Funding Is Now Drying Up For Luxury Real Estate Developers In Manhattan

Tyler Durden's picture

As we have noted on many occasions, the luxury real estate market in Manhattan is now in a downturn. Back in April, we reported that the Bauhouse Group had put a development project into bankruptcy after it wasn't able to find lenders to refinance short-term loans. We then posed the question: "Did The Canary Of New York's Luxury Housing Market Just Die?"

It appears as though that was the correct question to ask, as we have since learned that sellers of luxury homes have had to resort to drastic price reductions if owners wish to sell. It also turns out that the fact that the Bauhouse Group couldn't find any lenders to help refinance may have been an early indication that lenders are now pulling back in the space as well. Courtesy of the WSJ, we are given a little more insight into how lenders may be viewing the once booming luxury real estate market, as builder Extell Development Co. has admittedly had to resort to a program known as EB-5 to help finance its latest condominium tower, known as Central Park Tower.

The critical point to be made is that Gary Barnett, Extell's CEO is seeking foreign investors to help fund the project because "given the financing environment that currently exists, it's a critical component". Said otherwise, lenders aren't keen on financing such projects anymore. As far as EB-5, it is a federal program that grants permanent residency to immigrants who invest in certain US businesses measured to create jobs.

The WSJ explains

The EB-5 program grants permanent residency to aspiring immigrants who invest in certain U.S. businesses measured to create jobs. A minimum investment for a standard business is $1 million, but in an effort to aid development in struggling areas, investors can put in a lower amount—$500,000—if a project is considered to be in a rural area or a high-unemployment neighborhood.

 

Developers like Extell have flocked to the program in recent years, almost always for projects in prosperous neighborhoods that use the category meant for the rural and high unemployment areas, a level at which it is easier to find immigrant investors.

 

The practice is legal so long as state officials and developers craft special districts that connect the projects with high unemployment neighborhoods—a method termed “gerrymandering” by critics.

 

But because the program has rapidly ballooned to overcapacity—there is a yearslong wait for the 10,000 visas allowed annually under the program—many of the flashiest and largest projects are crowding out projects in rural and poor neighborhoods, EB-5 professionals say.

 

That has sparked a fight in Congress. Numerous lawmakers, Obama administration officials and academics have said it runs counter to the intent of the law. A set of real-estate developers who use the program have pushed strongly back against proposed changes, however, successfully winning the ear of some influential lawmakers sympathetic to their arguments.

Extell has construction underway on the lower floors, which are to be the home to a sprawling flagship for Nordstrom department stores, however the firm has not yet secured all the financing necessary to build the condo tower atop - the reason: the super high-end market has weakened significantly due to the supply glut and lower demand, and lenders have pulled back.

"There's such a financing crunch that a lot of projects won't get done without EB-5, and this is one of them" Barnett said.

Barnett is actively trying to secure financing for the Central Park Tower project, which is estimated to cost more than $2 billion. The tower is planned to be higher than the Empire State Building, and set a new standard of luxury on what has been called "Billionaires Row". As mentioned, part of how Extell plans on financing the project is through the EB-5 program, and consultants are already actively trying to seek up to 380 investors in China this month to contribute $500,000 each.

* * *

So in summary, we now have confirmation that lenders are pulling back from the luxury real estate market due to the massive over supply and decrease in demand. When firms start to rely on programs such as EB-5 to fund projects, it may be time to head for the exits. Also of note, Extell is trying to drum up Chinese investors, which is a good idea in theory as investors are looking for ways to preserve capital outside of China, however if demand tanks for these projects, that investment also goes to zero.

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N0TaREALmerican's picture
N0TaREALmerican (not verified) Jun 22, 2016 6:05 PM

 

Well,  as the article today said, the middle-class has all moved to the upper middle class, and as all the upper middle-class's kids are WAY above average it won't be long before they'll be needing more upper-upper-middle-class or lower-upper-Elysium-class apartments. 

Just a matter of time.

eatthebanksters's picture

It's one developer and one development deal...maybe they were just super aggressive and fucked up.  Maybe there are plenty of other smarter developers out there who will never get in the same position.  Only time will tell.

AdolphLustig's picture
AdolphLustig (not verified) N0TaREALmerican Jun 22, 2016 6:30 PM

Huh?

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) N0TaREALmerican Jun 22, 2016 7:12 PM

WTF?  EB-5 is now being used as a sign that real estate is in a downturn?  A few years ago EB-5 was touted as the reason FOR the bubble

 

http://www.zerohedge.com/news/2014-12-10/pimping-passports-chinese-capit...

"A week ago we wrote how Pennsylvania is financing various state infrastructure projects by selling residency to Chinese "investors" for $500K each. As it turns out, the practice of pimping passports for Chinese capex is hardly new or just isolated to Pennsylvania and is, in fact, massively widespread throughout America's insolvent states whose tax collections are far below budget and which are in desperate need of fresh funds to embezzle invest in random boondoggles.

Case in point, New York, where the Biggest real-estate project in a generation, the Hudson Yards, is now officially financed by 1200 Chinese families in search of visas allowing them to live (and park their stolen cash) in the US."

gregga777's picture

The true purpose of EB-5 projects are solely to further enrich the already obscenely rich. They have absolutely no intent of providing affordable housing to anyone or to provide development funding to benefit the non-rich. The only non-rich who benefit are the political parasite bribery recipients.

junction's picture

That EB-5 program is now a RICO enterprise where people like Bloomberg and DeBlasio sell green cards to Triad members, dope dealers and war criminals.  Totally ignored by the NYPD, whose "broken window" police method has been discredited again.  http://www.courthousenews.com/2016/06/22/stats-steal-police-chiefs-broke...

Meanwhile, U.S. Attorney Bharrara continues to indict top NYPD police commanders for accepting freebies to expedite issuing handgun permits to civilians. 

Big Corked Boots's picture

Man, the economy is so bad even the NYC developers can't get a handout.

AdolphLustig's picture
AdolphLustig (not verified) Big Corked Boots Jun 22, 2016 6:29 PM

Not true.

Trump is doing fine with his handouts.

Sure his (((step son))) is doing well as well.

yogibear's picture

About time!  We know the Federal Reserves's real estate pump wouldn't last infinitely.

AdolphLustig's picture
AdolphLustig (not verified) Jun 22, 2016 6:18 PM

(((Luxury real-estate)))

i_call_you_my_base's picture

It is really despicable that they're selling residency to juice real estate.

Houses Depreciate's picture

With skyrocketing housing inventory across the US, why is this a surprise?

Son of Loki's picture

"House prices never go down."

What?

Dre4dwolf's picture

Not in NY.

No

they dont

If you dont want your house, someone from another country will come and drop 30% more than what its worth to take it off your hands, then they will knock it down and build a mansion while you scurry away like the American peasent you are lol

These chinese investors probably come here and look down on Americans like we are some kind of backwards poor third world citizens.

 

Houses Depreciate's picture

And it's all dumb borrowed money. 

 

There's a reckoning on the horizon.

Never One Roach's picture

I'll take that Brooklyn end-of-the-subway-line studio apartment when the price drops to $4.8 million:

 

http://mehoosewontsell.blog.com/files/2010/07/chav-room1.jpg

Two Theives and a Liar's picture

The number of huge resi towers under construction in NYC is simply obscene right now. I kept wondering when the epic bubble would pop. Look out below!

Dre4dwolf's picture

Americans are struggling, and Chinese people who dont speak a word of english are building mansions.

New York has essentially been sold to China at this point, I am convinced all the Chinese millionaires are essentially funneling money into NY with bullion and bitcoin to buy residential and commercial property hand over fist.

Its kinda depressing when you lived and worked here for 20 years and you cant even afford to keep your house and someone who hasnt even spent a year here is building a mansion right next door to you.

But what are you gona do? it is what it is..... I guess only thing we can do is sell our homes to foreigners and move a few miles down the road to the less valuable areas.

(lol its like a guest is coming over and takes the master bedroom while you sleep on the sofa ) but w.e

This country has no loyalty to its citizens, it treats foreigners 100 times better than the domestic population, if we just got a tax break for a few years and could of refinanced a few years ago when the banks were getting bailouts at our expense..... there is no pressure for banks to refinance people, you have OK credit and they just deny you, not a very good " thank you " for billions of dollars in bailouts....

In a fair world after the bailouts every tax payers mortgage shoulda been lowered to 2.5% or better . . .  they got our bailout tax dollars and they got to keep us all locked in at 4-5%.

And they wonder why the economy is imploding.

The only thing propping it up is the foreigners buying up everyones distressed property for pennies.

 

 

 

 

AdolphLustig's picture
AdolphLustig (not verified) Dre4dwolf Jun 22, 2016 7:18 PM

"This country has no loyalty to its citizens, it treats foreigners 100 times better than the domestic MALE population"

I changed this but agree with everything else you wrote.

MASTER OF UNIVERSE's picture

Why can't Too-BIG-to-fail fund the developers given that they have not been NAILED, or JAILED, yet?

nailgunner44's picture

They're working on it, and so are we.

Houses Depreciate's picture

Rental Rates Fall In San Francisco And Manhattan As Rental Inventory Skyrockets

http://www.businessinsider.com/rents-are-falling-for-nyc-and-san-francisco-2016-6

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Houses Depreciate Jun 22, 2016 7:05 PM

The rate of increase in rents or rents?  Rents need to come down 40% or so with the increases they've had over the last 5-6 years, even more if you go before the real estate bubble started in 2006, NYC never saw a slump like other places.

 

"It now projects a revenue increase of 4.0% to 4.5% for 2016, down from the original estimation of 4.5% to 5.0%."

Houses Depreciate's picture

Agreed. Rental rates have a very long way to fall. Housing prices have much further to fall.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jun 22, 2016 7:03 PM

So 50% returns in 4 years isn't good enough anymore?  Damn, times are rough

http://www.zerohedge.com/news/2016-06-22/desperate-sellers-resort-dramat...

brada1013567's picture

Bill Ackman and a group of his buddies, I mean investors, dropped $91.5 million on a penthouse at One57 about the time he was lapping up VRX, that says it all.

Kasperfx's picture

GO AHEAD JUMP INTO THAT EMPTY POOL , YOU WILL QUICKLY LEARN: THE MARKET IS ALL HYPE!

christiangustafson's picture

If this building is in trouble, the implications go far beyond what has been discussed.