Mike Brenneman, one of the area's leading condominium developers, dropped his prices by 20 to 30 percent at a Dupont Circle building, hired a man dressed as Santa Claus to pass out handbills and held a clearance sale yesterday in a frantic attempt to sell 46 units that had gone unsold for a year.
Brenneman was one of eight area developers who were advertising clearance prices yesterday in hopes of moving unsold units, while other builders promised no condo fees for one or two years to entice buyers.
Oliver T. Carr Jr., one of the city's biggest developers, cut prices up to 24 percent at The Gibson, his high-rise condominium project at 1140 23rd St. NW in the West End because of languid sales.
The plight is the same for condominium developers throughout the area, as well as for the bankers who lent millions to either renovate and convert old apartment buildings into condominiums or build new projects.
Three years of high interest rates, which currently stand at 16 to 17 percent, and high prices have virtually killed off sales in the once-flourishing condominium market.
The developers find themselves sitting on unsold property while trying to keep up payments on multimillion-dollar construction loans that carry interest rates at one to three points above the prime rate, which at times during the past 1 1/2 years has hovered above 20 percent.
"The costs of carrying these projects can become strangulating," said Richard Leeds of Legum and Norman.
Last week, Continental Illinois National Bank foreclosed on the 723-unit McLean Gardens condominium complex in Northwest after the developer defaulted on his construction loans.
Several local bankers said they tried to avoid foreclosures and instead worked with developers to find ways to break the financial chokehold--deferring interest payments, offering below-market interest rates to attract prospective buyers and allowing some builders to rent unsold condominium units.
Last year, condominiums were the lone bright spot in real estate sales. Today, condominium sales are off by 50 percent, according to Brenneman. Developers who once thought they could wait out the high rates are now trying to cut their losses.
After selling only eight of the building's 54 units after a year, Brenneman said, "We decided to bite the bullet and get the hell out."
Last week, Brenneman launched a large advertising campaign that included television commercials, newspaper ads and leaflets distributed to downtown lunchers to get bargain hunters to the Albemarle at 1830 17th St. NW. He knocked down prices of some two-bedroom duplexes with a patio from $153,5000 to $112,500 and others were slashed from $136,900 to $93,500.
Two and half hours after the doors opened, about 100 people, most of whom were single lawyers, accountants and other professionals, had visited the remodeled building and many were signing sales contracts.
At 4 p.m., Brenneman said he had contracts for 28 of the units and he expected the rest to be snapped up today.
Earlier in the day, Mitchell Zeemont, 25, inspected a fifth floor one-bedroom unit at the Albemarle on which the price had been reduced from $88,250 to $64,990. "I thought I'd like to take advantage of one of these fire sales because this is a prime residential area and these are the lowest prices in quite some time," Zeemont said.
Ken Ryan, 38, an accountant, said he had wanted to buy in the renovated seven-story building several months ago "but it was more expensive than I thought I could comfortably afford. But when I saw the ad yesterday I thought if I could save $20,000 I should come back and look again."
Brenneman said Riggs National Bank, which financed the renovation, had allowed him additional time to pay off his construction loan, which came due in December. He and the bank considered renting the unsold units, but finally decided to reduce the prices and try to sell them outright.
Such a banker-developer partnership is not unusual.
"We nor any other financial institution likes the idea of foreclosure," said James Harris, president of Washington Federal Savings and Loan Association. "We would rather work with the developers. I'm not a developer or builder. I would rather work with him because we don't want their problems and we don't have the construction people and the expertise to run it."
William F. Wilkinson, a vice president of the American Security Bank, said, "Getting the developer out of the picture doesn't solve our problem. We want to get paid off."
A favorite technique used by builders and their bankers to incite sales is to offer interest rates of 11 to 14 percent for three to five years. Then the interest rate goes to whatever the market rate is in that fifth year.
But even these arrangements have lost their attractiveness as buyers reject all but the traditional long-term, fixed-rate mortgage.
Other developers, with the help of their bankers, are offering 30-year fixed-rate mortgages at below market interest rates by converting the builders' construction loan into a permanent loan.
Thus, instead of the builder paying off the construction loan in a lump sum when the units are sold, the loan is paid off over 30 years through the mortgage payments by the new homeowners.
But all these financing plans cost the bankers money. Usually banks and savings and loans sell their mortgages to obtain funds for other loans. But when the mortgages carry rates below those on the current market, they lose their attractiveness and can't be sold.
Some developers are marketing unsold units as tax shelters. But even that infusion of cash is usually not enough to pay off the construction loan, so the difference between the sales price and the total amount of the loan becomes deferred.
"We have gone from a condominium market that was red hot to a market that has gone to hell," said Brenneman, who expects to handle other distress sales--but next time for others.