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Questions building over Granby Tower project
[October 21, 2007]

Questions building over Granby Tower project


(Virginian-Pilot, The (Norfolk, VA) (KRT) Via Thomson Dialog NewsEdge) Oct. 21--The supporting cast for Granby Tower has been in place for some time -- the architect, general contractor and a sales-and-marketing firm, among others.

What's been missing? A lender.

When plans for the downtown Norfolk condo project were announced three years ago, its developer predicted that Granby Tower would be finished by 2007. The date was pushed back to 2008, then to late 2009. With each delay, skepticism about the future of the $180 million project has grown.



Last week, Granby Tower's developer said he expected to have financing in place by late this week. Buddy Gadams, president and chief executive of Marathon Development Group, said he had gotten a new appraisal and restructured his loan application. H e declined to discuss specifics.

"Because we're in the middle of closing on our loan and there is so much paper going back and forth, it would be premature" to talk about it, he said. Earlier this year, Gadams said that he was seeking a $145 million loan for the project.


Marathon also said last week that it has $80 million of units sold, with binding contracts that are secured by 10 percent of each unit's purchase price.

As he has in the past, Norfolk Mayor Paul Fraim expressed confidence that financing for Granby Tower would be finalized shortly.

Peter G. Decker Jr., a prominent Norfolk attorney who has reservations for two units on the building's 23rd floor, said he had no doubt that Granby Tower will be built. Decker said he understood that "three different companies are interested in financing the project."

However, lenders and others familiar with real estate development wonder whether Gadams and his partners will be able to come up with funds on terms that will work. In part, that's because conditions for financing condo projects have changed dramatically since mid-2004 when Granby Tower was announced.

At the height of the nation's condo boom in 2005, money for new projects was readily available, and banks made few demands on developers, said Jack McCabe, the head of a Deerfield Beach, Fla., market analysis and real estate consulting firm. Many lenders did little more than ask developers, "Have you got a piece of land? An architectural rendering? A marketing staff?" before they provided financing, he said.

That's not the case today. Because of the growing inventories of unsold units and reduced demand, banks are much more cautious about extending credit to condo developers.

Even if a project in a particular market such as Norfolk is viable, some banks with condo-development loans in other cities are reluctant to lend because they don't want more of these loans, said David H. Downs, a real estate and finance professor at Virginia Commonwealth University's School of Business in Richmond.

The situation is unlikely to change in the near future. Because of the scrutiny that banks have received from their shareholders and regulators, "I think we're looking at a year or two of conservative lending," said Downs, who directs VCU's Kornblau Institute for real estate research. "It's going to take a while for lenders and regulators to adjust to the situation we're in."

Marathon broke ground in May, but four months later, it notified buyers that its financing from Stonington Capital in Greenwich, Conn., had fallen through. In a Sept. 18 letter to the purchasers, Gadams said construction had been suspended while Marathon lined up new financing from "a top-ten national lender."

More than a month later, the wait continues. Based on interviews with other developers and those in financial circles, here are some factors that Gadams has faced as he seeks financing:

When Marathon announced plans for Granby Tower, it secured support from city officials because the project complemented Norfolk's effort to spur downtown development. By early 2005, however, the firm had scaled back its plan by 25 percent from 400 units in two towers to a single tower with 300 units. Earlier this year, Norfolk's City Council agreed to provide $22 million in assistance.

The project was also delayed because the General Services Administration considered taking the 1.7-acre tract on Granby Street at Brambleton Avenue for an annex to serve the federal courthouse across the street. GSA, however, eventually backed away.

Now, more than ever, lenders pore over the details of a project, including the market for prospective buyers. McCabe, the Florida real estate consultant, said one question lenders want answered is, "Are there competing projects in the same price range?"

They also want to know, "What kind of buyers will the project attract? And are they serious buyers?" he said.

One selling point for condo projects built close to the Elizabeth River has been a view of the water. A drawback for Granby Tower is that many of its units, especially those on lower floors, will lack a river view.

Advertised prices range from close to $300,000 for a one-bedroom unit to more than $900,000 for a three-bedroom unit that has 2,000 square feet. The tower also will have a half dozen penthouses that run upward of $1 million each.

Prospective buyers, however, may balk at paying more than $400 a square foot for a condo in downtown Norfolk, some developers in Hampton Roads said.

Banks lending for condo developments have demanded that developers put more of their own money into projects.

Two years ago, it was possible for a developer to get financing for 90 percent of a project, said Emanuel Westfried, vice president of construction finance at Meridian Capital, a New York-based mortgage broker. Today, some lenders may finance 75 to 80 percent of a project but only if the developer has an especially strong record, he said.

"They want to see real money and a stellar track record" for the developer, Westfried said.

What enabled some developers to get bank money in the past was the availability of mezzanine financing, a type of high-risk, unsecured debt. Investment banks and other financiers provided this in return for a share of the developer's profit on the project.

Today, however, it's much more difficult to find this funding. In some condo projects where it was used, "the builder's equity is gone, and the mezzanine lender is looking at a loss," McCabe said. That's prompted a few determined developers who lack sufficient equity to look to hedge funds. That, however, can be costly. Hedge funds expect hefty returns for their investors, he said.

It's not clear how much equity Gadams and his undisclosed partners have committed to Granby Tower. One critical part of the lending equation is likely to be the city's $22 million grant, an incentive designed to reduce the amount that the Marathon group must borrow. The city said it will pay the grant directly to the lender once Granby Tower has been closed in and at least 10 percent of its units are ready for occupancy.

Marathon and its partners are expected to make a profit of $19 million, according to the city's agreement with the developer.

Lenders for condo projects typically require that developers have a percentage of the units sold before they receive any money for construction. Today, banks want to see much higher levels of committed buyers -- those who have deposited at least 10 percent of the purchase price. That's partly because of the rampant speculation that occurred in some markets, especially in Florida. Some prospective buyers were betting on rapid appreciation in the value of condo units and walked away from their reservations if they couldn't sell their contracts for a quick profit.

Two years ago, lenders routinely required developers to have 40 to 50 percent of their units pre-sold, McCabe said. "Now it's 50 to 60 percent, and we've heard that it's as high as 70 percent in some markets," he said.

Marathon said that it has binding contracts for almost 50 percent of the project's 302 units. Last week, only 14 pending sales at Granby Tower were posted with the Real Estate Information Network Inc., the region's multiple listing service.

But a spokesman for Marathon said that was misleading. Jason Dodd, its marketing vice president, said the firm "only put a sampling" of pre-sold Granby Tower units in the multiple listing service. "We have sold more than is reported in the MLS," he said.

In response to the turbulence in credit markets this summer, the Federal Reserve made money more available to banks and lowered the rate banks charge each other for overnight loans. The changes, however, haven't reduced the rates that most condo developers must pay for financing, said Westfried of Meridian Capital.

One change that could complicate sales of luxury condos, including several units in Granby Tower, is the higher cost for so-called "jumbo" mortgage loans, those that exceed $417,000. Mortgages of $417,000 or less that conform to the standards of government-chartered mortgage companies Fannie Mae and Freddie Mac are easily sold to investors in the secondary market.

That's not the case with jumbo mortgages. After the upheaval in the mortgage market this summer, the rates for jumbos have climbed, which could make financing more difficult for some who plan to buy units in Granby Tower.

Besides demanding that a developer put up a greater share of the cost, lenders for condo projects are paying much closer attention to the developer's track record, Westfried of Meridian Capital said.

Gadams, a 37-year-old Richmond native, has attracted attention with his renovation of older buildings and conversion of several into condos. Last year, the lifestyle magazine Hampton Roads dubbed Gadams one of 50 "very important people shaping life" in the region.

While assembling a team for development of Granby Tower, Marathon lined up a skilled architecture firm known for its housing-design work, Humphreys & Partners Architects in Dallas. It chose a major national general contractor, Turner Construction Co., and brought in Garrison Partners, a Chicago firm with experience at marketing condos.

Marathon's management team has yet to complete a project of this magnitude. In recent years, Gadams has converted seven buildings in downtown Norfolk and the Ghent neighborhood to condos with 74 units total. More recently, he built a 24-unit project on Colonial Avenue in Ghent. His largest project to date was in Richmond, where he converted a 120,000-square-foot bakery building into 77 condo units.

One scenario, mentioned by others, is that if Gadams fails to line up financing for Granby Tower, it's possible that a partner with much deeper pockets could be brought in.

Staff writer Gregory Richards contributed to this report.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com

To see more of the The Virginian-Pilot, or to subscribe to the newspaper, go to http://www.pilotonline.com.

Copyright (c) 2007, The Virginian-Pilot, Norfolk, Va.
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