New Construction Financing Alternatives
Developers Aslan Palachi and Michael Baumann slashed condo prices at their 1800 Club in downtown Miami early this year but realized lowering prices wasn’t enough to attract buyers. They would have to help condo buyers finance their deals.
Investor Thomas Daly knew that to sell the scores of New Harbour House condo units he had purchased in bulk, he too would have to help buyers get loans.
And Swire Properties had buyers for units at Asia on Miami’s Brickell Key, but finding loans with favorable terms for million-dollar-plus condos was very difficult. The solution: Finance the deals through an affiliated construction lender.
In a tough economic environment and with conventional financing hard to find, these developers are turning to their construction lenders to get loans for buyers at their condo projects.
“Providing financing through the developer or the construction lender has become a necessity,” said Miami attorney Howard Vogel, a partner with Berman Rennert Vogel & Mandler. He represents developers and construction lenders and is the closing agent for Palachi and Baumann’s 1800 Club in Miami.
Since the credit markets seized up over a year ago, lenders have been reluctant to finance condo deals, especially in buildings filled with units that haven’t sold or are in foreclosure.
The few buyers in the market able to pay cash can bargain down prices, further depressing the market.
Hoping to fuel sales while maintaining values, some condo developers are filling the void left by traditional lenders.
Palachi said sales picked up significantly after he began offering financing in mid-June. At least 15 condos in the 1800 Club have sold with seller financing, according to Miami-Dade County property records.
Palachi’s construction lender, Union Labor Life Insurance in Washington, D.C., provided Kunal Nanavati and his wife, Patel Neepa, a $288,000 mortgage loan to buy an 1800 club condo for $360,000, according to property records.
Nanavati and Neepa did not return calls seeking comment.
“This is definitely a great help,” Palachi said. “At least it doubled the amount of units that we have been able to sell.”
Still, Palachi’s project has 89 units remaining with prices ranging from $180,000 to $615,000.
Palachi and Baumann completed the 469-unit 1800 Club in 2005, at the peak of the housing market.
Daly, a principal with HH Condo Investments in Hollywood, financed the sale of at least 30 condo units of 40 units sold at New Harbour House since March, according to public records.
“It’s been a great asset and has worked very well for us,” said Christina Cuervo, vice president of HH Condo and a former executive with condo developer Related Group.
Cuervo would not disclose the source of Daly’s financing for the individual purchases. Daly did not return calls seeking comment.
Daly paid $27 million for 101 units in the Bal Harbour project in December. The seller was an affiliate of the Related Group. Daly, who has been an investor in the Related Group, financed the deal in part with a $7.27 million loan from the seller.
Hong Kong-based Swire Properties began offering its own financing to buyers of condos at Asia in June, said Maile Aguila, who handles sales for the company. Five sales have closed using Swire financing, she said. Condo prices at Asia range from $1.1 million to about $3 million, Aguile said.
Swire Pacific, the construction lender and parent company of Swire Properties, recently provided Martha Beatriz Gadda de Riccheri and Natalia Cecilia Real a mortgage loan for $931,000 to buy a condo for $1.33 million, according to public records.
Gadda de Riccheri and Real could not be reached for comment.
Asia, with 123 condos, was completed in early 2008, just as the financial markets began to a collapse. Swire has sold at least 73 condos since closings began in March 2008, according to property records.
Aguila said Swire’s in-house financing has helped land buyers who wanted to deal but couldn’t get loans.
“It actually turned out to be quite good,” she said. “It helped stimulate some buyers who were in between fences because they were struggling to get financing elsewhere.”
Real estate experts applaud the effort.
“In the environment that we are in, [seller financing] provides a tremendous advantage to developers,” Miami real estate consultant Lewis Goodkin said.
Persuading his construction lender, Union Labor Life Insurance, to provide individual purchase loans took some work, according to Palachi, who said he negotiated with the lender for about four months.
Union Labor is not a residential lender so it needed to hire a third-party to originate, underwrite and service the loans for buyers, said Herbert Kolben, Union Labor’s chief real estate investment officer.
The insurance company hired Miami-based Nationwide Home Loans and its affiliate, Yale Mortgage, to do the job.
“When [Union Labor] made the decision to carry back the mortgages, it needed somebody in the mortgage business who knew how to do it,” Yale Mortgage president Woody Kahn said.
Nationwide underwrites the loan, then assigns it to Union Labor after closing. Yale Mortgage services the loan for Union Labor.
Domestic buyers who will make the condo their primary residence are required to put down 20 percent. The loans have to be paid off in five years and carry a 5 percent interest rate, amortized over 30 years.
Investors and foreign buyers have to put down 30 percent. The five-year loan has a 6 percent interest rate, amortized over 30 years.
“If these loans were for a year or two years, I’d say ‘get out of here,’ ” said Goodkin of Goodkin Consulting. “But in five years, we will be in a very different kind of environment. By then, you will have the [market] stability needed for refinancing.”
Kahn is providing similar services to Daly and Swire Properties.
Daly is offering loans with 50 percent down with a five-year term balloon payment, or a 25 percent down loan with a three-year balloon, Cuervo said.
Swire is offering qualfied buyers 70 percent financing at 6.75 percent with a 30-year amortization. The loan has to be paid off in five years, Aguila said.
Bob Waun, chief executive of Birmingham, Mich.-based Vacation Finance, said “developers are trying to work backwards into a solution. They are wondering what kind of financing do I need to offer to please my consumers.”
Seller financing makes sense because everybody benefits, attorney Vogel said.
“The lenders are able to maximize the returns by selling units to buyers at much higher prices than a bulk buyer would pay,” he said. “The buyers are able to get financing and the developers are able to pay down the loans a lot more successfully.”
Union Labor’s Kolben agrees.
“We still have the first lien on the unit and it is a way of diversifying your loan risk, it generates income and is less carrying cost for the developer,” Kolben said.
Every unit that sells means less property taxes and condo fees the developer has to pay.
Buyers benefit because it’s a source of money in tough times and they can close quickly, usually within a month.
The mortgages don’t require appraisals since construction lenders already know the value of the unit, said Yale’s Kahn said.
Developers who help buyers fund deals don’t have to cut prices drastically to attract the limited number of cash buyers.
“It keeps prices from just falling through the floor,” said Waun, Vacation Finance Home. “Every time somebody cuts the price, it affects somebody in the market.”
September 22, 2009 - Paola Iuspa-Abbott - Daily Business Review