By Nancy Trejos
Washington Post Staff Writer
Wednesday, August 15, 2007
A growing number of condominium developers are backing out of projects as the worsening real estate market causes lenders to tighten their standards.
For buyers, a project's cancellation can be an unexpected jolt. They get their deposits back but nothing for their time and aggravation.
In the past 12 months, nearly 20,000 condo units have been removed from the glutted local development pipeline, said Gregory H. Leisch, chief executive of Delta Associates, a real estate research firm in Alexandria. By Delta's count, in the second quarter of this year, developers abandoned plans for 22 local condo projects.
Victoria Hammond signed a contract for a one-bedroom condo in Arlington more than a year ago, but two weeks before she was scheduled to close, the developer, Monument Realty, notified her that the conversion from rentals to condos would not go through.
Hammond, a government consultant, persuaded the people taking over her group house to let her stay. In December, she put money down on another one-bedroom in Arlington. In April, developer Ed Peete Co. canceled the condo plans.
"I had no idea this was possible with my first contract. That was a complete shock," she said. "The second time, I was prepared and skeptical about what was going on."
In a recent survey, residential developers said lenders are making smaller loans and charging them higher interest rates, according to David Ledford, staff vice president for housing finance and policy with the National Association of Home Builders.
During the real estate boom that ended two years ago, developers could get loans even if they presold only one-quarter of their units, said Peter Antonoplos, a real estate lawyer in Carter Ledyard & Milburn's District office. But then sales slowed drastically, and many would-be buyers cancelled their contracts. Now lenders are asking that 50 percent or more of the units be sold before construction, he said. Others want the developers to contribute more of their own money.
"Institutional lenders don't have the appetite for condo properties that are going to sit around and present a credit risk," Antonoplos said.
Developers are more likely to get financing for rental properties because the rental market is healthier, real estate experts said, hence the push to convert condos to rentals. However, there are concerns that the recent turmoil in the mortgage market could cause that financing to tighten.
The list of abandoned condo projects is growing.
Level 2 Development of the District decided late last year to build View 14 at 14th Street and Florida Avenue NW as luxury rentals instead of condos. "It was clear to us from the sales pace and activity that we were going to have a difficult time preselling the number of units required to meet both the lenders' presale requirements and our own investment criteria," said Jeff Blum, a principal at Level 2.
Earlier this year, the Joule in Arlington, developed by Ed Peete, also went from condos to rentals. In Leesburg, Comstock Homebuilding went so far as to repurchase 58 of the 316 condominium units at the Bellemeade for $12.8 million before selling the building to a Midwestern apartment operator in June.
In rare cases, developers have combined condos with rentals.
Take the Four Winds at Oakton. Orion Residential bought the property in April 2005 and renovated it as condos. So far, about 225 have been sold.
In January, Orion decided to rent 103 units because sales were not fast enough. "In order to create a little cash flow during the sales process, we decided to release those," said Dan Gumbiner, Orion's president and chief executive. The company hopes to sell them eventually and is offering a lease-to-own program.
At Vaughan Place in Northwest Washington, the developers -- Ross Development and Investment and Carlyle Group, a D.C. private-equity firm -- sold 186 units to individual buyers, then sold the remaining 388 to a New York rental company in April.
That has rattled some of the owners. Lenders give less favorable loan terms to people who buy or refinance units in buildings where most residents are renters or where most are owned by a single entity, said Kevin Connelly, a mortgage banker with Pinnacle Financial in Vienna.
"I have very mixed feelings about it. In terms of my day-to-day living here, it's extremely pleasant," said Patricia Kenworthy, who bought her condo at Vaughan Place in April 2006. "In terms of thinking if I had to sell for some reason, it's very scary."
Christopher Ullman, a spokesman for Carlyle, said, "We remained on course in terms of our business plan, which was selling and/or renting condos."
Still, analysts said that because of local job growth, they don't expect the condo market to melt down in this region as it has in other areas of the country. The result here will be a healthier market as supply and demand reach an equilibrium, analysts said.
"What we're seeing is a pipeline that was started being completed, and there's virtually nothing being put in the pipeline, whether from lenders or developers," said John McIlwain, a senior fellow for housing at the Urban Land Institute.
Hammond, the government consultant, was eventually able to buy, this time at 1800 Wilson Boulevard in Rosslyn. In June, she had a "Third Time's the Charm" housewarming party. "Happy ending," she said.
Not so for Leigh Robertson.
A foreign-service officer, she wanted to buy a condo before moving to Bangladesh for two years. She put down a deposit in November on a one-bedroom at View 14. When that fell through, she put down a deposit at Highland Park in Columbia Heights. Now in Bangladesh, she is still waiting to hear whether the contract will be ratified.
If it doesn't go through, she plans to suspend her search until she returns.
"I'm going to buy something that's ready," she said. "Beware of pre-construction."
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