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Posted Feb 4, 2009, 4:38 PM
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Join Date: Jul 2007
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http://www.nytimes.com/2009/02/04/business/04chicago.html?pagewanted=all
Quote:
February 4, 2009
Two Chicago Towers Fall Victim to Scarce Financing
By ROBERT SHAROFF
CHICAGO — Back in 2006, at the height of the real estate boom, two projects here stood out as harbingers of a bright future for residential development.
The first and most significant was the Spire, a twisting lakefront condominium tower designed by the renowned Spanish architect Santiago Calatrava. At 150 stories, it was to be the tallest building in North America. (The current tallest, the Sears Tower, is also in Chicago.) The developer of the Spire is Garrett Kelleher of Shelbourne Development, a firm with offices in Chicago and Dublin as well as several other cities.
The second project was Waterview Tower, a 90-story mixed-use hotel and condominium building in the Loop, the central business district. It also was to be among the 10 tallest buildings in the city. The developer is Teng & Associates, a local firm.
Both projects got off to fast starts in terms of sales and construction, but both have now ground to a halt amid the many mechanics’ liens filed by subcontractors as the developers struggle to find additional financing.
At the padlocked lakefront site of the Spire, a seven-story-deep hole is ringed with 34 massive caissons that go down to bedrock.
The Waterview site on Wacker Drive, meanwhile, is even more unsettling. Workers had completed the first 26 floors of the building before they stopped work for good late last summer.
Taken together, the two are the most visible signs of the financing squeeze that has all but paralyzed the real estate market here over the last six months.
“If I’d known in July of 2006 that the world would be where it is today, I would have done a lot of things differently,” Mr. Kelleher said.
Both Mr. Kelleher and Teng ran into trouble because of a practice that, while unconventional, had become more accepted in the later years of the boom. In their haste to start building, the developers used money from their own pockets to finance the early stages of construction rather than go through the lengthy process of securing a traditional construction loan. The expectation was that further financing would easily be obtained at a later date.
Jim Loewenberg, a co-chief executive of the Magellan Development Group, the developer of the multibuilding Lakeshore East mixed-use residential project directly across the Chicago River from the Spire, said neither Mr. Kelleher nor Teng & Associates necessarily did anything wrong.
“I think that developers inherently are risk-takers and in many cases begin their projects before every t is crossed and every i is dotted,” he said. “So they lead themselves down a path, and sometimes it works out wonderfully and sometimes it doesn’t.”
Mr. Kelleher said: “It was about getting started. I needed to demonstrate that I was committed to the project.”
So far, Mr. Kelleher has invested about $250 million in the Spire; $180 million was cash from his own holdings and $70 million was in the form of two loans from the Anglo Irish Bank in Dublin.
When construction started, the plan, while aggressive, made sense. Total condominium sales were estimated at $3.4 billion, against total costs of $2.3 billion.
The project initially did well, selling just over 30 percent of its 1,194 units in the first eight months, at prices ranging from $750,000 to just under $40 million. The latter — for the 10,000-square-foot penthouse — is the highest price ever paid for a condominium in downtown Chicago. The contracts extend until the fourth quarter of 2013, and deposits are held in escrow until then.
Also significant was the fact that more than half of the sales were to individuals or entities outside the United States. “We launched in January” of 2008, Mr. Kelleher said, “and went to Beijing, Singapore, Hong Kong, Dubai, London and a number of other markets.”
In late September, Mr. Kelleher announced the penthouse sale — to Ty Warner, founder of the company that makes Beanie Baby toys. Since then, “things have slowed down,” he said.
Mr. Kelleher estimates it will take about $1.75 billion to complete the Spire and says he has had conversations with numerous financial institutions, both in the United States and around the world, over the last 18 months. “There’s no financing available to build the Spire today,” said Mr. Kelleher. “It’s a matter of waiting. And that’s what the plan is.”
Specifically, Mr. Kelleher is waiting for next fall, when the city will learn whether it will be the site of the 2016 Olympics. “If Chicago lands the Olympics, it will certainly be a boost to the local economy,” Mr. Kelleher said.
The situation is similar at Waterview Tower. Executives at Teng & Associates declined numerous requests for interviews, but reports about the project’s troubles circulated widely last fall.
The $500 million mixed-use project began construction using internal financing from Teng and a $20 million bridge loan issued by the Chicago-based LaSalle Bank, which is now a division of Bank of America.
The plan called for 200 hotel condominium units as well as 233 residential condominiums on its upper floors. About 40 percent of the hotel units and 67 percent of the residential condominiums were sold, the latter for an average of $800 a square foot.
“Waterview had some of the best prices out there in terms of what you actually got, and sold very well,” said James Kinney, president of Rubloff Residential Properties, a large downtown brokerage firm.
Last April, Teng announced that the Export-Import Bank of China would be providing the $400 million needed to complete the project. The loan was facilitated by Beijing Construction, a Chinese firm that was expected to take over as the building’s general contractor. The deal, however, eventually fell apart.
“It’s not really too hard to determine why the bank got cold feet,” said Zac Henson, chief executive of Beijing Construction’s United States division. “The economic news over the summer got worse and worse and never really got better.”
According to Mr. Henson, the bank has yet to formally cancel the loan, but he conceded that at the moment the bank’s appetite for the project was “questionable.”
Steven DeGraff, a lawyer who specializes in real estate workouts, says there are few good options in the current environment. “It may be cheaper to tear it down,” he said, “or it may be cheaper just to leave it in its current state.”
In the meantime, there are many more condominiums in the pipeline in Chicago.
The city added 4,600 new condo units in the downtown area in 2008, with another 4,700 units scheduled to be completed this year. The rate at which these new units are being occupied is lagging, however.
“Absorption last year was terrible — probably around 1,000 units,” said Gail Lissner, vice president of the Chicago-based Appraisal Research Counselors, which tracks downtown condo sales. “It’s going to take some time to work through this inventory.”
The upside, she adds, is that only 500 new units are expected in 2010 and fewer than that in the following years. “Any project that is not out of the ground now is going to have a very difficult time getting financing,” she said.
Prices, meanwhile, are down anywhere from 5 to 25 percent, depending on location and amenities. “The more generic, the more negotiable,” Mr. Kinney said. “If you want a two-bedroom two-bathroom plain-vanilla condo in downtown Chicago, I can get you a very good deal.”
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Last edited by Steely Dan; Feb 4, 2009 at 5:14 PM.
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