Sonnenblick-Goldman President Steve Kohn knows a thing or two about debt and equity placements. Last year his firm arranged about $7 billion in combined debt and equity financing — and roughly $1 billion of that total was earmarked for condominium conversions and condo developments.

The Manhattan-based firm doesn't shy away from unconventional deals, either. In April, Kohn arranged $80 million in debt and equity for a partnership interest in a large midtown Manhattan retail condominium. That 83,000 sq. ft. deal was one of Manhattan's largest retail condo deals of 2006, says Sonnenblick. NREI spoke with Kohn in May about shifting winds in the condo market and why capitalization rates just won't start climbing.

NREI: Talk of a condo glut has been brewing for some time now. Are you seeing any effects on the underwriting?

Kohn: Not really. The lenders' reception to condo deals is still strong, but it's clearly more guarded than it was in 2005. We are still working on many condo conversion and pure ground-up condo construction deals. It's different in New York City than it is in South Florida. Demand seems to have caught up with supply in New York City.

NREI: Are lenders shying away from these deals at all?

Kohn: In some markets, like south Florida, the answer is yes. Instead of maybe 85% non-recourse financing on these deals, you're starting to see more like 70% to 75% non-recourse financing. Lenders are also requiring more substance in the financial statements such as completion guarantees. You always had these [guarantees], but lenders are now more concerned that each guarantor have sufficient liquidity to back each deal. Lenders weren't as rigid on that point before, so the underwriting has changed a bit.

NREI: How important is the track record of the borrower/developer on any given condo conversion deal?

Kohn: It's hugely important. It all boils down to a developer or investor's ability to execute the project quickly and efficiently. Given some of the [construction] cost increases we've seen, too, it's very important to have a well-capitalized sponsor.

NREI: Sonnenblick-Goldman is known for executing creative deals. What was so unique about your recent $80 million retail condo deal in Manhattan?

Kohn: Selling a building before it's leased is not new, but selling a building to investors before it's even built is. It's also not every day that an investor can buy 83,000 sq. ft. of contiguous space on Broadway in Manhattan. The developer was also able to monetize the asset much earlier as a result.

NREI: From a capital markets standpoint, what's surprised you the most so far this year?

Kohn: We all thought that capitalization rates would start to move up as interest rates began to rise. But caps have stayed the same, or even moved lower for most property types. Now you have many investors that are expecting improved fundamentals in the market, and that's helping keep caps low. What's also driving this is the incredible amount of capital that's coming into this country from abroad. It's a staggering amount of capital, and it's showed no signs of slowing down yet. There are just so many people with a lot of money determined to place their capital into the real estate market.