How to fix the condo crisis…
“September 24, 2009
By: Paola Iuspa-Abbott
Lehman Brothers, the bankrupt Wall Street firm, is pouring millions into the troubled Canyon Ranch Living project in Miami Beach to boost sales and protect its investment from massive losses.
Rather than foreclosing on construction loans on the project, the lender is working with developers Eric Sheppard and Philip Wolman to turn around the ultra-luxurious oceanfront condominium.
Lehman plans to help fund up to $200 million worth of individual condo loans for buyers of the 580-unit condominium. About 223 units have sold in the three-tower project.
Condo prices range from $300,000 to $5 million. To gain some control over Canyon Ranch, Lehman paid $142 million to pay off a loan that it took to lend money to the developers. It also shed a mezzanine loan in a deal with another lender. “Lehman Brothers is reinvesting [in the project],” said Sheppard, owner and managing member of WSG Development. “On top of that, they are putting capital into the project to make sure that it’s stabilized for a very long time.”
U.S. Bankruptcy Judge James Peck recently approved Lehman’s plan to finance condos at Canyon Ranch. The company filed the largest bankruptcy in U.S. history in September 2008.
Since the real estate and financial markets crashed, the project’s developers have struggled to sell units despite its affiliation with Canyon Ranch, a well-known spa and resort operator.
The lender’s financial commitment could help lure back buyers, who may be leery about the future of the troubled development. “The instability of the project or the uncertainty of the viability of the project is definitely what is keeping people away,” Esslinger Wooten Maxwell broker Kevin Tomlinson said. He is trying to sell five units at the Canyon Ranch project on behalf of individual owners. When the project was announced in 2003, buyers rushed to sign purchase contracts, enticed by Canyon Ranch’s global reputation. Many of those deals never closed because buyers bailed out after the housing and financial markets collapsed. Some buyers are suing the developer to recover their deposits.
With slow sales, Sheppard and Wolman couldn’t pay off Lehman loans used to build Canyon Ranch. The loans, which initially totaled $522 million, came due in April. The lender and the developers haven’t signed new loan documents, “but we have a set plan and forged a relationship that has been very effective,” Sheppard said. “The project is stable and a lot better than it was when Lehman went bankrupt. Obviously, that was a very trying time.”
Sheppard said he has paid down the construction loan with proceeds from unit sales but said he doesn’t know the total of the remaining debt. “I know we paid down hundreds of millions of dollars in these tough economic times,” he said.
Sheppard said he still owns the project and is in daily contact with Lehman representatives over its direction.
CONDO LOANS
In June, the bankruptcy court approved Lehman’s mortgage-financing program for buyers who have had a tough time finding mortgages for condo units. Americor Mortgage originates the purchase loans and sells them to Lehman after closing, said Bob Waun, chief executive of the Birmingham, Mich.-based company.
Americor offers 15-year or 30-year fixed-rate loans. Rates range from 6 percent to a little over 7 percent, depending on whether the unit will be a primary residence or second home.Another plus for buyers: Americor doesn’t require an appraisal because the lender thinks the units are properly priced, Waun said.
“We think we have some cushion with the loan-to-value at 70 percent or lower,” he said. Americor agreed to work with Lehman in financing condo deals because the Canyon Ranch brand attracted sophisticated buyers. “We are impressed with the loyalty of the buyers to the brand,” Waun said. “There is a real emotional commitment to buy there. These people are not looking at a speculative investment to trade off in few years. Most are buyers with the mind of retiring there.”
Four buyers have closed using Americor financing since early August, according to Miami-Dade County property records. EWM’s Tomlinson doubts the financing program will help move units, which he considers overpriced.Asking prices at Canyon Ranch can go as high as $1,000 per square foot, Tomlinson said. He units should be priced at no more than $600 per square foot.
Sheppard won’t lower prices in the project’s North Tower, home to the largest units. The developer has cut prices of units in the other two buildings that had smaller units. He said he won’t need to further reduce prices now that Lehman’s loan program is in place. On the contrary, he said, it will help to firm up prices.
“There are no fire sales or reduced prices because Lehman Brothers really stepped up … fire sales are not our world,” Sheppard said. “We don’t need to do that.” Lehman’s bankruptcy raised questions about whether or not the development would be completed.
But Lehman pumping money into the project has helped build confidence in Canyon Ranch, one broker said. “Buyers are very, very cautious,” Miami Beach broker Mark Zilbert said. “They are looking for signs from the developer, the builder, from the other owners, from the brokers. They are looking for signs that will help give them assurance that the right things are being done” to benefit the project.In order to create the mortgage financing program, Lehman had to spend millions of dollars to resolve its own financing troubles.
The lender in July paid $142 million to Fortress Credit Corp. to pay off a construction loan that had come due. Lehman — in a desperate search for cash — had borrowed money from Fortress using its interest in the project as collateral. The loan was coming due, and Fortress could have begun a foreclosure action and taken control of Canyon Ranch.
To be able to set up the mortgage financing program without objections from third parties, Lehman had to gain control over a mezzanine loan of $104.7 million, which is part of the $522 million in construction financing for the project. For that, Lehman gave up interests in loans mostly controlled by State Street Bank & Trust. In turn, State Street gave up its interests in the mezzanine loan.
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