NEW YORK (TheStreet) -- Global lenders are quietly bankrolling the New York City luxury real estate bonanza, keeping domestic banks out of the New York out of the action, real estate publication The Real Deal revealed in an investigative report.
According to the report, not a single one of Manhattan's seven largest luxury condo towers under construction or pre-development is being bankrolled by domestic banks. Firms like Wells Fargo (WFC) and Bank of America (BAC) are being shut out in this latest New York real estate boom, the report said.
"What's happening is that they [domestic banks] have become a little more restrictive, they don't really compete with overseas banks," Kevin Swill, COO of the Carlton Group, a real estate investment banking firm, said in the report.
The Carlton Group has arranged the financing of some major luxury projects, including 432 Park and 125 Greenwich Street, two New York cornerstones of ostentatious wealth. The crown jewel of the uber-rich "Billlionaire's Row" on Manhattan's 57th Street, 432 Park is currently the tallest building in the Western Hemisphere, boasting 400,000 square feet of space spread across just 104 units with asking prices as high as $95 million. Meanwhile, 125 Greenwich Street, a $240 million property, stands to be the tallest residential tower Downtown.
In the past, Manhattan residential construction projects have been financed by groups led by large domestic players like those mentioned above, typically with interest rates in the 5% range.
A number of factors are causing developers to look abroad for capital. For one, there's a level of concern after the 2008 financial crisis, leaving foreign lenders to finance projects domestic banks won't touch.
"Dodd-Frank rules limit their exposure to risky assets, such as construction loans," said Konrad Putzier, the author of the report.
Moreover, domestic banks will often syndicate the loans to subsidize the risk of getting in the market, a hassle for developers if and when they want to renegotiate loan terms.
"The number of players involved makes renegotiating a loan very complicated," Putzier said. "Some foreign lenders don't have the same constraints and can offer developers a loan that they keep on their books in its entirety. This is the major advantage of foreign lenders, and the reason why developers often pick them over domestic banks."
While U.S. banks appear to be out, overseas institutions continue to get skin in the game with both cheaper capital and less restrictions, a major incentive for U.S.-based developers.
"Many key players are seeking this capital because it carries a lower return threshold or cost to capital," said Zach Ehrlich, CEO of the Mdrn Group, a New York City-based luxury real estate marketer. "Since these institutions don't see good enough opportunities domestically in their own markets, they need to undercut competitors and accept a lower return threshold to put out money."