Termsheet: Betting on expertise


 The Level Hotel project faced a number of financing hurdles, until it approached Madison Realty Capital, which employed its 360 degree perspective as both lender and developer. 

With glass towers rising at record speed and a host of retailers and restaurants opening up in Williamsburg, Brooklyn, it would be easy to assume that financing for a new hotel development in the achingly hip neighborhood wouldn’t be difficult to source.  

But Josh Zegen, founder of real estate investment firm, Madison Realty, reminds PDI that loans for real estate development are traditionally bank facilities. And many of those with previously large construction finance businesses are now retrenching in the face of increased capital costs.  

And while some banks still compete in the space, they are asking for more guarantees than developers are willing or able to offer at the start of a project.  

When Zegen first arranged an $18 million acquisition loan for the planned 22-floor Level Hotel in Williamsburg last June, most of the other debt providers the developers had conversations with were investment banks.  

For the construction finance, something Madison Realty expressed interest in at the outset of a project, the developers tell PDI they were mostly looking at commercial mortgage lenders, many of whom were not keen on hotel financing and were concerned about contaminated soil, as the site previously hosted a large gas plant. 


Mordy Steinfeld, director of development and operations at Riverside Developers, the firm behind the project, adds that the commercial mortgage lenders that he was talking to were skittish about lending to a hotel property. “Construction for a hotel is tricky, traditional lenders love residential developments or proven commercial developments, so from the start we were limited in that sense.” 

On the 320,000 square foot Level Hotel deal, the banks and other lenders were also uncomfortable with backing a project of that size without a private equity sponsor. The banks also typically want to attach a flag to a hotel, which the developers haven’t yet done.  

And Steinfeld says they don’t expect to brand the hotel. “In Williamsburg, that’d do more harm than good and it would cost more money,” he explains.  

The neighborhood is home to a lot of hipsters and creative types that prefer independent businesses and oppose chains moving into the area. The popular Wythe Hotel across the street is independent and has never taken on a hotel brand.  

“With banks, you’re really trying to fit into a box and that box is sponsor-driven, it’s the flag on the hotel, it’s pre-signed leases with office and retail,” says Zegan.   

Steinfeld tells PDI that Riverside don’t normally work with private equity. “Our main strategy is to knock it out quickly. Speed matters more,” he says, explaining that PE sponsorship or financing from more than one lender would take longer to negotiate. 


Madison initially provided an $18.35 million bridge loan for the developers to acquire the site, which cost them $30 million in June last year. The bridge facility was then rolled into an $81 million construction finance facility in December.  

The construction costs are estimated at about $130 million total, with the $49 million balance covered by the developer’s equity.  

The developers behind the project, Zelig Weiss and Yoel Goldman, began work on the site with their own money in April.  

Another major issue for other lenders was decontamination of the site, which formerly housed a large gas plant, the cost of which had the potential to escalate. 

Steinfeld says that’s why Ladder Capital, a New York-based commercial mortgage lender that was lined up to provide the acquisition loan, backed out at the last minute.  

He explains that all the old soil was excavated last June and replaced with new soil and construction of the building began in earnest in autumn. 

The $81 million loan has a two-year tenor, with a one-year extension option that could push it out to three years.  

Steinfeld tells PDI that they expect to keep the facility in place for a year after the hotel is built while they start raking money in on the commercial and retail spaces, as well as selling hotel rooms, before paying it back.  

The hotel is slated to open in spring of 2016, though Steinfeld adds that spring is the hard deadline and the developers actually hope to get it finished in the third quarter of this year. 

Madison Realty is charging an 11 percent interest rate on the loan. Steinfeld says other providers charge in the 8-12 percent range, so Madison’s quote is at the high end of the spectrum.   

“It’s not cheap but we’re very glad we went with them,” Steinfeld says. “There are no banks that would do this type of loan. We had very short conversations with them. They immediately said, ‘we only do residential, we’re not interested’.” 


Madison Realty, which manages equity and debt funds, also owns and develops real estate around New York. The firm targets mid to high teen returns for its funds and has so far achieved that, Zegen says.  

The Level Hotel deal was financed from the Madison Realty Debt Fund II, which raised $350 million and is still investing. The firm is in the process of raising a third $600 million real estate debt fund. 


Zegen says he worked with his development team, as well as an outside engineer, to review the project and estimate build costs.  

“Because we own, develop and lend, we can put all of that together and use the full resources of the firm to underwrite these deals,” Zegen says.  

Madison also took a view on the standard risks associated with real estate projects including cost and time overruns as well as the potential for another economic downturn.  

Looking at the deal from the developer’s perspective gave the firm a better insight, but it also carries extra risk. Developers take extra risk because they get equity upside, benefits that a lender doesn’t get for risks that they can’t afford to take on.  

The Williamsburg neighbourhood of Brooklyn attracted a lot of developers from 2004 onwards, when the traditionally industrial neighborhood was rezoned as residential.  

Once the housing bubble burst in 2008, development and sales of properties in the area stalled. Some condos developments were converted back into rental, rather than sales properties. Zegen himself worked on some of these conversions.  

Large-scale development rocketed in Williamsburg once again from the post-crisis period of 2009-2010. 


While some industry experts anticipate another downturn ahead, Zegen maintains that the project will retain its value over the two-year lifetime of the loan. 

For Zegen, given the popularity and population density of the neighborhood, and the previous success stories of the developers, whom he’s worked with on three other projects, the deal was a no-brainer. 

The rapid gentrification of Williamsburg has made it a “destination neighborhood” rather than just a cheaper alternative to Manhattan, says Zegen.  

The planned hotel is close to popular clubs and music venues; the Brooklyn Brewery is nearby, while Whole Foods and Apple stores, as well as the New York Sports Club, are set to open soon.  

And the area is home to many popular restaurants and bars, as well as the Brooklyn flea food market, Smorgasburg, in the summer. Indeed, there are often hordes of people coming into the area from Manhattan, when that kind of traffic used to only go in the other direction. 


Zegen has also worked with developer Yoel Goldman on another project in the area, where Goldman converted a church and rectory into multi-family housing.  

Madison lent $42 million for the construction of 93 apartments in September 2013 and one of the two buildings is already leased out.  

Zegen also collaborated with Goldman on another residential project, St. John’s Place in Crown Heights, another Brooklyn neighborhood. Madison Realty made a $24.5 million loan for the $35 million acquisition and is also working on a construction loan package for that project. 


Steinfeld and Zegen say Madison Realty was more comfortable with providing the loan for the Level Hotel, partly because of its other aspects, including the commercial and retail areas. 

The Level Hotel project, in addition to its 183 hotel rooms, will feature 40,000 square feet of office space, 20,000 square feet of retail, as well as a 20,000 square foot rooftop public garden.  

Zegen contends that the neighborhood is so popular, that it warrants another hotel (there are so far only two in the area) and that demand is actually outpacing supply. 

“Hotels are a cyclical market. It’s up when it’s up, and it’s down when it’s down,” Steinfeld explains. “But with this specific project, it’s so much more than a hotel, because of its retail and office components. It’s difficult to not just put us in a hotel box. But I think the other components outweighed the additional risk and [Madison Realty] wasn’t just pegging us in that box of hotels.” 

Leases have not been signed for the commercial spaces yet, but Madison expects a lot of interest, as many tech companies and creative agencies keen to set up shop in Brooklyn are often hard pressed to find floor spaces large enough to house all their employees.  

The hotel rooms will charge around $250-$275/night. The first floor of the complex has already been built. 

The futuristic design, by architects Yohay Albo and Nicholas Liberis, has the building straddling two bases, which is designed to echo the water and oil towers that were fixtures of the neighborhood in the past, the architects told The Real Deal last year.  


Zegen is no stranger to the neighborhood. He recently lent $70 million for the construction of an office building across the street from the Level Hotel.  

He says it’s this experience in the New York mid-market real estate that makes him confident about such projects. “The traditional lenders aren’t able to necessarily see a construction loan through an owner’s eyes and that’s something that I think gives us the comfort to make a construction loan, knowing that we have a full development team here that understands what it’d look like if things went awry or took longer,” Zegen says. 

Looking at the project as a developer as well as from a traditional credit point of view, allowed Madison to get comfortable with the deal. The outcome of the project will decide whether that extra insight gave them an edge or blinded them to some risks.