There have been numerous newspaper articles reporting on the financial woes for Avenue Communities and its downtown Tempe high rise condo developement, Centerpoint.
What I have not understood is how can a project that has sold 20-25% of its condominiums over the last three years survive current market conditions AND the bankruptcy of its construction lender?
But I'm starting to understand. Here's my take on it:
The construction lender referenced above, Mortgages Limited, funded approximately $100 million of a $175 million loan. So they funded approximately $75 million less than the loan commitment stipulated. Then the company filed bankruptcy.
Avenue Communites is out looking for lenders to supply the $75 million so that it can complete construction of the building.
One can easily understand that a lender might be hesitant to loan $75 million on a $200 million project in today's market. However, what if the $75 million takes priority over the $100 million already spent? In other words the new lender would loan $75 million for assets valued at $200 million. That seems pretty safe even today doesn't it?
Apparently this is possible because the bankruptcy court can force the first lender (the $100 million lender) to subordinate to the next lender (meaning going from first position to second position) thus changing them from a first mortgage to a second mortgage if you will.
I guess the reason this is allowed is because it is better for the $100 million lender to be in a position if doing so is the only way to save the project. This way the lender as a chance to get something instead of all of nothing.
What I haven't understood is that if the project was originally projected to cost $200 million and profits were based on 2005 prices or higher and prices have gone down since 2005 then how can the project survive?
A case can easily be made that new construction high rise condo prices have gone down a minimum of 30% and maybe as much as 50% over the last three years. IF this is true then total sales could end up as low as $130 million (taking into account a 30% profit for the developer). So how does that work? Total sales of $130 million for a project that cost $200 million to build?
I'm guessing that the new lender, the one coming in with $75 million gets paid principal plus interest or $85 million, the original lender which ended up in second position gets paid $.30 for every dollar loaned or $30 million and then the developer gets the rest (about $15 million). But guess what? the project would be successful at these prices and survive!!! Granted the developer would not make as much profit as they had expected and the original lender would lose a ton of money but again, something is better than nothing. And of course, if I'm wrong about the value of high rise condos today and they actually sell for more then the developer and the second lender end up with more in their pockets.
And, Tempe and the Valley would see the completion of a fantastic urban community. One that would add significantly to the popularity and ultimate success of downtown Tempe.
NOTE: PLEASE KNOW THAT I AM TOTALLY PULLING THESE NUMBERS OUT OF THE AIR. I HAVE ZERO INSIDE INFORMATION. I AM PROBABLY WAY OFF ON THE VALUE OF THE FINISHED CONDOMINIUMS, THE DEVELOPER'S PROFIT, THE LENDER'S INTEREST AND THE AMOUNT THAT THE SECOND LENDER WOULD LOSE BUT AT LEAST THIS MAKES SOME SENSE. I WELCOME ANYONE TO PLEASE CONTRIBUTE TO THIS ARTICLE (LEAVE A COMMENT OR E-MAIL YOUR INPUT TO ME AND I'LL POST IT FOR YOU) ESPECIALLY IF YOU HAVE ANY EXPERIENCE OR KNOWLEDGE IN SUCH MATTERS.
We would love to see Centerpoint succeed and any dialogue that helps us better understand how that might be possible would be much appreciated.
