From: SF Business Times

Friday, June 25, 2010
Condos still a tough sell to finicky lenders
San Francisco Business Times - by J.K. Dineen

It’s likely 2010 will be remembered as a year when not a single significant condo project broke ground in San Francisco — and 2011 may not be much better.

While several apartment projects are likely to start this year, the future for condominiums is considerably bleaker. The Section 220 program that provides loans for apartments does not cover for-sale housing. While the projects on the market have been selling well, prices are still near enough to construction costs that it would be difficult to make a profit.

“There is still not really much development capital out there for urban housing,” said John Manning of Highland Realty Capital, a commercial real estate finance firm. “Sales values are just not high enough yet to justify new construction and there are still enough clouds in the sky that we don’t know where we are going to be in 18 months.”

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The few banks that are willing to discuss new condo deals are generally requiring equity to cover 50 to 60 percent of the cost, according to Lennar Executive Vice President Kofi Bonner.

“The conventional, non-recourse condo construction loan that would go up to 80 percent (of value) — they have not come back,” said Oz Erickson. “That was the typical instrument that we used and you could get them from anybody if you were an experienced developer.”

Finding an equity partner to fill in the gap is possible — but prohibitively expensive for the developer. Erickson said the return on equity investors expect has jumped from 20 or 21 percent three years ago to 27 or 28 percent.

Another hurdle to new condo construction is that Fannie Mae and Freddie Mac will not guarantee mortgages on condo projects with less than 50 percent of the units sold. Even if a developer sells seven or eight units a month, it would take a good 18 months for one of the larger entitled towers on Rincon Hill to get to that point. An exception to this is phase two of One Rincon Hill. The first tower of that project is 85 percent sold, taking sales of the entire development above 50 percent.

One Rincon Hill developer Michael Kriozere said three factors bode well for a 2011 ground breaking at One Rincon: construction costs are 20 percent down, inventory of new condos is dwindling, and Mayor Gavin Newsom recently signed a provision that defers 80 percent of project impact fees until construction is nearly complete.

On the more negative side, there is still uncertainty in the overall economy and lenders are nervous about the political landscape and new taxes that may be introduced. Kriozere said he has been talking to lenders. “Everyone has their finger on the trigger, but no one is ready to pull it.”

“It’s a subjective thing — businesses and investors are still hanging onto their money. The amount of cash corporations are holding is at a record high. All the construction lenders are wondering where the country is going,” he said.