Last week we surfaced the issue of construction loan covenants putting pressure on developers to sell, this week the mortgage lenders get into the act. From the Mark Company by way of a plugged-in tipster:

• Wells Fargo now requires that 25% of the units be in contract or closed before they can fund the first loan.

• Chase is requiring that 51% of the units be in contract or closed before the first loan can close. Their previous presale requirement was 25%. We first saw this in Los Angeles, but the requirement has now been instituted nationally.

• Countrywide now bases the required presale percentage on the project’s sales velocity. Well-marketed projects with solid absorption may have a presale requirement of 15%, while slower moving projects have higher presale thresholds.

In addition to varying presale requirements, lenders will continually evaluate the ongoing success of a project, as well as the developer’s reputation and financial position. [The Mark Company’s] understanding is that a project with a sales velocity of 3-4 homes in contract per month will be considered marketable and therefore acceptable for the lender to continue processing loans on. Should a project fall below that threshold, loans may be discontinued.

In the words of our tipster:

A mortgage broker friend of mine suggests that this takes things back to “the old days” when no lender wanted to be the first one in a project. The first 25% of the units would typically be sold/financed subject to “simultaneous” escrow closes.

And in the words of us: there are other old days (now new new days) implications as well.
RandomRumors: Calling On That Guy And The Guy He Heard It From [SocketSite]

19 thoughts on “Developers In San Francisco Getting Squeezed From Both Sides”
  1. What?! They look at sales velocity? So a place like esprit park making deposits refundable to increase sales velocity wasn’t out of the goodness of their hearts?! I’m shocked, shocked at this revelation!

  2. You have mortgage broker friends?
    [Editor’s Note: Zing! And although our tipster was talking about his friend not ours, we do have a few as well. It’s funny how many people prefer talking about important trends, facts and analytics versus the vacuous sell side spin. Who would have guessed? And now back to what’s actually happening in the world of new developments…]

  3. Question is, what will the Mark Company do about one of their developments, Infinity II, if they are not currently preselling those units. Will they have to wait for at least 25% [or more] to be under contract before closing a single one of them? In this environment, that could take a while … and the whole time that’s millions of dollars in carrying costs [HOA fees and interest payments] for the developer every month.

  4. @tipster
    Esprit is currently 35% in contract. The TCO hasn’t even been issued yet so nothing can close escrow yet. They’ve released selected large units in the north cort but have not released all of the units.
    If you consider only about half of the units have really been available and it’s 35% sold for the whole project and the CofO hasn’t even been issued I think they’re velocity is pretty good. Not to mention that Chase’s deal with them is 30% sold and Wells is 25% so I think they’re OK.
    Oh, and as far as reputation is concerned the developer was considered for the lot south of PacBell but pulled out, has just been given the project to redevelop the DMV near the panhandle, has been given multiple parcels on Octavia corridor to develop, and is very involved in Pier 70 as well. And I’ve heard they have an exceptional reputation and relationship with the SF building department.
    But you can continue to talk crap on them for their consideration of people’s risks in this lending market.
    Rip on us stupid yuppie buyers all you want for moving forward in this market. But you’ll need to come up with something else if you want to talk about the developer at Esprit. But I can tell you’re just the smartest guy in the room all the time. Your posts are tiresome lately. I seem to remember there was a time when you contributed something on this site other than cynical comments.

  5. @fluj: Let me be the first to welcome you back from your self-imposed exile.
    I think many of us “armchair bears” have friends/family in the industry, shocking as it may seem. I myself have a good friend who was (formerly) in the mortgage business, and a close family member who’s a real estate agent. That doesn’t prevent me from being objective about the state of the RE market.

  6. This actually makes me wonder about complexes that I think will have a real hard time selling out, like South City Lights down in South City. I really like those units (and would be OK with living outside the city for one) but the prices are just too high–you’re paying city prices and getting more space, but it’s just not quite enough to justify buying in a sub-market that’s less stable than the core city market. But if they need to unload…

  7. is there any way the editor can make sure this is the real fluj?
    if so: welcome back.
    to the post:
    we’ve talked for some time about the problems that developers would face as the RE downturn hit SF. How many times have I predicted that many of the big proposed complexes would never come to pass?
    the smart developers will see the writing on the wall and drop prices as soon as possible. It’s better to get rid of these units ASAP.
    unless the govt comes in and bails them all out I guess. it’s the one problem with repetitive bailouts… now everybody is holding on hoping for a bailout, which slows the clearing process.
    so we’ll have a housing shortage with empty units all over the place. great.

  8. It is quite obvious that the Infinity will rent and not sell Phase II. So, this will not be an issue for that building.

  9. Increased difficulty in developing future projects is certainly good news for existing condo owners.
    Anyone want to guess how long it willbe until the next major tower (like Rincon or Infin) will break ground?

  10. As a buyer at EP – I must admit that my toes are getting cold. This is almost a 180 degree turnaround from where I was two weeks. My big beef with EP has nothing to do with the developer at all – but the McGuire group has really been ticking me off to the point that I am considering backing out of my contract.
    I was at the Apero the other night at EP and while it was upbeat, I am beginning to have serious doubts about the completion of the whole project. The whole promise of the project was to develop a new community there and keep with the vibe of the area. But i.e. urbino were to pull out (which given the economy wouldn’t surprise me) and the rest of the neighborhood doesn’t fill out in the next years – I don’t think the investment is worth it.
    I did not pay in the 800/sf range as Spencer has tossed this number around on other posts. I think more of us are in the 600 – 620 /sf range. But I’m beginning to question even that investment now…. oh what a dilemma!

  11. @MissSunshine…
    you’re not alone! Everyday things in this economy and lending market change for the worse. It’s risky for sure. And if you’re thinking this area will turn or develop within a few years then I’d say back out if you can. It will take much longer than that. If you don’t like how it is now, then don’t buy.
    I like it how it is now and I plan to live in my unit for 4 or 5 years and then buy a larger unit somewhere else in SF but keep my unit at Esprit as a rental. I’m buying well within my means right now. I believe the area will be more desirable 5 to 10 years from now and I think really attractive 10 and on. I bought small unit now because it’s all I really need (how Euro of me) and I think I’ll have more chance of covering the cash flow on the unit later when I move on.
    I hate to tell you to split but if you’re feeling bad about it and you are looking for significant changes to the hood in the short term then save your cash and relax stress free and maybe get a better deal later when things normalize a little. Good luck!

  12. oops – I should give some color as to my beef with the McGuire group. There is CLEARLY room for negotiation in this environment. In case they haven’t figured it out – people aren’t buying. They are not doing me a favor by “letting” me buy a property there. Every contract they sell is another uptick on their “% in contract” figure.
    But the McGuire group has pretty much refused to take any of my reasonable requests to the developer. We are not talking serious dinero here, but considering they still can not guarantee me a move in date, and its supposedly less than 2 weeks away… (HA HA HA) you would think some consideration is in order. But instead its “hurry up and wait” and very much a don’t waste our time attitude.
    And I might point out that my first offer was very much in line with what they have recently announced for reductions. But at the time, they wouldn’t even take it to the developer. So now with all the price reductions and offer to refund deposits, they had better learn to play nice or I may walk.
    Which would make me soooo sad coz I love the building. But not worth the headache. My job is stressful enough, I don’t need this on top of it!

  13. I would also say the weakest part of the process at Esprit is McGuire RE. And I heard the same from others at the event at Esprit on Tuesday. It was obvious the broker I’m working with hadn’t even read all the disclosures and this person even went as far as to say recently that I shouldn’t worry about prices declining because I got such a good deal. I didn’t even want to argue about it because once someone shows you they’re not going to be honest with you then you really can’t discuss anything with them.
    But this thread is about more than Esprit… sorry for hijacking the topic for a bit there folks.

  14. @MissSunshine,
    am floating on the same boat here…not sure what to do with EP unit when I’ve seen more better prices in soma, closer to the city – more I read and think, more I get sink deeper in my dilemma zone. Tuesday event was good in EP, I thought but it hasn’t helped me at all.

  15. misssunshine and ephbuyer, if you are not 100% comfortable with your decision to purchase, then don’t do it. I know what it’s like to be excited about a new place you really love, but one thing I have found out about SF is that there always seems to be something coming up to fall in love with. This is not the last development in town. And given the current market, real-estate and otherwise, I would not be buying or selling at this time. Just my two-cents worth and good luck

  16. The world economy is deteriorating rapidly. The dollar has strengthened and Asian buyers are evaporating. Many would be buyers can’t even get mortgages. Most importantly, there is significant inventory and oversupply in the SoMa / South Beach condo market. Bottom line . . . Infinity, One Rincon, Millenium, Radiance and other SOMA / South beach condo projects are way overpriced. Anyone who buys at the current prices is a fool. Inside the sales offices you can learn how each project is unique and different from the others, but outside in the real world, unemployment is accelerating and the developers will eventually be forced to accept the new reality. In the next 12 months, they will be lucky to sell units at 25% discounts from current prices.

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