A Twin-Tower Trauma in Queens; Project Was Left to Bats and Owls until Realistic Study Was Done

Article excerpt

Guards were hired to patrol the premises after dark. For seven years, they marched around the perimeter of the project, guarding the booty: two empty concrete shells, 21 floors high. Unfinished and vacant, the shells were testimony to the foibles of the developer -- and the guards, paid by the lending institutions, were testimony to the risks inherent for lenders who, unwittingly, back a project that fails.

More and more frequently, lenders are being saddled with similar failures. Throughout the country, residential structures are going up--and are not selling. But it the fault of the economy, the developers, or even the changed wishes of the buyers, it is the lenders whose money is at stake. Is there a way for lenders to avoid becoming reluctant partners?

The failed development described above showed every sign of succeeding--as a concept. A twin-tower complex in the New York City borough of Queens, it was equipped with elegant amenities and boasted unique views of the Manhattan skyline and Douglaston Bay. What's more, it was a singularly unusual addition to a desirable neighborhood. The quiet, subdued community of Bayside consisted primarily of single-family residences and semi-detached homes, and included no other high-rise residences.

A traditional market study was, no doubt, the spur to the original financing -- and such a study had probably shown that the project was likely to succeed. These investigations involve the standard, straightforward gauges: "comparables" and their market history, the borrower's record, the immediate equity, the competition, census information and demographics.

But a subsequent, more specific investigation was commissioned by the second developer, who stepped in to pick up the pieces. He didn't want to run the same risks again--and neither did the banks, who had already been saddled with the project for more than seven years. This second, comprehensive study revealed some surprises, and many of the risks for all involved were sidestepped or eliminated as a result. Potential Residents

The second investigation accurately identified potential residents, and showed that the marketing targets -- which seemed so obvious -- were quite mistaken. And it showed that subtle architectural changes were necessary to insure a reasonable sales pace. It also showed that amenities which Manhattan spaces wouldn't allow--a health club and running track --should be added, and prices could be raised accordingly.

But more importantly, the second study gleaned specific financial information from the qualified buyers, which permitted the establishment of an innovative selling plan. This study was the first ever to determine that qualified buyers -- from 50% to 60% of them -- would drop out of the market altogether if interest rates surpassed a certain level.

The study results further indicated that if interest rates below 13-7/8% could be guaranteed, the majority of these buyers would still make purchases. These buyers, in fact, indicated that they would spend up to $15,000 more for a property with such a mortgage rate over its 30-year life.

The developer, at a cost of over $5 million, offered such a financing plan. The project sold steadily -- even through the depths of the recession--and is now sold out. And the developer reaped over $6 million in profits through the higher selling prices alone.

What exactly is the difference between the two types of investigation? Briefly, one deals in qualifiable data, while the other is quantifiable; one deals with concepts, and the other with specifics. There was a time that these concepts--the history of similar projects, the ages and incomes of the population and their traditional buying patterns -- were sufficient. But the myriad factors involved in today's market have made thee tools ineffective. Developers, builders, and lenders share the resultant risks. Not That Easy

What protection is available to the lender, and what tools can crack the mysteries of the newly complicated market? …