3rd Ward Midrise Projects

[UrbanFuture]

From my discussions with Catalyst people, the real holdup is Wachovia (their primary lender) who is dragging their feet on approving Novare's request to change the project to rentals.

I thought Novare financed their own projects internally??? Yikes. Also, that stinks about your earnest money deposits, what does the contract say about getting them back? I bet you could get them back, as they were not necessary for construction of the building.

Edited December 2, 2008 by QCkid

[PwC Keith]

I thought Novare financed their own projects internally??? Yikes. Also, that stinks about your earnest money deposits, what does the contract say about getting them back? I bet you could get them back, as they were not necessary for construction of the building.

I too was under the impression that all of their projects were financed internally, but I do know they have this loan with Wachovia for some reason. As for the earnest money I think they fully intend to refund it, but don't want to do that until a final decision is made.

I was just making the point they aren't taking their time just to earn $30 of interest on each deposit.

[atlrvr]

The amount of interest paid to Wachovia over the same time period is many mutlitudes of 10 greater than whatever interest they would earn on deposits.

If Wachovia isn't worried about them defaulting in the interim, then it makes sense for them to drag it out, generating substantial additional income for Wachovia at minimum risk.

[monsoon]

Maybe that would be continued bad financial management by Wachovia. I would think they would want to get this property closed as fast as possible, while there are still some buyers willing and able to take the risk, lest they end up with something like The Park where they find themselves owning an empty building. I was in Myrtle Beach this weekend and was simply taken back by the number of highrises where work had simply stopped. The cranes and equipment abandoned because there is no money to take them down. I've seen bad times before, but nothing like this. It ought to be a warning to people still betting on these places in Charlotte. Better get it while you can still get it.

Then again, with the government literally handing our future over to these financial institutions to keep them from going under, maybe they don't really care.

[atlrvr]

If it's going to become a rental building, and they have a permanent loan lender lined up, then Wachovia is really at minimum risk here. Novare would continue to pay interest to Wachovia until probably 90% or so of the units are leased. If Wachovia can delay this process by a couple of months, they can probably make an additional million or so in interest.

[Mobuchu]

Progress on 440 S. Chruch

12-8-08

[boilerdown]

Thanks for the picture updates Mobuchu, always appreciated!

[rockhilljames]

Is it just me or is there an inordinate amount of dirt on the first floor?

[Andyc545]

I noticed that all the retail spaces in the bottom of the garage look to be set to go. Glass is in and all of the utilities seemed to be installed. The grocery store and Picasso's could have made a killing there last night with all of the tailgating. Hopefully these businesses will thrive during nonevent times.

[sleightofhand]

Over the wknd I learned a little more about the rental aspect of the Catalyst building. Someone may have pointed this out earlier in the thread and if so I missed it but I've been wondering about those who have contracts when it is determined to turn the building to rental. Those that do have contracts on units will be refunded. I was curious if they would allow those buyers to keep their condos while the remainder of the building was leased. I was told this would not be the case and the entire building would be rental. I'm sorry if this was mentioned earlier but I thought I would point it out incase anyone else was curious like myself.

[JonesQC]

Those that do have contracts on units will be refunded. I was curious if they would allow those buyers to keep their condos while the remainder of the building was leased. I was told this would not be the case and the entire building would be rental. I'm sorry if this was mentioned earlier but I thought I would point it out incase anyone else was curious like myself.

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.

[Charlotte_native]

No one would be able to get financing for a purchase in a building primarily rental. I think the FNMA guidelines won't lend if the ratios are over either 20% or 25%. And those were the rules in the days when financing was far easier...

[28202]

I also think most underwriting guidelines will disallow any new loans if less than 50% are owner occupied purchases.

[boilerdown]

I checked a few days ago at the sales office, no word yet. I don't know this for a fact, but I suspect they will be extending everyone's contracts out 60 days at the end of the month to allow more time for their apartment conversion negotiations with their lender. In more positive news, I've been told that all of the heating and AC units have been installed and the granite countertops are installed as well.

[nonillogical]

i almost hate to ask, but what is left to do to the exterior face of the catalyst? i remember hearing about exposed concrete being a theme with novare, but tell me thats not what i'm looking at right now.

[tiblerbrit]

The exterior of Catalyst isn't concrete its painted hard coat stucco. I'm pretty sure what you see is what you are going to get at this point.

[boilerdown]

Is that also the case with Avenue?

[atlrvr]

Avenue is exposed concrete.

Catalyst is mostly done on the exterior...they just need grills to cover the HVAC condensers for each unit which are currently exposed.

Also, the glass has a protective film that will need to be removed, and there is cardboard covering the railings....the exterior is probably about 95% complete.

[2hearts]

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.

[atlrvr]

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? I was under the impression that all land was purchased with investor equity from proprietary funds. I was also under the impression that the amount of debt in properties under construction was low (less than 50% LTV), so even a steep decline in value based on a rental strategy would allow for substantial debt service coverage (at 50% LTV of a project at $300/sf would still allow for a annual DSC ratio of about 1.50 if they coverted to rental). Of course my assumptions are based on hearsay that Catalyst really is less than 50% financed by debt....if Novare got greedier, well, then yes, they could be in a world of hurt.

As far as Wachovia, I spoke to an exec in their commercial REO group recently, and my impression was they didn't have a huge appetite for taking properties. There is a limited market of buyers willing to take them off their books for what Wachovia's loss pain threshold is, so they are having to actively manage properties. This project strikes me as too large and complex for Wachovia to want sitting in their portfolio, especially considering they have to be aware of their bad asset ratio. Then again, if Wachovia smells blood in their water, and think that Novare would be willing/forced to default, even on a low leverage deal, then I suppose their could be some upside if Wachovia can flip it, though one look at The Park shows that a lender can't be presumptious.

Ultimately, I think it comes down to Wachovia really trying to get their arms around their enitre commerical real estate loan portfolio. I think they are terrified of the downside risk of every scenario and are stalling more as a sense of trying to re-establish their company direction in handling these type of situations.

My guess is Wachovia will do the perm loan for apartment as I think it provides the least risk for everyone....unless they think they are cutting all 10,000 Uptown jobs and there won't be a rental market left

[2hearts]

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.

Edited December 18, 2008 by 2hearts

[2hearts]

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.

[atlrvr]

Hmmm....that more like a 1.15 DSCR then.....that is getting really tight in for today's standards. I can assume they could downsize the debt with the developer fee holdback, but your right, that pushes Novare's upside to some distant point in the future...still better than foreclosure.

As far a lease-up goes, that's not typically considered as part of the perm loan underwriting. They would begin leasing with the credit facility in place (assuming they get approval) and then convert once break-even operations are reached, or at least that's how it is typically done, though Wachovia might want them to convert sooner so they can retire the current loan. If so, Novare will have to put some substantial cash into a reserve account to cover short-term losses.

Though I understand Wachovia's hesitancy, I would think they'd at least give approval to Novare to begin marketing these as rentals and try to line up tenants. Their's a reputation risk for Novare if Wachovia ultimately doesn't allow rentals, but I don't really see any other option.

[2hearts]

^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.

[UrbanFuture]

^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.

Camden is my bet. Totally out of the blue, no information behind that. But they are one of the people I'd probably look to partner with here if I had to do a rental on that kind of scale.