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

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.

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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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