CASE STUDY
A Substantially Complete but Unsold Condominium Project
Project Background:
A group of investors forms an LLC with a local developer purchasing a four acre parcel to build eight semi-luxury $400,000 +/- priced condominiums. Based on the recent real-estate boom, the group anticipates a very profitable 12-18 month venture. The ownership group purchases the property for $280,000 and obtains a $1,100,000 loan from a local bank which is personally guaranteed by the developer and one of the investors.
Development-Construction Process:
The site development permitting process does not go as smoothly as planned and final site development permits are not issued for a year after application. Site development commences in the spring and building construction in early summer. By the fall a fourplex townhouse condominium building is nearly complete, but some site details such as landscaping and final paving are not fully complete. However, the construction loan funds had been nearly fully disbursed and the ownership group is required by the bank to provide an additional $40,000 to complete the project. Additionally, the group now must also pay the monthly debt service and maintenance costs of approximately $8,500 per month.
Sales and Marketing:
Marketing services were provided by a local Realtor engaged at the start of site development but as the units near completion, after a ten month development/construction period, no units have been sold. Very little advertising, other than an MLS listing and on-site signage, is on-going and the Realtor ceases conducting regular “open houses”, claiming no interest by potential buyers.
Project Problems:
Maintenance of the community and clean-up of construction debris is lacking, resulting in poor appearance. Two years after the LLC was formed, the investor group stops making interest payments, claiming they have exhausted their personal funds. The developer tells the bank that his group has no new ideas to rescue the development but will “keep trying” to sell units if the bank provides additional funding.
Bank:
After several meetings with the developer and investor guarantor, the bank, having lost confidence in the development group, declares the loan in default and classifies the project as non-performing, writing the $1.1 million loan down to $800,000. The lender files a foreclosure action and contacts RPRC.
RPRC ACTIONS:
RPRC is engaged to analyze the project and develop alternative disposition plans designed to maximize the bank’s recovery or minimize its losses.
A Substantially Complete but Unsold Condominium Project
Project Background:
A group of investors forms an LLC with a local developer purchasing a four acre parcel to build eight semi-luxury $400,000 +/- priced condominiums. Based on the recent real-estate boom, the group anticipates a very profitable 12-18 month venture. The ownership group purchases the property for $280,000 and obtains a $1,100,000 loan from a local bank which is personally guaranteed by the developer and one of the investors.
Development-Construction Process:
The site development permitting process does not go as smoothly as planned and final site development permits are not issued for a year after application. Site development commences in the spring and building construction in early summer. By the fall a fourplex townhouse condominium building is nearly complete, but some site details such as landscaping and final paving are not fully complete. However, the construction loan funds had been nearly fully disbursed and the ownership group is required by the bank to provide an additional $40,000 to complete the project. Additionally, the group now must also pay the monthly debt service and maintenance costs of approximately $8,500 per month.
Sales and Marketing:
Marketing services were provided by a local Realtor engaged at the start of site development but as the units near completion, after a ten month development/construction period, no units have been sold. Very little advertising, other than an MLS listing and on-site signage, is on-going and the Realtor ceases conducting regular “open houses”, claiming no interest by potential buyers.
Project Problems:
Maintenance of the community and clean-up of construction debris is lacking, resulting in poor appearance. Two years after the LLC was formed, the investor group stops making interest payments, claiming they have exhausted their personal funds. The developer tells the bank that his group has no new ideas to rescue the development but will “keep trying” to sell units if the bank provides additional funding.
Bank:
After several meetings with the developer and investor guarantor, the bank, having lost confidence in the development group, declares the loan in default and classifies the project as non-performing, writing the $1.1 million loan down to $800,000. The lender files a foreclosure action and contacts RPRC.
RPRC ACTIONS:
RPRC is engaged to analyze the project and develop alternative disposition plans designed to maximize the bank’s recovery or minimize its losses.
- 1. Preliminary Assessment:
At a cost of $3,500 the RPRC team inspects the site, condominium units and project documentation, and performs a market assessment and competitive market analysis. The team determines:- a. Condominium documents and condominium as-built plans were never completed or recorded. Recording these are necessary to convey a unit.
- b. Sewer connection fees had not yet been paid.
- c. Final paving not yet applied. A site punch list had not been prepared and several site drainage defects were noted. Conduits for telephone and cable service had not been installed.
- d. Condominium units evidence many “punch list” defects which need to be remedied before a sale could be closed. Town Certificates of Occupancy had not been issued.
- e. Many of developer’s subcontractor/supplier agreements were verbal hindering warranty work.
- f. The bank’s $80,000 letter of credit providing surety for project site improvements expires in several months.
- g. Marketing:
- Project brochure is of poor quality;
- A community website does not exist;
- Realtor print-advertising lacking creativity and not generating buyer urgency.
- 2. RPRC Recommended Alternatives to Bank Client (see summary chart below):
- a. Sell the existing mortgage for $400,000 to a private-equity entity procured by RPRC ending continuing bank management involvement and legal expenses in approximately 45 days but requiring the bank to book an additional $400,000 loss.
- b. Complete a property foreclosure then sell the partially completed project to a successor developer procured by RPRC. RPCR estimates the price for an all cash sale will be $600,000 but more if the bank finances part of the sale. This course of action will cost approximately $30,000, take 4-5 months, and result in an approximately additional $250,000 bank loss. Review permits, engineering plans, and installed infrastructure to determine compliance with governmental requirements and functionality.
- c. Complete the foreclosure; then complete the remaining site work and four units currently substantially complete. Finalize condominium documents. Implement an improved sales program to sell the four units $240,000 (a 35% discount from the original asking price.) The site for the additional four units would also be sold as soon as possible. This 6-10 month program would cost approximately $140,000 and likely result in a full recovery of the loan balance.
- d. Complete the foreclosure; spend $70,000 to complete the site and condominiums then rent the four units for the next 2-3 years earning a 6% return while waiting for a recovery to occur before re-selling the units as semi-luxury condominiums for $300,000 +/- resulting in an approximately $1,000,000 recovery.
- 3. RPRC Implementation of Selected Alternative:
- a. Bank Decision: The bank decides to complete the project and attempt sell the completed condominiums at the $240,000 discounted price. The bank’s attorney files a foreclosure action but in a few weeks, after title examination and discussions with the loan guarantors, negotiates accepting a deed in lieu of foreclosure and payment of $200,000 from the guarantors.
- b. RPRC Corporation: The bank negotiates a contract with RPRC to manage the project, including completing construction and site work, implementing professional sales and marketing program and maintaining the property. The RPRC contract for the required work including, legal, engineering, construction, property management, and marketing and broker sales commissions totals $140,000.
- c. RPRC Implementation:
- Marketing: RPRC immediately revamps the marketing program producing a new brochure, website, and print advertising, and formulating an e-mail and direct mail campaign. Real estate brokerage companies are interviewed and a listing agreement negotiated.
- Legal and Permits: the RPRC attorney reviews and completes the condominium documents. RPRC’s engineer renews permits and produces required as-built site and condominium plans.
- Site Work: Remaining site work is completed then inspected/certified by RPRC engineers to facilitate approval by the Town.
- Unit Construction: RPRC’s contractor carefully inspects the completed units and supervises completion of unit “punch lists” by project subcontractors.
- Maintenance and Marketable Appearance: RPRC’s property manager enhances the landscaping and returns the property to marketable condition.
- Condominium Sales: RPRC marketing programs produces four sales in six months at an average price of $248,000. RPRC assists the buyers in obtaining their mortgage financing and RPRC’s attorney manages the closing process.
- Vacant Land: RPRC sells the additional land designated for additional condominium units to a local builder for $50,000.
|
RPRC Alternative |
Time
to Implement |
Approximate Program Costs |
New
Net Recovery (Loss) from $800,000 loan balance |
|
Sell Mortgage for $400,000 |
45-60 days |
$8,000 |
($400,000) +/- |
|
Foreclose and Sell Property |
4-5 months |
$30,000 |
($250,000) |
|
Foreclose, complete units and sell at 35-40%
discount ($240,000 +/-) |
4-6 months |
$140,000 |
$0 (fill Recovery) |
|
Foreclosed complete units, rent for 2-3 years,
and then re-sell. |
2-3 years |
$70,000 |
5-6% return on funding then $200,000 |
If you have questions concerning this case study or are seeking assistance with an impaired or non-performing real estate asset, contact, Robert Satter, President, Real Property Resolution Corporation, 561-301-4541 or bob@Satter.com.