property owner can calculate a tax himself and essentially finance it because he has a priority lien over the first mortgage. You can raise capital at a relatively low cost. And C-PACE can potentially be used for 20 to 30% of the capital stack for new builds. “