Developers must also submit to various loan covenants, terms they might have laughed at during the boom years, when money came with few stipulations.
“You’ll always have certain guarantees such as completion guarantees that you’ll finish the building,” Mr. Bendit said. “But now the lenders want more. There are guarantees that if you run out of interest reserves, you’ll pay the interest out of your own pocket. There are guarantees that if there’s a default and the lender has to take, say, a $50 million project and sell it for $47 million, you’re on the hook for the $3 million difference. These terms are all new.”
The tougher lending environment has forced developers to pour more of their financial resources into construction deals and also to bear more exposure to the consequences of how the investment performs.
John Lam, a prolific developer of hotels in the city, told The Commercial Observer that he may pony up as much as $200 million of the estimated $350 million cost of a large new hotel and retail complex he is planning to erect on 30th Street and Broadway.
“Financing is still very tough and most of it is relationship driven right now,” Mr. Lam said.
Mr. Lam said he is pulling money out of his large portfolio of Manhattan hotels by refinancing the properties in order to write the huge equity check for what will be his signature Manhattan development. Before the downturn, he would have likely been able to finance the project without having to involve his other assets. Although he is leveraging his holdings to do the deal, Mr. Lam also looks at the massive cash infusion as a way to gird himself against risk by lessening the debt payments he’ll have to make while he gets the 30th Street project up and running in the coming years.
“I don’t like to have a lot of leverage against a property when it’s not income producing,” Mr. Lam said, noting that his portfolio currently has low leverage and strong cash flow and that the planned refinancing won’t burden his hotels with undue amounts of debt.