Lower investment volume in New York City in 2016 and 2017 has meant trouble for some medium-sized brokerage firms. After Eastern Consolidated closed its doors in July as a result of the slowdown, financing specialist Jonathan Aghravi set out on his own, looking to top the $2 billion in total transactions—debt and equity—he has brokered, primarily in the New York tri-state area and Los Angeles. Aghravi, who has been in the business for approximately a decade, talked with Multi-Housing News about how looser lending standards are impacting the business and how traditional lenders are adapting to a market that is being won over by alternative debt providers.
Together with your team, you recently closed on a $76.6 million financing package for a condo development in Downtown Brooklyn. Tell us about the challenges in completing this deal and how they reflect market conditions in New York City?
Aghravi: The ground lease that was in place presented challenges for lenders. While the ground lease would eventually convert to fee simple, we had to find lenders that were comfortable with the complex structure. In addition, there were more parties and moving pieces involved than in a typical construction loan that required a tremendous amount of detailed organization and management.
The loan required significant creativity, which is symbolic of construction lending in New York. It is typical to encounter many obstacles that may impede the closing process. To get deals closed in New York, all parties involved ultimately must work collectively to form innovative solutions to ensure the project’s completion and success.
Tell us more about the creative part of sourcing a loan.
Aghravi: Creativity in sourcing financing for clients is often required in today’s financing market and encompasses solving for any potential issues that can range from cash flow, sponsorship, borrower requests, lender requirements and filling the capital stack.
One example is solving for vacancies and upcoming expiring leases. Financing a newly renovated property that requires additional time to lease up or addressing commercial vacancies that affect a large portion of the overall gross income, requires additional structure to provide the borrower with their targeted loan proceeds while also providing comfort to lenders for a lack of sufficient debt service coverage.
Structuring senior and mezzanine and/or preferred equity loans to complete the capital stack is another example. There are many hurdles that are encountered when working on structured finance deals. In order to succeed in providing the borrower with multiple layers of capital, leverage providers must find common ground when negotiating inter-creditor agreements and establishing the proper leverage points to allow for the successful funding and completion of the project.
What are the main trends in New York City’s multifamily financing market? What about the challenges?
Aghravi: Multifamily lenders are still very active in the market and continue to provide competitive financing terms. We’ve noticed that traditional multifamily lenders, such as banks and insurance companies, have tightened their spreads in recent months to become more competitive in the rising rate environment. This has allowed lenders to provide more aggressive loan proceeds.
We’ve seen some borrowers run into challenges taking out existing debt when providing rental concessions and dealing with the increase in rates. A few years ago, we were securing five-year loans in the 3 percent range as well as providing long interest-only payments, which enabled borrowers to maximize proceeds. As those loans are starting to mature and their principal balances have been paid down minimally at maturity, borrowers that maxed out leverage are forced to solve for rental concessions and the current retail market conditions. Our team has provided creative solutions for our clients to solve these situations and eliminate the need to provide additional equity.
How do you see the financing of multifamily deals or projects compared to past years?
Aghravi: Most lenders have become more conservative with loan proceeds due to rising interest rates. Lenders are stressing the loans more stringently, resulting in lower loan amounts than in previous years. We have noticed this to be more prevalent in properties that contain a high percentage of rent stabilized units due to rent increases being limited while real estate taxes continue to increase.
How does tech fit into the multifamily financing environment?
Aghravi: Technology plays a big role in the real estate business and, in particular, for those in advisory roles. There are many lenders in the market offering similar terms and options. Maintaining comprehensive databases allows us to identify the best lenders for each deal so that we can work efficiently and productively. Technology also helps us compile comprehensive financing packages and comps so that we can provide lenders a full understanding of the properties and the market to assist in their underwriting and enable them to realize the full value of the asset.
What are your predictions for the business in 2019?
Aghravi: We remain bullish on the commercial real estate financing market. We have been able to secure very competitive terms on stabilized and transitional properties as well as provide creative solutions to more complex capital stacks. A tremendous amount of new and aggressive foreign lenders, local debt shops and family-run funds continue to enter the market and are consistently looking to put their capital to work.
Our team is still in the process of finalizing our next move, but we are very excited about the potential options. In the meantime, we have a full pipeline of loans scheduled to close before year-end 2018 and even more that we are in the market to close in the first half of 2019. While we have been actively closing deals since Eastern Consolidated closed its business a few months ago, we look forward to joining an organization where we can capitalize on our success and contribute our business and expertise to the growth of the firm.