[The Vue]

Assuming there was some kind of default in the loan agreement the bank probably had an opportunity to improve the terms of their deal with the developer. This could have included stronger guaranties, additional collateral, and an interest rate floor (the construction loan was probably libor plus a spread now paying the bank only 2-3%) of 5-6%. They may have also agreed to include closing benchmarks to assure the bank that they would be more agressive with pricing. All of this will probably serve to create much more urgency on the part of the developer to get units closed. If the developer is wise he will be very proactive with the existing buyers about offering them generous discounts in order to minimize walk aways. One way or another they're going to have to face the reality that the world has changed since the original pricing for this project was established. At this point, developer profits are very likely not going to materialize and in order avoid losses of equity and loan the developer should be swift to lower prices 20-25% for existing and new buyers alike enough to convince all of them that the initial cut is going to be sufficient to get all the units closed. Otherwise, IMO the smart money will sit on the sidelines and wait to purchase at a discount after the intial wave of (old contracts) overpriced units close. Again, if the developer tries to wrestle these old contracts to the closing table (at existing pricing) that will make it very difficult to make any new deals at current market pricing between now and several months beyond the opening of the building. This would mean forgoing as much as a year of time to court new buyers.

Also, I disagree with the comparisons to the Park. That project was a disaster from the getgo. It was clearly conceived by an inexperienced team and this was apparent in almost everthing about the project from floorplans, to amenities and exterior appearance. All of this quirkiness makes that project at risk of being functionally obsolete from the outset. And that's before consideration of all the risks associated with getting it out of construction moth balls. BoA would have had little trouble finding another developer like Related or Cousins willing to step into complete the Vue, especially at a reduced basis that would have enabled them to offer class a luxury condos at steep discounts. Again, I suspect MCL realized this and renegotiated loan terms and committed to be more aggressive with their pricing strategy.

[3rd Ward Midrise Projects]

They do not have specific lenders set up for buyers to use. They have somehow legally separated floors 15-27 as a condominium. The amenities on floor two are jointly managed somehow. The sales staff did not seem to have all the answers. I am in the process of confirming financing with a major bank and will let you know what I hear about whether it is a viable property for a commodity mortgage that can be sold off to FNMA.

Has anyone been able to deterimine whether or not you can get a conforming loan for a purchase ?

Here is an article from yesterday that speaks to the new changes related to presale requirements. It went from 50% to 70% as of March 1.

http://online.wsj.com/article/SB123733304341863319.html

[3rd Ward Midrise Projects]

^ I'll be interested to hear what you find out. There seems to be a lot of confusion about this issue even though I think it will have a very big impact on the future values of these condos. Here is some additional relevant info:

http://cincinnati.bizjournals.com/atlanta/...16/story10.html

I'm not sure how/whether this change in FNMA underwriting will impact projects in NC but, again, it seems like a big issue.

[3rd Ward Midrise Projects]

I don't know the ins and outs of residential mortgages, but could they not essentially create 2 separate entities, just as they would with the Twelve product? Essentially condo the building up so that one condo is 13 floors of apartment owned by "Catalyst Apartments LLC" or whatver, and the remaining building is individual condo units.

I assumed they'd go that route but I still question whether or not that will enable the building to get FNMA approved. I understand that there are unsold projects everywhere that can't offer conforming loans. If it were as simple as legally carving up the building I would think that every one would do this to qualify, regardless of how serious they were about renting. For example, a 460 unit project needing to show 50% presales (and related rental restrictions) could legally split the building in two (rental and for sale) and immediately lower their 50% presale hurdle by half. Or why not make it 90% rental and 10% for sale ? Then they'd need only 23 contracts to be 50% "sold" (and qualify) rather than 230. Even better they could then convert small rental sections (as they achieved 50% sold) in order to keep the conforming loans coming from FNMA. My sense is that the Agencies won't allow this kind of manipulation.

To your point about Twelve, I don't think the agencies view sharing a condo with a hotel use the same as sharing it with rental apartments since hotels are considered a commercial use like office and retail. They don't specifically attempt to avoid having these uses in a mixed-use project like they do rentals. On the other hand, if this were a two tower development, one rental and the other for sale, I think that would probably be ok.

All of this is to say that buyers should understand this issue very clearly before jumping in. Attractive teaser loans available from the developer's preferred lender today will be little consolation at refi or resale time if the building can't deliver conforming loans. Since yesterday's post it sounds like somebody has confirmed that they're indeed offering discounts and/or outs. Given the growing risk of very steep price reductions (see below), or even an auction, on the last 10-20% of the project's units, this would seem warranted. Time will tell whether or not the current prices are sweet enough to move buyers under the circumstances. Good point by someone about the lack of parking in those prices. Need to adjust for that too.

http://www.ajc.com/business/content/printe...d%3Dinform_artr

[3rd Ward Midrise Projects]

Confirmed - top half is being sold, bottom half is being leased.

Interesting. Given the material change in plans I assume that everyone with an existing contract will be permitted to walk if they're not comfortable buying in to a building that is 50% rental rather than 20 or 25% as the Novare projects usually are. Maybe Novare is planning to offer sizable discounts to counter this.

For a buyer that chooses to move forward, how will they possibly get a conforming mortgage with less than half the building presold and 50% or more of the units not being owner occupied ? I realize Novare and the lender might offer something competitive through an affiliated lender group to move the units today but how does a buyer's buyer get a conforming loan in a few years ? If anyone is up on current mortgage underwriting standards I'd appreciate your input.

[3rd Ward Midrise Projects]

Element is another condo tower Novare is building in Tampa, FL that was converted into apartments. It is set to move in its first residents in January, so pretty much the same time frame as Catalyst. From what I've read the Element condos went for $220k+, nearly 40k higher than Catalyst sold for so rents should in theory be lower only taking this into account even with the unique parking situation at Catalyst . From what I can tell they are not using another apartment/rental specialist to rent these units out. Intown group was already attached to the project when it was condos. So if their construction lender allowed them to do this in Tampa, why won't Wachovia allow it here in Charlotte?

My guess would be that every deal is generally different in terms of structure, mezz lenders, and even equity partners. A successful negotiation on one deal wouldn't necessarily equate to success on another. Here's an article I ran across that addresses the issue of "going rental":

http://www.bizjournals.com/atlanta/stories.../18/story6.html

There is some good discussion and quotes in this one about the challenges of switching to rental, including some quotes by Jim Borders, the Novare chief.

And here is another more recent article about some of the bulk selling going on down in Miami:

http://www.bizjournals.com/southflorida/st.../05/daily5.html?

This one seems to highlight the importance of generating enough sales to pay off the construction lender regardless of how steep the discount has to be. In this case the developer sold 60 units to a bulk buyer for $200/sf, or about half the price of what the first 50% of the units closed for. They reasoned that this would get the monkey off their back and enable them to sell the last 15-20% of the building for better prices. I could see Vue finding themselves in similar circumstances.

[3rd Ward Midrise Projects]

^It's my understanding that there is a mezzanine lender between Novare and Wachovia still owed $20-$30 million so I doubt much consideration is being given to Novare's rep at the moment. My guess is that the mezz lender is trying to assess the benefit of throwing more capital at the deal to maintain a position going forward. Whatever the outcome, I suspect they will probably team up with a multifamily rental specialist before they launch the rental program.

[3rd Ward Midrise Projects]

That is correct to my understanding. The value of an individual unit would plummet if there were 80+% rental units. The contracts state no more than 25% of the units can be leased and this is a protection against the home values. Not to say they wouldnt/couldnt offer this but a big discount would have to be offered. With that said this would be unheard of - Im not aware of any project ANYWHERE or EVER that would do such a thing.

You are spot on. When the smoke finally clears on the condo craze I think the buildings lacking any reasonable limitation on rentals will represent the worst of all worlds. Painful as it is for Novare and its lenders they are doing the right thing by avoiding the mess of a fractured condo association and 50% plus of rentals in the building. Having hundeds of amatuer landlords scrambling to try and stay current on their overleveraged mortgages is just not a good situation, particularly when these tenants are co-habitating with owner/residents that paid top dollar for what I'm sure they expected to be an owner occupied lifestyle. Think about it, when you have hundreds of independently managed leases throughout the property with different maturity dates how will it ever achieve enough owner occupied status for buyers to get conforming loans ? The more likely trend would be for the few owners living in the building to eventually leave and lease out their unit. In any case, not a good situation.

[3rd Ward Midrise Projects]

There is probably a good bit of truth in this....I did some quick number crunching using some basic assumptions, and came up with a value as a rental property of $190 per square foot.

The only question I have, is how much total debt does Novare have?

The senior debt on Catalyst is about $73 million, which I think works out to a little under $200 per foot. I agree that Wachovia would be likely to do a permanent on the deal as a rental but at 90 plus percent loan to value, absent a big pay down, they'd really be keeping Novare in the deal for nothing. Given that Novare isnt an apartment specialist I'm not sure why they'd do this. Also, bear in mind that the apartment values you and I seem to agree on are for a stabilized property. Someone will have to carry this monster for a couple years, service the debt, pay the taxes and hoa fees, etc. until it's fully occupied. If you went to the market for this today you'd probably be looking at a permanent loan in the range of $45-50 million and they'd want new underwritten sponsorship/guarantees.

As to your other question about Novare's debt load I don't know specifics other than that in addition to lots of project level debt on struggling properties they apparently had $40-$50 million of high octane corporate debt with Lehman. Not sure how Lehman's bankruptcy would play in to this.

[3rd Ward Midrise Projects]

That is correct to my understanding. The value of an individual unit would plummet if there were 80+% rental units. The contracts state no more than 25% of the units can be leased and this is a protection against the home values. Not to say they wouldnt/couldnt offer this but a big discount would have to be offered. With that said this would be unheard of - Im not aware of any project ANYWHERE or EVER that would do such a thing.

The Catalyst office has 15 days to let us know their plans so I'm hoping to hear something before Christmas but not expecting to until the end of the month.

I am reliably informed that Novare is in an organizational tailspin right now coping with an enormous pile of high interest debt on both unsold projects and vast amounts of land purchased at the crest of the market. In order to stay afloat they have eliminated most of their staff and are scrambling to negotiate extensions on debt where they are unlikely to retire the loans as provided in their original agreements. In some cases, as with Catalyst and Element (a Tampa twin of Element) they realize they're unlikely to close more than 20-30% of the building so they are instead opting to convert the properties to rental. To do this they need to convince the lenders to go along but most won't agree to this without extracting major pay downs of their debt. Thus, the delays we are hearing about in getting to a final decision. The developers in these situations hope that in a year or two the market conditions will be better and they can convert the property back to condos and eventually achieve something close to the $300/sf plus value that was originally anticipated by them and the banks. However, this hopeful strategy isn't a no-brainer. Industry vets I speak with don't think we'll see condo conversions again for at least 5 or maybe 10 years. If they are right then the lenders should make certain that the new deals they cut include debt pay downs sufficient to not be overfunded w/ too high a loan-to-value if the property ultimately has to stand on its own as a rental asset.

Therein lies the dirty little secret that developers have known for years now. Most of the new condos (particularly at the low, entry level end of the market) built and sold for $300-$325/sf would only now be worth $180-$220/sf if they were owned by a single institution (Post, Camden,etc.) and operated as luxury rentals. Only the combination of endless cheap/exotic debt, expectations for unsustainable price appreciation, and a seemingly endless pool of young and inexperienced buyers made the bids for these condos escalate so far beyond their rental values. Again, even the bumblers at Wachovia are starting to understand this now which, I suspect, is why the tug of war between them and Novare is apparently still ongoing. If Novare is either unable or unwilling to bring the debt levels in line with a more conservative underwriting Wachovia may reason that they are better off pushing Novare or the property into bankruptcy. If I were Wachovia I think I'd rather have an experienced apartment REIT managing the asset rather than a weak and disabled condo developer struggling for survival. We'll see how things unfold.