NEW YORK — Berdon LLP Chair of Real Estate Services, Seth Molod, CPA, moderated a panel discussion on secrets to raising capital and borrowing funds at GreenPearl’s “New York Multifamily Summit” event at Convene’s Midtown Manhattan location on September 19, 2017.
In a career spanning more than 25 years, Mr. Molod has advised some of the nation’s most prominent real estate owners, developers, managers, and investors on both commercial as well as residential projects. Mr. Molod works on transactions valued in the hundreds of millions of dollars; advises on restructuring and loan workout transactions; and assists with obtaining various types of financing—including traditional, mezzanine, and securitized financing—for a variety of projects.
Joining Molod on the GreanPearl panel were:
The five industry experts covered a variety of topics related to the multifamily real estate market, but the primary focus was on raising capital and borrowing funds, from the perspectives of owners, investors, and lenders.
Molod began the discussion by asking Gray what kind of equity Millhouse was seeing in the rent-stabilized multifamily arena. Gray noted that due to low cap rates created by rent-stabilized apartments, it is harder to raise rents and therefore the internal rate of return is lower, compared to free market products. Furthermore, he added that Millhouse likes to work with “investors who are looking for more stable types of returns and are happy with the risk-adjusted nature of the product.”
Watkins noted that while Megalith works with investors looking for more stable returns where the Internal Rate of Return (IRR) is somewhere in the low to mid-teens, they typically look for higher returns for condominium developments.
“We operate out of a fund,” said Watkins, “and also partner with larger institutional private equity funds and family offices.” He added that return expectations depend on the size of the transaction.”
Private Banks and Construction Lending
Molod asked Swerdlin about the current state of the financing environment with regards to construction, new asset acquisition and refinancing. Swerdlin noted how it is indeed a “very interesting time in the New York area,” as many banks are hesitant regarding lending as a result of criticism towards many active community banks by the Office of the Comptroller of the Currency (OCC) . The criticism occurred a few years back, when the banks had more than 300% of their core capital invested in multifamily properties in the New York area.
Swerdlin went on to describe how Capital One had previously invested $650 million in construction loans in the New York Metro area and that their risk management team is nervous because they are concerned with who is going to fill the high-end units -- in Long Island City or downtown Brooklyn -- that were recently constructed and are currently empty. Capital One aims to sell down a portion of the construction loans they currently have outstanding prior to getting back into the construction lending game.
Swerdlin added how it has been harder for those using investors to get acquisition opportunities than it is for non-bank lenders getting deals because these non-bank lenders are often families sitting on large amounts of money that don’t need to get returns back to investors.
Molod directed the discussion towards foreign equity, asking the panelists what they have seen in terms of overseas capital coming in. Miller responded by describing how there is a significant amount of overseas capital invested in the United States, and that “when one country steps in, another steps out.”
Watkins concurred with this point, but added that it takes time for overseas investors to learn about the local market. “When we first spoke about the Park Slope multifamily market in 2014, [overseas investors] didn't know anything about Brooklyn or the local marketplace, but once they learned about it, they quickly invested in it,” he said.
Gray reiterated this point, saying that while foreign investors love New York City, it is difficult to get them to the outer boroughs because they don’t understand the New York market well enough beyond Manhattan, adding that “there is a learning curve, especially with rent-stabilized apartments.”
Swerdlin stepped in and spoke about a heavy increase of overseas families investing in the New York multifamily market, describing New York as “the center of the world” due to it being “unique to any place else.”
Molod then shifted the discussion towards the idea of entering the lending as well as financing markets by leveraging existing relationships, questioning the difficulty of entering the business without partnering with another firm or individual. Gray swiftly responded, saying that, investors and lenders want to know with whom someone is partnering, adding that “relationships give us the ability to borrow capital at the best pricing.”
Swerdlin agreed, and pointed out that a primary reason for the sudden interest in knowing who is partnering with who stems from the fact that, “most of the problems during the last downturn involved inexperienced lenders.”
Watkins and Miller noted that they have been approached by prospective lending and financing partners interested in what they have to offer, but are concerned with the strength of the teams currently involved.
“I have been approached by equity partners saying that say they are looking at a site but can’t get comfortable that the team in place is able to see to fruition,” said Watkins. Similarly, Miller described receiving calls from banks his company has developed relationships with, asking him to “come in on a deal because they are afraid the team in place won’t be able to close.”
Swerdlin concluded the discussion by noting that having a good relationship and being able to trust everyone on your team is so vital because “if there is a problem, we know that we can turn it over to [our partners] and let them run with it.”