Developer Taps Non-Profit to Fill Tall Loan Order

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L.A. developer CIM Group is beginning construction on what will be the tallest residential building in the country, a 1,395-foot condo tower in midtown Manhattan.

But some of the money to build the $1.25 billion project is coming from an unexpected source.

With the financing markets still tight, CIM turned to a non-profit organization rather than a bank for a construction loan. Children’s Investment Fund Foundation, a London-based group benefiting disenfranchised youth, agreed to lend $400 million.

Experts now hope foundations and other alternative lenders, which can be quicker and more flexible than banks, will provide much needed capital to developers such as CIM, which has several large L.A. projects in the works.

“This is a good sign that there is more capital available from less traditional sources,” said Ross F. Moskowitz, a partner in the real estate division of New York law firm Stroock & Stroock & Lavan LLP who is not involved in the deal. “As more projects are looking for capital that’s low priced and flexible, I think you will see it more.”

CIM declined to comment for this article. Children’s Investment Fund Foundation did not return messages.

These types of loans remain unusual. Foundations typically don’t have the manpower or expertise to investigate deals and instead often hire third-party firms to handle their investments, according to Andrew Kirsch, an attorney specializing in real estate transactions at Raines Feldman LLP in Beverly Hills. But increased federal regulations and stricter underwriting criteria have made lending more difficult for traditional banks, thereby creating an opportunity for nonconventional lending sources.

“(Non-profits) can lend out money cheaper than your traditional institutions,” Kirsch said. “Their money is essentially free money from endowments or charitable contributions as opposed to banks that are borrowing or getting equity from institutions that require a return.”

Terms of the loan were not disclosed, but a founding principal of CIM told the Wall Street Journal, which first reported the deal, that the loan was low price and flexible. It is also nonrecourse, so the foundation cannot go after CIM’s other assets if the company defaults on the loan.

Meanwhile, Howard L. Michaels, chairman of New York’s Carlton Group, which arranged the financing for the two parties, said in a statement that the non-profit had distinct advantages over traditional lenders.

“The foundation is not subject to the same liquidity requirements as regular banks and funds and was able to work quickly to underwrite and commit without the bureaucracy of a bank,” he said.

CIM recently started excavation and initial construction work on the 122-condo, 95-story tower, which is planned at the former site of the Drake Hotel on Park Avenue several blocks from Central Park. The ultraluxury project is expected to open in 2015.

It will include wine cellars, staff units, a midfloor restaurant for residents and other amenities. CIM plans to ask about $5,800 a square foot for the condos, making them among the most expensive in the city. The six-bedroom penthouse unit is said to be offered for $85 million.

Dangling crane

But it faces competition. Nearby at 57th Street and Fifth Avenue, closer to Central Park, Extell Development Co. is building its One57 luxury condo project, only about 400 feet shorter, and plans to ask similar – or slightly higher – prices when it is completed next year. (One57 attained national attention during Hurricane Sandy late last month when a construction crane at the building snapped and dangled dangerously, although it never fell.)

Jason Maier, director at New York real estate investment firm Stan Johnson Co., said that given the competition, the condo project remains a bold move for the West Coast firm that has only joined the New York scene in the last two years.

“CIM comes to break into a development market that is very competitive and insular. And for a development this size, it’s an aggressive move given the location and competition from One57,” Maier said.

CIM, which has numerous hotels, office towers, residential buildings and the like under management across the United States, became involved in its latest project last year after buying the $510 million debt that original developer Harry Macklowe defaulted on during the downturn. CIM, which is structured as a private-equity firm and gets most of its financing from pension funds, raised more than $800 million in equity investment for the condo tower project before turning to Children’s Investment Fund for the remainder of the money.

Co-founded by London hedge-fund manager and investor Christopher Cooper-Hohn and his wife, Jamie, a decade ago, Children’s Investment Fund receives most of its funding from Cooper-Hohn’s hedge fund – and its investors who are required to donate to the foundation if the fund achieves a return goal. The non-profit foundation works with organizations benefiting underprivileged children.

The foundation also has about $3.8 billion in long-term investments and has made at least four loans to developers since the market downturn – including two to CIM. The developer borrowed $250 million last year for a New York condo conversion project.

It is unclear whether CIM plans to turn to the non-profit again for any future projects, which include several in the L.A. area.

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