Mission Capital Structures a $23-Million JV Equity Investment for Largo’s Acquisition of Williamsburg Development Site
Buyer plans to develop a 105,000 square foot mixed-use property with luxury condos, office, retail and an automated parking garage
NEW YORK — Largo and Mission Capital Advisors announced that Mission Capital’s Debt and Equity Finance Group has structured a joint venture between Largo and First Atlantic Real Estate for the $25-million acquisition of 215 North 10th Street, an 18,000-square-foot corner development site in the North Williamsburg section of Brooklyn, New York. This North Williamsburg deal is the first investment that First Atlantic and Largo have partnered on and Largo’s ninth deal in Williamsburg. The Mission Capital team of Jordan Ray, Ari Hirt, Steven Buchwald and Jamie Matheny worked on structuring First Atlantic’s $23-million equity investment and has also been engaged to arrange the construction financing.
The JV has also purchased inclusionary air rights allowing for the development of a 105,000-square-foot, seven-story mixed-use property with approximately 31 luxury condominiums, 45,000 square feet of office, 7,000 square feet of retail and 85 parking spaces. Construction is expected to begin in the second quarter of this year.
“Largo is one of the most active developers in New York right now and really earned their stripes in Williamsburg early in this cycle, with this project being their ninth in the neighborhood. They know what product the market needs and can execute.” said Ray. “Raising JV equity for ground-up construction right now is challenging, but we are intimately familiar with the demand in the local market and were able to demonstrate that to First Atlantic. There really aren’t very many options for growing families to expand in north Brooklyn right now. There is a whole market of buyers who have lived locally and don’t want to leave the neighborhood because units that suit their needs don’t exist. Not only do they want to live in Williamsburg, but they want to work there as well, which has created a big demand for quality office space. Largo and First Atlantic saw a need and will fill it.”
Largo is a private real estate development and investment firm founded by Nissim Ben-Nun and Nicholas Werner. Largo specializes in the acquisition, development, and operation of luxury multifamily and mixed-use real estate in New York City, and is currently heavily active in the Manhattan and Brooklyn markets.
Since its founding in 2009, Largo has successfully developed over 1.4 million square feet of luxury rental apartments, condominiums and mixed-use properties.
In addition, Largo provides construction management services for many of its projects through its construction management operation Largo Construction.
About Mission Capital Advisors
Founded in 2002, Mission Capital Advisors, LLC is a leading national, diversified real estate capital markets solutions firm with offices in New York City, Florida, Texas, California, and Alabama. The firm delivers value to its clients through an integrated platform of advisory and transaction management services across debt, mezzanine, and JV equity placement; commercial and residential loan sales; and loan portfolio due diligence and valuation. Mission Capital Advisors is extremely active in arranging financing for office, industrial, multifamily, retail and self-storage properties across the country. Since its inception, Mission Capital has advised a variety of leading financial institutions and real estate investors on more than $65 billion of financing and loan sale transactions, as well as in excess of $14 billion of Fannie Mae and Freddie Mac transactions, positioning the firm strongly to provide unmatched loan portfolio valuation services for both commercial and residential assets. Mission Capital’s seasoned team of industry-leading professionals is committed to achieving clients’ business objectives while maintaining the highest levels of integrity and trust. For more information, visit www.missioncap.com.
If you are not aware already, Soho House Chicago is an incredible hotel experience. Mission Capital arranged financing on this deal. Soho House Chicago is located in the heart of Chi-Town in the West Loop. We strongly suggest visiting if you’re in the area.
The financing is flowing — but only from a few well-funded lenders (yes, Bank of the Ozarks is one)
April 20, 2018
In Los Angeles as of late, it seems the cash spigots have been turned on for several large-scale developments.
Huge construction loans have flowed in recent months to high-profile apartment, hotel and retail deals — some planned for years — from North Hollywood to downtown to Marina del Rey.
But scratch the surface, and a more nuanced picture of the lending market emerges. The Real Deal’s ranking of the county’s top construction loans found that it’s just a handful of lenders that account for most of the activity. As market conditions have become less favorable and some fairly recent financial regulations limit risk, the pool of loan sources has shrunk, those in the industry say.
“In today’s market, construction lending is difficult, and every year it gets more and more difficult,” said Bryan Shaffer, a principal of George Smith Partners, an L.A.-based capital advisory firm. “For most banks, it doesn’t make sense anymore.” Lenders are likely stingier now, knowing the recent boom is winding down, said Paul Habibi, a teacher at the UCLA Anderson School of Management and a principal at Habibi Properties, a large residential landlord.
“As construction lenders perceive it, when you get in bed with a developer, you are looking at a two-year commitment. So you will have two years to get out from under that commitment,” he said.
“And we are relatively late in the real estate cycle. It’s why some economists think 2019 will be a cloudy year,” he added.
Zeroing in on transactions from 2017, TRD also ranked the largest construction lenders in L.A. County across commercial development categories, though most of the transactions involved new apartment buildings.
The biggest lender — which won’t come as a surprise to anybody who has followed its aggressive moves in recent years — is Bank of the Ozarks, from Little Rock, Arkansas. It issued about $721 million in construction financing in L.A. County in 2017, at an average of $80 million a pop.
And five of the 10 largest construction loans in L.A. originated with the bank, which in the last four decades — through a chain of acquisitions — has swelled from a community bank to a national player with $21 billion in assets in 2017.
The largest single loan in the Ozarks portfolio last year was a $205 million issue to Sunset Time, a hotel-condo project on Sunset Boulevard in West Hollywood that broke ground last year and is scheduled to open in 2019.
Developed by Combined Properties, a Washington, D.C., firm, and AECOM Capital, the project will offer 149 hotel rooms and 40 condos in a row of buildings with staggered heights that together resemble steps.
Spokespeople for both Combined and AECOM said it was premature to discuss the project, which plans to begin marketing later this spring. Bank of the Ozarks did not respond to requests for comment.
If the construction loan market has tightened, the Sunset Time project embodies the kind of deal that still does get done, some brokers say.
Because of its deep pockets, Ozarks can satisfy tough Dodd-Frank financial rules that require lenders to have capital reserves covering the entirety of their loans to protect against financial collapses, like in the last recession. That might mean having, say, $100 million on hand to cover a $100 million loan, even if the loan is released in stages, as construction loans usually are, Shaffer said.
In the pre-Dodd-Frank days, lenders usually only held reserves for the amount of the specific stage, Shaffer said.
Those regulations, some of which went into full effect as recently as 2015, have had a chilling effect on smaller banks, which has strained the construction lending business overall, brokers say.
When loans are available, they are often nonrecourse loans — those that allow the lender to go after just the property in the case of a default but not after other assets. These loans usually carry higher interest rates and require low loan-to-value ratios. Ozarks, for one, specializes in loans of this type.
If construction loans generally offer interest rates of 7 percent, Ozarks might charge 10 percent, brokers said.
Naturally, well-capitalized developers are able to play in a market where money costs more. Combined Properties, which has developed $1 billion in properties since the mid-1980s and has another $1 billion in its pipeline, according to the company, is the type that can weather the current climate, brokers said.
That climate also seems to favor hotel and apartment projects over office development, in a city where the office vacancy rate was 15.4 percent in the fourth quarter of last year versus 14.4 percent in the year-ago quarter, according to Cushman & Wakefield figures. But even Ozarks, which is known for having a stomach for risk, seems to be making relatively conservative moves, like with Park Fifth, a mixed-use development in Downtown L.A. Developed by MacFarlane Partners, the project — on Pershing Square Park — scored a $103 million construction loan from the bank in May 2017. It was seventh largest loan last year.
MacFarlane, a 30-year-old investment manager with a development arm, was also issued another $80 million from the bank for the same project in 2016, which wasn’t included in TRD’s survey.
For that loan, Ozarks said it would cover only about half the development total for the $335 million project, said Dirk Hallemeier, a managing director of MacFarlane. The project also benefited from a $60 million mezzanine loan through the EB-5 program, which grants green cards to foreign investors in exchange for their financial support for job-creating projects.
“The lenders are being very cautious, let me put it that way,” Hallemeier said. With Ozarks, “the pricing is a little higher, and you have to meet their expectations in terms of liquidity and coverage and those kinds of things, but they set their loans up to be relatively secure,” Hallemeier said. Ozarks also typically asks for large down payments, according to news reports.
Park Fifth, which will open in 2019, consists of a high-rise with 347 one- and two-bedroom rental units and a mid-rise building with 313 units in a complex that will also offer shops.
The project, which is rising from a site cleared in the ’80s by developer David Houk for a hotel-and-office complex that never came to pass, is the latest example of a long-planned project that lenders seem to be giving another look.
Downtown, which has enjoyed a population spike in the last decade, is the kind of walkable, densely settled area that some L.A. lenders believe is good bet, even if some projects there, like the Bloc, are struggling.
Another neighborhood that seems to fit that bill is North Hollywood, or NoHo, an area well served by subways and buses. Rising there is NoHo L&O, a mixed-use property with 297 studio to two-bedrooms, plus a 26,000-square foot Whole Foods grocery store. “There’s nothing really like it over there,” said Jeff Cairney, a director of New York-based Camden Securities Company, the project’s lead developer. Joining it are Hayes Capital Management and Canyon Partners Real Estate, both of California.
The project, which broke ground last year and is set to open in 2019, scored a loan of $70.5 million from Ozarks, good for a 10th-place finish on TRD’s list.
Though Ozarks has aggressively pushed into L.A., it remains to be seen if the effort will continue, brokers said. Last summer, Dan Thomas, the head of the bank’s real estate group, abruptly left the publicly traded company, causing its stock price to plunge.
It seems to have recovered somewhat. On April 9, the bank’s stock was $46.35, up from a recent low of $40.35 on Sept. 7, 2017, though that was still off from a peak of $56.24 on Feb. 26 of last year.
Meanwhile, traditional banks are also still kicking in the market. Bank of America was responsible for two deals in the top 10 and was the third-largest construction lender in L.A. last year, with $416 million across six loans, according to TRD’s ranking.
Private equity groups deploying debt funds are also doling out hefty sums.
The Blackstone Group, for one, was the second-biggest lender in L.A. County last year, with $475 million in issuances, though in just a single deal.
The loan was for Row DTLA, the massive redevelopment of the former Los Angeles Terminal Market, a 1923 produce complex near downtown. With seven buildings and 1.3 million square feet, Row DTLA is being built by a partnership of Atlas Capital Group and Square Mile Capital with funding from HOOPP, a Canadian pension fund.
An earlier plan from Evoq Properties to redevelop the concrete buildings that line the site, called Alameda Square, did not come to fruition despite a $78 million loan in 2013. The loan, from a firm called Olen Properties, was for renovations, Evoq principals said. Those principals suggested in interviews at the time that the unconventional mix of tenants at the site — startups and garment manufacturers — meant loans from traditional banks would have been difficult.
Atlas and Square Mile picked up the sprawling 32-acre property for $357 million from Evoq in 2014. Representatives for the project, and Blackstone, were unavailable or declined to comment.
But as prices rose, “they got into the lending business instead, which allows them to manage returns better,” Hirt said. Private equity firms will also generally offer nonrecourse loans, for high fees.
While multifamily properties are attractive to banks, industrial projects are perhaps a hotter subsector, Hirt added. Indeed, sixth on TRD’s list of top construction loans was Victory Unlimited Construction’s closing of a nearly $105 million loan for a new warehouse project on Union Pacific Avenue in East Los Angeles.
“It’s a very sought-after and easy-to-finance asset class,” said Hirt, who added that borrowers with those kinds of projects often don’t even have to lock in an anchor
Going forward, Hirt is keeping an eye on macroeconomic events. The federal tax law passed in 2017 is one to watch, though most attorneys and analysts have so far issued no serious guidance about how it will impact construction lending.
New tariffs, though, could hike steel prices, though Canada, a source of a lot of U.S. steel, has been exempted. “But we just don’t know yet,” Hirt said.
In the meantime, many developers seem bullish on the chances of locking in loans for developments in L.A. — even as other markets soften — as the city embraces the types of urban-core projects other metro areas jumped on long ago.
“L.A. has always been a world-class city, but the sidewalks rolled up after 5 p.m.” Hallemeier said. “Now it has crossed the tipping point.”
In the aftermath of the financial crisis, banks were saddled with scores of soured loans. But even if institutions were looking to sell these assets, and investors were interested in purchasing them, banks were often constrained by capital level requirements from taking the necessary write-offs associated with fire sales.
Now capital levels are higher, so banks would be better able to absorb losses, and investors are still hungry to buy distressed assets for good prices. But banks have mostly been reluctant to complete loans sales.
That could be a mistake if credit quality were to take a turn for the worse, and there are a few indicators that new problems could be on the horizon.
“If you are selling assets today, you are probably being more tactical,” said Jeff Davis, a managing director in Mercer Capital’s financial institutions group. “You are thinking strategically as the economic cycle ages, and you are trying to take some chips off the table.”
Credit quality has improved significantly since the depths of the recession. Problem assets for all banks totaled $193 billion at Dec. 31, according to data from the Federal Deposit Insurance Corp. That figure included other real estate owned, assets that were 30 to 89 days past due and at least 90 days late, and those in nonaccrual status.
That is down from a peak of $581 billion at year-end in 2009, according to FDIC data.
Still the recent number is roughly 42% higher than the $136 billion recorded in 2006, according to data from the FDIC.
“Banks still have a pretty elevated level of classified assets because many of them didn’t fully pull off the Band-Aid half a decade ago,” said Jon Winick, CEO Clark Street Capital. “You are starting with a decent sized workout universe to begin with. Now there are new credits coming in.”
There are signs that credit quality could weaken, though certainly no one is predicting an imminent financial collapse. For instance, the Federal Reserve Bank of New York said in a report on household debt earlier this year that credit card delinquencies increased “notably.” The percent of credit card balances that were at least 90 days late rose to 7.55% in the fourth quarter from 7.14% a year earlier, according to the report.
Winick said an uptick in credit card delinquencies can be an early indicator of wider problems to come. Generally, business customers have more resources to keep their loans current when trouble starts to brew.
Interest rate hikes may also put pressure on certain commercial customers, especially in the commercial real estate portfolio. For instance, multifamily housing has been overbuilt in some cities, meaning that supply has out stripped demand. Owners of these buildings could have problems increasing rents as a result. That may become a problem as their loans come due and they get new financing at higher interest rates, Winick said.
Owners of retail properties in some areas may also struggle to raise rents on tenants either because of long-term leases or because the market won’t support such hikes, Winick said. Retail is also facing pressure from broader changes in consumer behavior as more people shop online.
“The 900-pound gorilla is Amazon,” said Lynn David, CEO of Community Bank Consulting Services. “What it is doing to retail is phenomenal. It has to be a concern to everyone. I don’t care if it is paper towels. You can now order it online from Amazon and get them shipped for free.”
To be sure, there have been banks in recent months that have looked to sell loans, both performing ones and problem credits. Substandard loans that banks consider selling may still be performing, but there could be other concerns, such as a covenant being breached.
A bank may decide to unload good loans if they are concerned about concentration levels, are looking to exit a certain business line or decide they could redeploy the funds into a higher-yielding asset.
PacWest Bancorp in Beverly Hills, Calif., announced in December that it would sell cash flow loans worth roughly $1.5 billion as it looked to wind down its commercial lending origination operations related to healthcare, technology and general purposes. PacWest President and CEO Matt Wagner said in the release that the $25 billion-asset company made the decision “for both cyclical and competitive reasons.”
Other banks looked to pare back their exposure in energy after oil prices tumbled.
Still, many banks are deciding to hold onto credits, even ones that are in danger of becoming distressed. This lack of supply could be helping to drive up pricing for the loans that do become available, said Kip Weissman, a partner at Luse Gorman.
“We are at the top of a credit cycle and that means there’s less of a supply,” Weissman said. “More loans are performing, and it is a countercyclical industry.”
Michael Britvan, a managing director in loan sale and asset sale group at Mission Capital Advisors, has observed banks are currently less willing to sell loans at a loss, likely due to the potential impact on earnings. This decision seems counterintuitive as the market is awash in liquidity, resulting in the narrowest bid-ask spread in recent history, he said.
”Performing, subperforming or nonperforming debt is in vogue,” he said. “We have been in an extended bull market run, therefore investors are targeting fixed-income investment, targeting assets they view to be slightly less risky and less correlated with the broader market.”
Matthew Howe, vice president of special assets at Lakeside Bank in Chicago, said he has seen better pricing on stressed commercial loans than in recent years. He said the bank is seeing bids between 85% to 90% of a loan’s outstanding balance, compared with offers in the low 80s just a few years ago.
Even though the $1.6 billion-asset Lakeside is not suffering from the credit problems that plagued the industry after the recession, management still tries to be proactive in managing its loan portfolio. That means even in a strong economy sometimes the bank offloads distressed credits.
Howe says one reason driving buyers’ interest in distressed assets is that foreclosures are moving faster through the court system. That can eliminate some of the uncertainty for potential buyers of troubled commercial real estate loans.
“It has been aggressive,” Howe said. “There is an appetite in the marketplace for distressed and for performing loans.”
ARLINGTON, VA. — Mission Capital Advisors has arranged a $47 million bridge loan for the refinancing of Hyatt Place Arlington Courthouse Plaza, a 168-room hotel located at 2401 Wilson Blvd. in Arlington, roughly 5 miles southwest of Washington, D.C. The property is located adjacent to the Association of the United States Army (AUSA) Conference and Event Center. Jason Parker, Ari Hirt and Jamie Matheny of Mission Capital arranged the loan through EagleBank on behalf of the borrower, a partnership between The Schupp Cos. and LodgeWorks Partners. The eight-story hotel was constructed in 2016 and features a business center and indoor valet parking. In addition, the hotel is home to Verre Wine Bar on the ground level.