Showing posts with label residential. Show all posts
Showing posts with label residential. Show all posts

Sunday, January 11, 2015

Baron of bland buildings soars to the top—on a shoestring



Gene Kaufman certainly ranks as one of the city's most prolific architects. During the third quarter alone, he had 16 residential and hotel projects totaling well over 1 million square feet underway around town. Yet for all his commercial success, one thing largely eludes him: even a smidgen of love from critics.

When he filed permits for a 79-room hotel in Chelsea last year, for instance, a local real estate blog referred to the designer as the "dark lord of architectural blandness." Weeks later, another critic called the designer's execution of the world's tallest Holiday Inn, which opened its 492 rooms downtown in October, "another atrocity courtesy of Gene Kaufman." Such snipes—some of which are unfit for publication in a family newspaper—have increasingly dogged Mr. Kaufman as he nears 30 years at the helm of his namesake architecture firm.

Yet his skill in landing jobs—this year, another 40 Kaufman properties will be either designed or built—speaks volumes about what it takes to succeed in New York as an architect, as well as, for better and for worse, why the city looks the way it does. The fact is that in a metropolis with some of the nation's highest land and building costs, Gene Kaufman Architects delivers more of the one thing developers -value above all else: profit.

"The value of a [hotel] project when we do it is usually a couple million dollars more than if somebody else does it," said Mr. Kaufman, seated at his desk behind a high, undulating black partition in his SoHo office. "That's why people come to us."

Just ask the city's most prolific hotelier, Sam Chang. In 1997, the then-aspiring developer of smaller, budget hotels—many in the boroughs outside Manhattan—tapped Mr. Kaufman for a seemingly impossible project. It was a proposed 65-room Hampton Inn in the South Street Seaport Historic District, a project where the architect first demonstrated an odd mix of ingenuity and shrewdness that helped launch his career.

The hostelry's location was perfect, but the size of the lot and zoning constraints made it nearly impossible to build enough rooms to cover land and construction costs. Somehow, the designer would have to find a way to shoehorn more rooms.

"So we told them that we will put in this brand-new thing, and people will come to stay in the hotel just to see it," Mr. Kaufman said. "It's called a flat-screen TV."

True, the sets were initially budgeted to cost $10,000 a pop, but they also took up far less valuable space than traditional TVs—enough to allow Mr. Kaufman to shrink the width of each room enough to squeeze in one additional room onto each floor. That change alone was enough to boost the hotel's projected revenue, quickly persuading the chain's executives to go ahead with the project, which indeed has proved wildly successful.

Since then, Mr. Kaufman has designed about 50 hotels, often with Mr. Chang's McSam Hotel Group as the developer, and has found myriad ways of reconfiguring rooms and shrinking construction schedules and costs, all while sticking to guidelines imposed by many hotel chains on everything from ceiling heights in the lobby to room layouts.

Among other things, he has an in-house team of consultants focused on getting projects through labyrinthine bureaucracies like the city's Department of Buildings. The fact that his designs often feature plain-Jane façades, and buildings set back from the street wall to ensure that every floor is exactly the same size, also help cut costs.

The world's tallest Holiday Inn (99 Washington St.), Candlewood Suites (339 W. 39th St.) and 347 Bowery are beloved by clients but loathed by critics of Kaufman-designed hotels.

Similarly, on the residential side, Mr. Kaufman has a reputation for keeping costs low enough that developers can afford to take chances on projects in iffy areas that others had written off. More than 20 years ago, he and a developer tried to persuade the city to grant permits for an apartment project in Williamsburg, Brooklyn, where they insisted that they could make good money charging monthly rents of a then-¬unheard-of $1 per square foot.

"They said, 'How are you ever going to get that much money?'"

For the developer, that bet would have paid off handsomely, as rents in the area have since quintupled.

Scores of designs for shoestring apartment buildings and budget hotels that others insisted would never pencil out have handsomely enriched Mr. Kaufman's clients and his own firm, but they have also come at a cost to the 56-year-old's reputation. One writer referred to him as the designer of "craptastic apartment buildings." Yet even some of his harshest critics concede that his budget designs simply reflect what his clients want and what city zoning rules allow.

When Mr. Kaufman was tapped in 2006 for a planned seven-unit residential project at 314 John St. in Prospect Heights, Brooklyn, for example, he produced two very different façade designs. His client, the developer Aljohn Group, cited costs in opting for the cheaper one, since the prices for other elements of the building, such as the foundation and plumbing, are fairly standard.

"At the end of the day, everything in New York City always comes down to money," said Nikolai Fedak, founder of blog New York YIMBY [Yes in My Backyard]. "While rich people are willing to pay the price for top-level design, it just so happens most New Yorkers aren't rich, and neither are the people who come here to visit" and stay in a hotel.

Developers of luxury properties can afford to hire starchitects and set a higher aesthetic bar because they know their buyers will cough up enough cash to justify all the additional sums spent on the finer points of a building—from custom-made windows to marble-clad bathrooms. But for those who aim to build for everybody else, the same math does not work.

"It's very 'in' to say architects can do design on any budget," Mr. Kaufman said in his deadpan delivery. "But I think a lot of criticism [of my buildings] is actually from people who want something for nothing."

Others insist that New York has to offer not just striking properties for those few who can afford them, but something for everybody else, too.

"We need hotels and residential buildings that are not exclusively for the very rich," said Kenneth T. Jackson, a history professor at Columbia University. "To the extent that Gene Kaufman is helping to provide those units, that's a good thing."

And while Mr. Kaufman has designed pricey projects as well, it is the blander ones for which he is known. Oddly enough, they seem out of keeping for a man who has so many connections to high art and design. After graduating from Cornell University, he interned at an architecture firm in Switzerland and went on to work as an associate for world-renowned Uruguayan architect Rafael Viñoly—the designer of what now stands as the tallest residential tower in the hemisphere, 432 Park Ave.—before starting his own firm.


Bowing to the greats

During the last real estate boom, he designed a Williamsburg condo inspired by the design of French architect Le Corbusier, a titan of modernism. And since purchasing a majority stake in well-regarded architecture firm Gwathmey Siegel & Associates in 2011, Mr. Kaufman has led a campaign to save an upstate government office building, designed in the (all too) brutalist style by Paul Rudolph.

Outside the office, he is a devoted museumgoer, along with his wife, Terry Eder, a successful classical pianist. In recent months, Mr. Kaufman has been attempting to purchase the name and assets of their beloved but bankrupt New York City Opera.

It is less surprising, then, that Mr. Kaufman is currently designing a ground-up development of artist studios in Bushwick, Brooklyn, and that he also has done many higher-end projects that have been better received by the same people who criticize his budget hotels. Among those is his design for Hilton's boutique brand, Indigo, in the financial district. YIMBY grudgingly praised it as "actually somewhat appealing." In the same vein, Mr. Kaufman's vision for a Thor Equities hotel on Canal Street was deemed "not that ugly," by Curbed.com, which also described an upcoming project of his a few blocks west as "surprisingly pleasant."

And on the residential side, Mr. Kaufman's work in today's hyperpricey Williamsburg bears little resemblance to designs he came up with in the late 1980s. His work there includes projects such as the Lucent and the Decora.

Even when he's had big bucks to spend, though, Mr. Kaufman's designs have stirred the wrath of some critics. A daring design for a condo on the Bowery prompted The Village Voice to note that the building "may as well come emblazoned with a rainbow 'F—k You!' sign."

But like him or loathe him, it is the pricier side of Mr. Kaufman that the city may be seeing more of as a result of changing market dynamics. The designer's longtime collaborator, Mr. Chang, notes that stratospheric land and construction costs are making budget-hotel development a thing of the past.

"People think there will be a lot more new [budget] hotels, but I think construction will completely slow down," said Mr. Chang, who, having built more of them than anyone else, announced last year that he is retiring.

Monday, October 14, 2013

Bridging the financing gap: New funds could inject $220M to spur commercial development

Summary: Foreclosure- and repossession-ridden Michigan has been left with little access to liquidity from banks and investors.  In response, the Michigan State Housing Development Authority (MSHDA) is launching a $100 million mezzanine fund for multi-family, mixed-used and residential projects throughout the state.  Similarly, Great Lakes Capital Fund is working toward a $120 million fund allocated to underwriting loans to Michigan developers.  Meanwhile, regional banks have used the real estate rebound to clear foreclosed and repossessed houses from their balance sheets.  Developers and entrepreneurs are hoping that these funds will help with second tier funding to close the gap between <60% LTV and equity investors who are looking for more leverage.


Grand Rapids --(MiBiz)--
Commercial real estate developers in West Michigan could soon get some much needed relief from their struggles to access bank financing.

Still smarting from the millions in losses they incurred from foreclosed and repossessed properties, banks are keeping the purse strings tight on loans for commercial real estate projects. That has developers facing a financing gap in the market as the economy improves.

“There is a (financing) gap out there,” said Michael Price, chief executive officer of Grand Rapids-based Mercantile Bank Corp. “There are lots of good ideas that have come not only in the real estate market, but in manufacturing and other commercial opportunities where there just needs to be that level of debt that has a bit of higher risk profile than what a traditional bank financing package looks like.”

With developers and banks finding it difficult to work the numbers on many potential projects, that’s left some in development limbo, Price said.

There may be some help on the horizon. Two new funds expected to hit Michigan markets next year with up to $220 million in project financing could help close the financing gap.

The Michigan State Housing Development Authority (MSHDA) announced on Sept. 25 that it is launching a possible $100 million mezzanine fund with a focus on providing financing to urban multi-family, mixed-used residential projects across the state.

Also in September, MiBiz reported Lansing-based Great Lakes Capital Fund, via its Develop Michigan Inc. economic development arm, is working to close a $120 million offering for its Develop Michigan Real Estate Fund LP. Company officials say they plan to use the fund to provide capital for a program that would offer loans to commercial developers across the state.

It’s often the case that developers and entrepreneurs just don’t have access to the necessary equity that would make banks comfortable in extending the financing needed to push a project forward, Price said. Banks also just went through an intense period of trying to shed foreclosed assets from their balance sheets and salvage the losses from collapsed deals. In essence, they’re not in any hurry to risk adding more bad debt, he said.

Developers say they can typically get a bank loan for 50 percent to 60 percent of the total cost of a deal, but while they’re willing to put some equity into the projects, they’re still often left with a 30-percent funding gap. That’s created a need for a funding source that’s willing to come in and be last piece of capital that fits between senior debt and equity so that deals can move forward, said Chris LaGrand, chief housing investment officer at MSHDA.

With the availability of these funds, owners and developers have more financing options in structuring a difficult deal and more investors would have reason to invest in Michigan, LaGrand said.

Kalamazoo-based developer Tom Huff, owner of Peregrine Realty LLC, said the new funds could help fill a lending gap that’s been making it difficult to finance projects.

“It seems like these are great ideas that just open more options for developers,” Huff said. “Right now, the banks are timid and the appraisal market is also timid, so (these funds) make some sense.”

It’s no surprise that banks tightened their underwriting standards for property developments after the recession.

Local banks accumulated millions in foreclosed and repossessed real estate on their books in the recession. Deals with just one Holland-based developer, Scott Bosgraaf, left banks holding roughly $24 million in unpaid real estate loans and bad debt.

But Dan Yeomans, whose turnaround firm has been involved in the sale of $12.6 million of those foreclosed assets, doesn’t think developers should bear all the blame for the banks’ losses. Bad lending practices were often just as much to blame as over-extended developers, he said.

“I don’t even know how some of those loans were given,” said Yeomans, president of Amicus Management.

As the economy has improved, banks have gotten rid of foreclosed or repossessed properties, what’s known as “other real estate owned” or OREO. Locally, Mercantile Bank Corp., Macatawa Bank Corp. and Independent Bank Corp. combined have cleared their balance sheets of $17.1 million in OREO between Dec. 31, 2012 and June 30 of this year.

But because banks are reluctant to lend even as the economy has picked up, developers can’t assemble enough project financing to be able to meet the demands of the market. That’s where the new mezzanine financing could help, even if it’s at a higher interest rate and adds complexity to the deals, sources said.

While the new funds could make deals more complex in terms of layering different financing mechanisms and necessary paperwork, Price said the extra due diligence is worth it for a good project.

“In working a little with these types of funds and entities, they’ve made it fairly easy to work with, but of course, that’s always in eye of the beholder,” he said. “I’m not going to sugarcoat it, but every time you have another entity involved, that always includes another layer of paperwork and additional triggers and holds that need to be put in place. But all things considered, we think it’s eminently worth it for the entrepreneur or project team to spend the time.”

The process shouldn’t be so onerous that project managers will have to go out and hire a tremendous legal team to tackle the work, he said.

In the current market, many projects rely on the ability to secure building incentives primarily from state and local governments. At the same time, some incentives such as Renaissance Zones are retiring. Other incentives like the Michigan Economic Development Corp.’s Community Revitalization Program can help deals get off the ground, but the funds are always distributed on the back end of a deal when the project is complete.

Huff said his experience is that banks are reluctant to loan any more than 70 percent loan to value for projects despite the demand for urban residential development in many communities across the state. Those communities “need this kind of injection,” he said.

“This kind of keeps the momentum going,” Huff said. “There is definitely risk involved, but there is demand.”

Working in partnership with banks, MSHDA wants to identify a pipeline of deals that could unlock with the help of mezzanine debt, LaGrand said.

Given MSHDA’s strong portfolio of past successful projects, LaGrand believes the organization can convince investors to get involved in the Michigan market.

“We believe we have the history and market intelligence of doing deals in the state since 1960 that investors will find useful and attractive,” he said. “We’re thinking that we can offer investors an 8- to 10-percent yield, and the cost of the funds is around 14, 15, 16 percent. We think deals would pencil at those numbers.”

Right now, mezzanine debt is offered at around a 25-percent interest rate in some markets, which LaGrand said is a “go-away price.” Investors know deals don’t pencil at that rate, but initial conversations with investors have been positive, LaGrand said, noting the experience and market knowledge MSHDA can bring to the table.

The mezzanine fund is seeded with $25 million of non-taxpayer MSHDA reserve funds.

“We obviously believe this fund is going to provide a good return, which is why we’re moving the money,” LaGrand said. “We’re probably looking at the middle of next year for the first closing.”

The fund’s target investment is mixed-used multifamily housing in urban cores, the cost of which can range widely. LaGrand hopes to unlock primarily large-scale multi-million dollar developments. One stipulation to access the financing: Projects must have at least 50 percent of their units set at market-rate values.

“We want to get as many strong deals into the pipeline as possible,” he said. “Ideally, we want to be 10 to 30 percent of the investment cost of the deal. So if our target investment might be $10 to $20 million — depending on what percentage of the deal we are — you’re talking a $50 million real estate investment. That’s sort of the base level, and we can go higher.”

Given the potential returns for investors and MSHDA’s track record, Price of Mercantile Bank said he thinks the fund makes sense. He expects investors are really going to kick the tires on projects because of it.

“It all depends on the risk profile of projects,” he said. “(Investors) are clearly going to demand a higher return, but they are going to fill that gap that we think is going to allow some ideas and projects to go that may not have come to fruition — and hopefully provide a lot of job growth.”

http://mibiz.com/news/real-estate/item/20998-bridging-the-financing-gap-new-funds-could-inject-