Tag Archives: Real Estate Development

Condo Project Borrows From Its Future Residents

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By AramilFeraxa – Own work, CC BY 4.0

The Wall Street Journal quoted me in The Luxury Beverly Hills Condo Project Borrowing Money From Its Future Residents (behind a paywall). It opens,

The developer behind one of the country’s most expensive real-estate projects has an unusual request for its condo buyers: Lend us money.

Purchasers of the site’s roughly 150 condo units are also providing debt to help Cain, an investment firm based in London, fund its $10 billion project, known as One Beverly Hills.

The 17.5-acre site, set to be completed in 2029, will include high-end retail such as Dolce & Gabbana, upscale dining, 78 new hotel suites and acres of botanical gardens. The ultraluxury condos will be operated by Aman, one of the world’s leading high-end hotel operators.

The condo owners’ debt takes the form of a bond—the developers call them Founder Bonds—and buyers will receive a return of 5%, according to a person familiar with the matter.

No condo buyers are forced to participate in the bond program. Founder Bonds offer a financial return and the opportunity to assist in the construction of their future home, Cain has told condo buyers.

When the Founder Bond program was launched early last year, 10-year Treasury debt offered less than 5% returns. In recent weeks, however, the 10-year yield has exceeded that level, rising above 5.3% at one point this month. That means Founder Bond holders are now earning less than the yield on Treasurys, which are commonly considered the “risk-free” rate.

But some say this rarely seen financing tool sticks condo buyers with a risk.

The bonds are junior to other debt on the project, which includes a $2.8 billion senior loan led by J.P. Morgan and a $1.5 billion mezzanine loan from VICI Properties. Parts of both loans are conditional on Cain hitting certain sales milestones.

That means that if the condo towers were to fall short of completion—in a city where most luxury buyers are focused on single-family homes and estates—bondholders could be left not only without the penthouse they were expecting, but also without the extra money lent to the developers.

“Even though these are luxury buyers, I would guess they’re going to face more exposure if the project goes bust than they may realize,” said David Reiss, a professor at Cornell Law School, who researches real-estate finance. “They’re getting paid a small amount to take a large amount of risk…but because they’re luxury, they may be able to tolerate the risk better.”

Monday’s Adjudication Roundup

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  • New York federal judge dismisses suit against Bank of America Corp. over “hustle” high-speed mortgage approval process for allegedly defrauding Fannie Mae and Freddie Mac.
  • Midtown TDR Ventures LLC and Midtown GCT Ventures LLC, real estate developers that currently own Grand Central Terminal, file a complaint against the City of New York and SL Green, another developer, claiming that they were robbed of potential profits from air rights when the City and SL Green worked to rezone the area in which Grand Central sits and devalued the property.

Monday’s Adjudication Roundup

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Foreign Funding for Real Estate Projects

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Jeanne Calderon and Gary Friedland have posted A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. The paper provides a great overview of a relatively new source of funding for real estate deals. The introduction opens,

From an immigrant’s perspective, the EB-5 Immigrant Investor Program (“EB-5” or the “Program”) represents merely one of several paths to obtain a visa.  The EB-5 visa is based on the immigrant’s investment of capital in a business that creates new jobs. However, from a real estate developer’s perspective, the immigrant’s investment to qualify for the visa creates an alternative capital source for the developer’s project (“EB-5 capital” or “EB-5 financing”).

Despite the Program’s enactment by Congress in 1990, for many years EB-5 was not a common path followed by immigrants to seek a visa. However, when the traditional capital markets evaporated during the Great Recession, developers’ demand for alternate capital sources rejuvenated the Program. Since 2008, the number of EB-5 visas sought, and hence the use of EB-5 capital, has skyrocketed. EB-5 capital has become a capital source providing extraordinary flexibility and attractive terms, especially to finance commercial real estate projects. Consequently, many developers routinely consider EB-5 capital as a potential source to fill a major space in the capital stack. As the financing tool becomes more widely known and understood, this source of capital should become even more popular.

The EB-5 investor’s motivation for making the investment accounts for the relative flexibility and favorable terms afforded by EB-5 capital compared to conventional capital sources. Unlike that of the conventional capital providers (such as banks, private equity funds, REITs, life insurance companies and pension funds), the EB-5 investor’s reason for making the investment is to secure a visa. Thus, his primary objective at the time of making the investment is to satisfy the EB-5 visa requirements. Consequently, so long as the investor believes that the investment will qualify for the visa and result in the safe return of his capital, he is willing to accept a below market, if not minimal, return on the investment. Furthermore, the investor might not require some of the other protections that more sophisticated, conventional real estate investors typically seek.

*     *     *

Simply stated, the Program requires that the immigrant make a capital investment of $500,000 or $1,000,000 (depending on whether the project is located in a “Targeted Employment Area”) in a business located within the United States. The business must directly create 10 new, full-time jobs per investor. Thus, the number of jobs that a project will create is a key determinant of the amount of the potential EB-5 capital raise. (3-4)

This once exotic funding technique is now becoming quite mainstream. Of interest to some readers of this blog, the paper describes at various points how EB-5 funds have been used in residential projects. The paper is a useful introduction for those who want to know more about this program.

Monday’s Adjudication Roundup

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Brooklyn’s New Center for Urban Business Entrepreneurship

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Brooklyn Law School has announced a new venture, the Center for Urban Business Entrepreneurship (CUBE), that will encompass much of the work that Brad Borden and I do, including this very blog.  The press release reads:

Brooklyn has become a world magnet for new businesses. Today, the Brooklyn Tech Triangle (DUMBO, Downtown Brooklyn, and the Brooklyn Navy Yard) ranks second only to Silicon Alley as the largest technology hub in the nation. Brooklyn Law School is intent on playing an integral role in ensuring the borough’s promise as the home for future innovators and entrepreneurs.

The Center for Urban Business Entrepreneurship (CUBE) – an extraordinary venture launching in November – will harness this energy. CUBE will be the hub for exploring legal issues surrounding entrepreneurship, and for providing effective legal representation and support for new commercial and not-for-profit businesses – while also training the next generation of business lawyers to advise and participate in these sectors. CUBE’s express purpose is to offer the legal tools to support and help build the start-up successes of tomorrow and beyond. The Center will reinforce and capitalize on Brooklyn’s role as a haven for business, media, energy, technology, creative arts, and social enterprise innovators.

Marking CUBE’s launch will be the Entrepreneur Lawyers Showcase on Thursday, November 14. The event will bring together BLS alumni and students who are exploring new ways to represent innovative entrepreneurs; trailblazing paths for the entrepreneurial lawyer and the legally-trained entrepreneur; and embarking on ventures of their own.

In addition to its base at the Law School, CUBE will be headquartered at two locations: 55 Washington Street in the heart of DUMBO, and 15 MetroTech Center. Space has been generously provided by David and Jed Walentas, Principals of Two Trees Management Co., LLC., and Forest City Ratner Companies, respectively.

“Brooklyn has always been a place where great ideas are born and nurtured, from the start of the American Revolution up to today’s Digital Revolution,” said Dean Allard. “CUBE will be a home for the next generation of revolutionaries, pioneers, entrepreneurs, and leaders. It also reflects the very best of Brooklyn Law School. In the public sector, our pro bono, government, criminal and civil justice, and community work in the U.S. and abroad – such as through the Sparer Fellowship Program – is renowned. In the private sector, we lead in areas such as international business law, business regulation, bankruptcy, and compliance, among others. CUBE presents powerful new opportunities centered on the role of law for emerging commercial and not-for-profit businesses. It adds another component of our comprehensive curriculum for the 21st century.”

The curriculum will focus on advanced training in six specific areas: Real Estate Development; Technology; Cre­ative Arts and Media; Community Deal-Making; Energy; and Social Enterprise. A three-pronged approach will define the experience:

foundational courses focused on entrepreneurship;

in-house clinics and other skills-focused courses (including the successful Business Boot Camp) that allow hands-on training with expe­rienced attorneys; and,

industry-specific courses, workshops, pro bono opportunities, student organizations (Start-Up Club, Business Law Society, IP Law Society), panels, conferences, symposia, journals, and other activities for burgeoning entrepre­neurial attorneys.

Students completing CUBE’s coursework in all three categories will have the opportunity to graduate with an Entrepreneurship Certificate at graduation.

CUBE will also promote entrepreneurial thinking through one-year fellowships, supporting third-year students’ projects designed to improve legal representation and support of start-up companies and growing enterprises. Adding to this unique approach will be a CUBE Legal Project Competition to encourage innovation and entrepreneur­ship. Students will pitch their projects, with winners selected as Fellows by a panel of prominent judges, many of whom will be entrepreneurs themselves. Seed money will also be available to help jumpstart the winning proposals.

CUBE builds on a foundation of highly respected programs, such as the Brooklyn Law Incubator & Policy Clinic (BLIP), founded by Professor Jonathan Askin; the Corporate and Real Estate Clinic, founded by Professor Debra Bechtel; and the Community Development Clinic founded by Professor David Reiss. Earlier this year, Askin was tapped by the European Commission to help guide implementation of similar clinics world­wide, part of a European Union-funded pilot program. CUBE will serve as the U.S. “landing strip” for a European consortium of 16 academic partners, which includes Queen Mary University of London Centre for Commercial Law Studies in England, the KU Leuven Interdisciplinary Centre for Law and ICT in Belgium, and the University of Amsterdam, Institute for Information Law, in the Netherlands.

The launch of CUBE is made possible through the vision of BLS entrepreneurs: Evan B. Azriliant ’92, Partner, S & E Azriliant, P.C.; Robert B. Catell, Chairman, Advanced Energy Research & Technology Center, Stony Brook University and Former Chairman and CEO of KeySpan/National Grid; Lawrence I. Feldman ’74, Chief Executive Officer, Subway Development Corp., and Diane Feldman; Stanley M. Grossman ’67, Senior Counsel, Pomerantz, Grossman, Hufford, Dahlstrom, and Nancy Grossman; Debra G. Humphreys ’84, Founder and Chair of Board of Trustees, Thomas Jefferson Independent Day School, and David C. Humphreys, President and CEO, Tamko Building Products Inc.; and Gary M. Rosenberg ’74, Partner, Rosenberg & Estis P.C.