he market in the months to come.
“Gary’s an entrepreneur, but like a crazy one,” Keinan said. “Everyone told us, ‘If there is someone who can pull it off, it will be Gary.’ But even for him, it’s a stretch.”
A rendering of Central Park Tower (Credit: New York YIMBY)
Extell completed its first offering on the Israeli bond market in 2014, eventually raising a total of $400 million at roughly 6 percent, much cheaper than could be found at home. One headache that came with the cheap debt, however, was the level of transparency that the mandatory public disclosures have imposed on Extell — scrutiny that some developers find disconcerting.
[vision_pullquote > Shahar Keinan, Brosh Capital [/vision_pullquote]“I decided not to do it for that very reason,” Rechler said. “You’re trying to sell units. With that kind of transparency, you can’t control the messaging.”
“It’s not ideal,” Barnett agreed. “But it comes with the territory. I took the money. Now, I have to pay for it.”
The disclosures provide rare insight into how Extell is trying to put together the funds to finish CPT, which many in the market have speculated will not get built. The 1,500-foot-high condo project at 217 West 57th Street is set to Eclipse 432 Park Avenue as the tallest residential building in New York and will have a sellout of over $4 billion. But Barnett needs over $2 billion just to build it, and said the total capitalization of the project tops $3 billion.
Here’s the math: Barnett’s equity, plus an approximately $300 million capital injection from SMI and an infusion of cash from Nordstrom (which is buying its space), amounts to more than $800 million lined up for the project so far, Barnett confirmed. That leaves the developer with approximately $1.2 billion to go, $300 million or more of which may come from money raised through the EB-5 investment visa program. Barnett has tapped the program for cash several times in the past, including for 1MS.
Yaniv Saylan, an analyst at Israel Brokerage Investments, said that as a “bondholder,” he had “uncertainty and a lack of awareness” about how CPT will be built.
“I’m worried about it,” Saylan added.
All you have to do is go by 57th Street and you d see it was getting built, Barnett countered. There s never been a slowdown.”
Extell is in talks with several potential lenders for the $900 million construction loan though Barnett declined to confirm any names, sources said the list includes JPMorgan Chase and the Korea Investment Corporation.
But the developer is in a serious time crunch. It has just three months to repay a $235 million land loan from Blackstone Group, which it secured in 2013. To repay the loan, Barnett is counting on securing the construction loan rather than going through a refinancing. If he’s unable to repay Blackstone by the deadline, the loan goes into a one-year standstill agreement, whereby the private equity giant can’t demand an immediate settlement until the latter part of 2017. Barnett has already blown one deadline. If he blows the next one, the interest rate on the loan will shoot up from 8 percent to 14 percent.
He isn’t bullish on racing the clock. “We have a deadline to meet and we’re going to try very hard to meet that deadline,” he said. “That’s our job. Beyond that, I’m not going to speculate.”
And then there’s SMI. The subsidiary of Shanghai Municipal Investment, a developer of Shanghai’s tallest skyscraper, expects to make a return of up to 20 percent if the project goes as hoped, according to Barnett.
SMI will be entitled to an annual interest of 4.5 percent in monthly payments, as well as 30 percent of the development fees, according to TASE filings, which also show that Extell needs to get SMI’s blessings for all critical decisions.
But if Barnett can’t close on a construction loan by July, SMI has what amounts to a real estate get out of jail free card: It can force Barnett to buy back its equity stake for roughly $300 million, plus interest. And if he can’t come up with the funds to buy SMI out by July 2018, it can push him to sell the whole project. While few expect it to go that far, it’s a scary proposition for any developer.
“It was kind of a distressed deal,” said one Israeli bond market source. “You have a lot of conditions. It’s an equity partner if everything goes smoothly, if not, it becomes sort of a mezz lender.”
A chart showing the SMI deal (Credit: IBI)
In an August report, IBI said CPT “represents the core risk to Extell’s business because of the challenges it will face in seeing this project through the completion. “These include the uncertainty over future funding sources, the relationship between the parties with an interest in the project (Blackstone, Nordstrom and SMI) and the softening of demand for residential property in New York.”
Bankers said SMI’s demands illustrate how equity investors are getting serious about contingency plans, in case the market slides further. And there are signs that lenders are following suit.
“Lenders are becoming more informed about the sponsor’s other projects and those deadlines,” Ori Eisenberg of real estate financial advisory firm One Ha’am said in September, when Extell closed on its construction loan for 1MS. “Terms are being customized.”
Brad Dubeck, the commercial real estate banking executive for Bank of America in New York, said, “these days, the domestic banks are not keen on new ultra-luxury condo loans and many foreign lenders have lost their appetite as well. But this is a terrific piece of real estate. I m confident Gary will secure financing. It might be more expensive than in the past and will likely come from a non-traditional provider.”
Developers such as Macklowe Properties and CIM Group have turned to alternative lenders such as hedge funds to get their projects built. At 432 Park, for example, the word is that Macklowe and CIM are paying nearly 10 percent on their loan from Children’s Investment Fund. Others have gotten even more creative: Sharif El-Gamal, for example, turned to a consortium of international lenders to score $219 million in Sharia-compliant financing for 45 Park Place.
[vision_pullquote > Israeli bond market source [/vision_pullquote]Barnett believes he’s on solid footing. “It’s an extraordinarily low loan-to-value loan,” he said. “We’re going to be looking at less than $2,000 a foot [basis] for a construction loan and 220 [Vornado Realty Trust’s 220 Central Park South] is averaging [sale prices of] between $8,000 and $9,000 a foot.”
But even he concedes that, for banks, perception matters.
“Today, it’s not so much a question of loan-to-value as that condos are difficult to finance, period,” he said. “Not because they don’t make sense, but because, even if they’re guaranteed their money back, the banks just don’t want trouble. They don’t want to get a call from regulators saying they need to put more reserves forward, even if it’s not warranted. They know they can’t fight with Uncle Sam.”
First we take Manhattan
A rendering of One Manhattan Square
Extell’s recent flurry of financing deals at 1MS convinced investors the project is now a go — even if not quite on the terms they expected.
The firm was well underway with work by the time it scored the construction loan in September, thanks to Barnett’s own deep pockets.
“Those pockets,” he quipped, “were starting to feel a bit empty.”
One Ha’am’s Eisenberg said that after SMI secured a corporate guarantee on CPT, he’d heard that Deutsche Bank would also get one for the $500 million construction loan they are leading on 1MS.
“This is unusual for a New York developer,” Eisenberg added, “but I don’t think it’s by chance.” The construction loan was also downsized from an original $600 million, but the lenders have the option to bump it up to $750 million within the first nine months, according to TASE filings.
“It was a struggle,” Barnett admitted. “We thought we’d be able to get a higher loan per square foot price than we were able to achieve. We had to lower our sights by more than 10 percent and pay a little bit more.”
[vision_pullquote > Gary Barnett [/vision_pullquote]Extell was also counting on $463 million in mezzanine financing from RXR, but after Barnett didn’t score his construction loan in time — a condition of closing on the mezz loan — Rechler’s firm slashed its loan to $300 million and raised the interest from 7 to 8 percent. The loan is also collateralized by Extell’s condo project at 500 East 14th Street in the East Village and its rental tower nearing completion at 555 10th Avenue.
Dubeck said developer-lenders such as RXR, who’ve filled a gap left by traditional banks, are typically able to negotiate better terms as they face little competition.
“On one hand, it’s very positive to see an experienced and sophisticated player like RXR make investments in Gary’s projects at a more uncertain time in the market,” he said. “It shows support for the business plan for those assets. On the other hand, it might signal the lending appetite is cooling.”
Barnett joked that Rechler “conned me,” promising cheap debt.
“He’s a charming fellow, Scott,” Barnett added. “We went down the road and it turns out it wasn’t so low-cost. But, it’s probably a win-win situation. For us, it gave us that extra chunk of capital, which, given the financing environment, we needed.”
With construction and mezzanine loans in place, Barnett now has about $850 million for the project, enough to finance about 18 months of construction, according to the developer. That amount includes an additional $55 million he secured last month from a Deutsche Bank-led consortium. Completing the project will require another $190 million. RXR is likely to exercise its option to increase its loan by $163 million, Rechler said, and Barnett will look to banks and EB-5 funds for the rest.
“With doubts about whether construction would actually be completed having now been lifted, the only concern is how quickly the project will sell and the prices for properties,” the IBI report stated.
The 815-unit project’s target sellout is about $1.88 billion, down from over $2 billion last year. Extell has already sold 60 units for a total of $125 million to both domestic and Asian buyers, according to Israeli bond market filings from Sept. 5 — and the sales office is opening this month.
Only a few deals were sold directly to China, but we have a lot of Asians buying because it is Chinatown,” Barnett said. “It s really word of mouth though, because we [the sales office] are not open. The issue is logistics. There s a lot of people interested but you have to be able to get deals done.”
Barnett’s continued need for cash has some of his investors wondering: What other sources of capital might he tap?
Going back to the Israeli bond market doesn’t seem like an option, at least not now.
“The market has learned to distinguish between Gary, who is a developer, and operators focused on income-producing assets,” said Yossi Levi of Infin, which advises U.S. developers on raising debt in Israel. “For condo developers, it will be very hard to raise money right now.”
A possible source of funds, Israeli investors believe, is a sale or refinancing of Extell’s 555 10th Avenue. The 52-story, 478-unit luxury rental project will begin leasing in October and IBI forecasts its annual net operating income at $30 million.
When RXR reduced its mezzanine loan for the three Extell projects, it also restructured the deal so that Extell has greater financial flexibility on 555 10th. Extell may now sell or refinance its stake, which is valued at between $300 million and $400 million, based on a total asset valuation of between $700 million and $800 million, Say上海千花网交友