Madison Realty Capital - A Private Commercial Lender

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By Sarika Gangar
April 28, 2008

In recent weeks, sellers in New York have been offering would be buyers a helping hand. “People are starting to understand that they won’t get [the prices they saw] in 2007 and property [values] have decreased,” said Josh Zegen, managing partner and co-founder of Madison Realty Capital.

The most high-profile example is Deutsche Bank offering seller financing for seven office buildings purchased by Macklowe Properties from the Equity Office Properties portfolio (4/14). “Typically, this didn’t happen in the New York metro market as much because of the liquid mezzanine [debt] market,” Zegen added, noting that seller financing is common in other markets. Sellers are typically pitching in financing of 20% to 30% of the acquisition price on a two- to three-year term.

Zegen, who said he is working on two deals where the seller is offering financing, said that in one, the buyer and the seller have renegotiated the purchase price several times. This ultimately led the seller to offer financing. Doug Hercher, a managing director at Cushman & Wakefield Sonnenblick-Goldman, said the ability to provide seller financing is easier for institutions such as life insurance companies and pension funds given their embedded lending arms. “Institutions that own real estate in New York are in a position to put loans in place and administer the loans because they have lenders in their business,” he said.

Sonnenblick has seen this in just a handful of deals in New York and Hercher said he believes it is a short-term phenomenon. “As the credit markets normalize, which could take 12 months, you’ll see seller financing as a significant part of the market,” he added.

Seller financing works much like a second mortgage and is priced accordingly. To repay the debt, borrows typically either increase the property’s cash flows or refinance. Providing financing also opens the door in the event of a problem with the property. “A lot of guys think, “If this guy screws up, I can come and take back the property,” said Dan Lisser, managing director at Johnson Capital. Lisser added, however, that most sellers, unless they have to sell, are taking a wait and see attitude.

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