Four Stalled Projects Come Back from the Dead

A handful of seemingly left-for-dead apartment and condo communities are being resurrected in some of the nation’s most overbuilt markets, indicating glimmers of hope for the multifamily sector.

Stalled projects in markets hit hard by the economic downturn, including New York and Miami, are slowly moving forward as owners renegotiate loans with their lenders or new buyers find ways to make the projects pencil out financially. For stalled condo developments, that typically translates into selling unsold units to buyers at steep discounts.

“We are starting to see some stalled projects come back where banks are starting to be a little bit more interested in getting liquidity back,” says Andres Hogg, general manager of U.S. operations for Espais, a Barcelona, Spain-based developer, which is actively looking to invest in stalled condo projects. “But I have to say that the numbers are not to the level we in the private sector would like to see them. We have some offers on the table for projects that have stalled or for vacant lots where developers couldn’t get financing. The problem is the value we wish to get on the land or the unfinished condo is not there yet, as there is still a margin between sale value and purchase value. I don’t know if we are too conservative or the seller is too greedy.”

Whatever is causing the bid/ask gap, the market has a long way to go before the majority of stalled projects will trade hands and resume sales or construction. This is especially true in the Las Vegas market, where no notable stalled deals have yet to stage a comeback.

“Unfortunately, it’s very challenging to get a lender, whether it be national or local, to issue new money for a buyer,” says Peter Zalewski, a principal at Bal Harbour, Fla.-based Condo Vultures Realty, which tracks condo sales and brokers bulk sales, primarily in the Miami market. “If you are a buyer and you need financing, the likelihood is that you will have to pay a significant premium to secure the property from the seller, usually a 15 percent to 20 percent premium. Many sellers don’t want to sit out of the market for 30 or 60 days while financing may or may not come at the end. There has to be a financial incentive for them to take that offer from a buyer with financing unless it’s just a deeply distressed, troubled property that no one else wants.”

Multifamily Executive scoured local markets to find four stalled projects in overbuilt markets that have recently managed to resurface (through a variety of tactics), eschew the challenging financial markets, and forge ahead.

Icon Brickell, Miami

A whopping near 1,800 of the 23,000 condo units built in downtown Miami from 2003 to 2010 are concentrated in a single project: Icon Brickell, developed by The Related Group at the end of 2008. For roughly a year, the lender and owner were at a standstill, with The Related Group unable to sell units. “Most people wrote the project off as being dead in the water because there were so many units, and it came to market so late, and there was a year lag time where nothing happened,” says Zalewski of Condo Vultures Realty.

But the developer didn’t give up: Related rented a portion of the units, and, in the spring of 2009, Icon Brickell got a boost from the GSEs’ decision to buy up mortgages in projects previously considered too risky. Fannie stepped in and approved mortgages for two of the project’s three towers. In December 2009, Related reached an agreement with HSBC, the lead lender on the two towers, to sell units at $400 a foot, which is a 30 percent discount off original pricing, Zalewski says. “Low and behold, the Fannie Mae approval is put in place, the lender decides to get actively involved, and now you have a building that is not yet vibrant but is showing signs of life. Last time I looked, the closing rate was in the 120-unit range.”

500 West 23rd Street, New York

Chicago-based Equity Residential CEO David Neithercut recently told Multifamily Executive that in the second or third quarter of this year, the firm plans to break ground on the West Chelsea plot of land it purchased in December 2009 from struggling developer Shaya Boymelgreen. Equity’s plans to revive the stalled rental project on the corner of Tenth Avenue and 23rd Street call for 111 market-rate apartments and 10,000 square feet of retail. Equity paid $750,000 for the land and $11.25 million for the ground lease; Boymelgreen paid $23.15 million for the ground lease in 2005. “That’s about a 50 percent haircut from the amount Shaya Boymelgreen spent on buying the land, and I’m sure he spent a lot more money between then and now getting the property entitled, etc.,” says Ben Thypin, a senior market analyst at New York-based research firm Real Capital Analytics. “It was especially valuable for Equity to be able to buy this site at a very cheap price but also have it approved to build something already.”

Bailey’s Crossing, Alexandria, Va.

When San Diego-based Fairfield Residential declared bankruptcy in the fall of 2009, it left behind a trail of unfinished business, including Bailey’s Crossing, a 90 percent completed, four-building apartment community in Alexandria, Va. In December 2009, Addison, Texas-based Behringer Harvard stepped in to save the property and bring the units online. In a joint venture with Dutch pension fund PGGM, Behringer Harvard acquired a 78 percent interest in Bailey’s Crossing after contributing $29.1 million of equity. “They were able to do this because they had a mezzanine loan on the original deal,” says Ben Thypin, a senior market analyst at New York-based research firm Real Capital Analytics. “To expedite the completion of property, Berhinger converted their mezzanine loan into equity and put in $29.1 million to pay down the first mortgage.”

These sorts of creative solutions, in which the mezzanine lender takes over or even a new partner comes in and contributes new equity to bring down the balance of the debt and make the project more viable, are happening more and more frequently, Thypin adds. “A lot of firms out there right now are trying to buy mezzanine loans in order to do what Behringer did and be in the position to take over the property by giving the first mortgage holder a more palatable option than a costly foreclosure.”

Behringer Harvard expects to complete the 414-unit Bailey’s Crossing this summer; the community already is more than 30 percent leased. The one-, two-, and three-bedroom units will feature stainless steel appliances and cultured marble countertops; amenities will include a pool, clubroom, fitness center, and rooftop pool.

Aqua Terra, Austin, Texas

Looks like downtown Austin, Texas, could be seeing an influx of cranes in the not too distant future. Although no construction dates are set, the lead architect on Aqua Terra—a planned condo building that never made if off the ground—has been ordered to resume its drawings, according to the Austin Business Journal.

Aqua Terra, a planned 163-unit, 20-story building, was put on indefinite hold in 2008 by its developer, Charlotte, N.C.-based Crescent Resources, a joint venture between Duke Energy and Morgan Stanly Real Estate Funds, which filed for voluntary Chapter 11 bankruptcy protection last year with more than $1 billion in liabilities. Crescent filed a restructuring plan in a bid to exit bankruptcy by the second quarter of this year—and is gearing up to develop.

“The original owner is coming right back. In fact, we are rapidly approaching finalizing our plan approval,” Rhode told the Austin Business Journal. “They have not announced the construction date, but they are putting the wheels to the ground.” Crescent declined to comment on the status of the project to Multifamily Executive.