Ask the Experts: Compliance Experts Open Doors to Mortgage Lending For NYC Developers

Behind-the-scenes, Orest Tomaselli is a key figure in the reshaping of New York City’s skyline. Many of the most prominent luxury residential developers turn to him and his team at National Condo Advisors to help coax lenders into offering financing to homebuyers who are interested in their buildings.

Tomaselli started National Condo Advisors a decade ago after Fannie Mae and Freddie Mac changed their condo and coop guidelines, leaving management company’s and boards confused and often out-of-compliance. The government agencies created a specific process and set of rules that nobody knew how to follow, leaving hundreds of buildings and thousands of unit owners unable to get mortgage financing. After years of handling compliance in the back offices at mortgage banks, Tomaselli saw an opportunity and he took it.

“Nobody knew how to do it,” he explained. “If I work with existing, established developments and new construction developments, I could work them through the process of getting them healthy, getting them compliant, getting their bylaws and budgets in-line. Making mortgage financing available.”

When they first started, the aim of National Condo Advisors was to obtain a blanket approval from Fannie Mae for an entire building – an “Agency Approval.” That would often stoke the fire and help with the first several sales until lenders became comfortable with a building. The focus now is portfolio lender approval, directly from banks and mortgage companies.

An approval from Fannie Mae isn’t as relevant in New York City as it might be elsewhere. The agency will only purchase mortgage loans for amounts less than $726,525, which is impractical for so many of the multi-million-dollar units throughout the boroughs. So, in many instances, they’ve eliminated Fannie Mae project approvals and they’ve gone directly to the lenders.

“The lender piece has become incredibly important,” Tomaselli said. “When a developer is looking at a site, they will call (and they will say) we need mortgage financing on this building as soon as we record a condo declaration, which happens when 15% of the units are in contract.”

What once seemed a tall order, considering Fannie Mae calls for 50% of the units in a building to be in contract, is now a common request that National Condo Advisors is equipped to handle. A developer wants to capture every buyer that likes their building, so the ultimate goal is to be able to close on a unit as soon as there is a temporary certificate of occupancy on the building, which doesn’t always happen in New York City.

“Letting a buyer go because a lender can’t provide mortgage financing is ridiculous,” Tomaselli said.

The most common impediment standing between a building and a blanket lender approval is the same as it was when Tomaselli started his business more than a decade ago. The Fannie guidelines state that a condo should have a line item in its budget that allotted 10% of its revenue from common charges toward a reserve account.

During the early years for National Condo Advisors, they assisted a massive Brooklyn new construction condo project that had an annual budget of more than $5 Million. To become compliant, they would have to add a line item showing $500,000 was earmarked for reserves. Since all of the assets were already allocated, one of the few solutions was to jack-up common charges, which would make it extremely difficult for the marketing team to sell units in the building.

“Nobody wanted that,” Tomaselli said. “It seemed like a really innocuous kind of guideline. We had to figure out a way around it.”

The solution became a reserve study – An engineering study where every single component within the property is inspected and assigned a value and a remaining useful life over a 30-year horizon. The undertaking was designed mostly to determine if the building really needed to dedicate 10% of its budget toward a reserve fund. Fannie Mae allowed for it, so many lenders followed suit.

A reserve study done on the Brooklyn condo project determined that it needed to allot only $112,000 annually toward reserves. Since it was a brand-new building with very few unit owners paying HOA dues, the burden of funding the reserves fell on the project developer/sponsor. Regulations state that once the project’s sponsor contributes toward reserves, that money cannot be taken back. So, having the reserve study done saved the developer almost $400,000 every year until they sold out the building. It also kept the maintenance fees at market levels at a time the marketing team was trying to sell units.

Since then, National Condo Advisors has mimicked that plan Across New York City and elsewhere. They assist new and existing buildings obtain an initial reserve study, help them align their budgets, work with the marketing team to outline how to keep maintenance fees low, and they work to get a building’s bylaws, budget and insurance compliant so it will gain approval from the Attorney General’s office and pass muster with lenders.

Tomaselli started Strategic Inspections just a year after he launched National Condo Advisors because the reserve studies were taking up to 3 or 4 months to complete, which “did not go over well in New York,” he said.

Today, a typical reserve study takes Strategic Inspections 30-45 days to complete. It costs between $8,500 and $15,000 for a 100-200-unit building. The company provides a 70-page report that details the cost to repair and replace every specific component in the building that’s paid for by the board. They outline a cost to contribute to the reserve account over a 30-year horizon, in many instances eliminating the need for special assessments, and ensuring that the building is healthy, and mortgage financing will always be available. Strategic Inspections completes 40-60 reserve studies every month.

Reserve studies have saved the day in more unusual circumstances as well. Mortgage financing was unavailable at a condominium in the Financial District because the board sued the developer for shoddy workmanship. Lenders were too uncomfortable with multi-million-dollar litigation pending. But when a reserve study revealed that repairs would cost $2.5 Million, and the board documented it had more than $6 Million in its account, Tomaselli was able to prove to one of the biggest mortgage lenders in the city that the building did not represent too high a risk to lend in. Property values in the building skyrocketed afterward.

Having a 10% line item in a building’s budget isn’t the only compliance issue that stands in its way of gaining a blanket approval from a lender. They’ll often balk if a building has too much commercial space, insufficient master insurance, a high percentage of single-entity ownership, too many non-owner-occupied units, and/or low pre-sales at new buildings. In all of these instances, National Condo Advisors either can help a building get healthier or it can make a case that it’s already worthy of mortgage financing.

Still, Tomaselli said he sees pushback from some management companies and attorneys that are just fine with the status quo. He said there usually has to be a trigger for people at existing buildings to call on his team for help.

“People don’t often do a reserve study because they should do it,” he said. “They call us because they can’t get mortgage financing, or when people complain to the board about a special assessment.”

A troubled building might spend $10,000 on a reserve study and another $10,000 on compliance, but then it could quickly get approved by three lenders or more, Tomaselli said.

“From our perspective, it’s such a low-cost barrier for these developments.”

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s