When Bob Krause, president of Newport Development in Atlanta, spoke to lender Merrill Lynch in December about construction and mezzanine loans for a condominium development in Florida, the answer Krause received is becoming all too familiar to multifamily executives.
"We were told they are not even looking at any condominium loans for at least 90 days, and they will reevaluate it at that time," Krause says. "Other lenders have increased their presale requirements or equity amounts if they are making condominium loans at all."
After several years of flying high, condos have suddenly come back down to earth. In some cases, lenders are making changes because they want a more diversified portfolio. "We woke up one morning and realized our portfolio was overloaded with condos," says Arthur Nevid, managing director of Mountain Funding in Charlotte, N.C. "For us, it was a matter of portfolio balance. We decided to stop and see how it goes."
But that isn't the whole story. Nevid concedes that the slowing market and large number of investors buying condos has made him and other lenders wary. "Everyone talks about the bubble, but nobody is smart enough to predict when it will end, and nobody wants to be the last one in," he says. "We've done well and we're happy with these condo deals, [so] we're happy with what we've done. We don't want the next one to be a mistake, so we're being very careful."
Nevid isn't alone. Many financial institutions are avoiding condos for the moment; those that aren't are making more conservative lending decisions. "The availability of capital for condo loans has lessened, and the terms are more constricting," says Mitch Kiffe, vice president of multifamily flow sourcing at housing finance giant Freddie Mac.
This has forced some developers to dig deeper into their Rolodexes for financing. Even prolific and well-known condo players are facing hurdles. "My job has become much tougher, because I'm on the phone much more explaining to [lenders] about what's happening in our markets–with construction costs and our jobs–to get them over [their] nervousness," says Matt Allen, CFO for The Related Group of Florida, which is based in Coral Gables, Fla. "They're tightening their underwriting. They're dotting their 'i's and crossing their 't's and making sure they're getting more equity and the appraisals are done right."
Lending attitudes do vary regarding specific markets. Nevid says he won't touch South Florida and Las Vegas right now, for example. But that doesn't mean deals aren't getting done in those places. "Lenders are verifying the projects and the developers a bit more," says Bruce Langson, president of Langson Development in Las Vegas. "Viable projects are still viable projects, and lenders still want to loan to a good project." Glenn Eubanks, executive vice president of real estate finance at Wachovia, agrees. "If a well-conceived deal came to us with the right developer and the pre-sales, we would still consider it."