Lavish New York City Condo Project Contends With Lenders' New Demands
By ALEX FRANGOS
August 20, 2008; Page C1
To see how difficult the condominium-development market has become, consider the plight of 100 Eleventh Ave., which was designed to be one of the hottest addresses in New York.
Developers Craig Wood and Curtis Bashaw hired cutting-edge French architect Jean Nouvel to design a 23-story building that features a shimmering facade with thousands of unusually shaped windows looking out on the Hudson River. High-end buyers such as Blackstone Group's incoming chief financial officer, Laurence Tosi, and fashion photographer Mario Testino plunked down deposits to purchase apartments, according to documents and people familiar with the project. The pick seemed like a coup when Mr. Nouvel won the Pritzker Prize this year, the top award in modern architecture.
But like many other real-estate developers, Messrs. Wood and Bashaw have learned that there are no sure things in the current credit climate. Some $50 million over budget and nearly a year behind schedule, their company, Cape Advisors Inc., is under the gun to refinance its construction loan in the midst of pouring concrete, or it risks the possibility of having to halt work next month, according to several people familiar with the project.
A Cape spokeswoman says that there is "huge interest" from potential investors. The developers could strike a deal with new investors as early as Friday, according to two people familiar with the deal. But that unnamed capital source is expected to get a 25% return, slashing into profits Cape hoped to see from the project, these people say.
The developer's predicament comes at a time when the biggest condominium construction lenders of the boom times -- like iStar Financial Inc. and Corus Bankshares Inc. -- are under the gun themselves, facing skyrocketing defaults and plummeting stock prices. In this eat-or-be-eaten world, lenders are squeezing developers like Cape Advisors that have stumbled, several people familiar with the market say.
Indeed, iStar Financial is forcing the developers to refinance a $110 million first-mortgage construction loan with much higher rates, according to people familiar with the project. IStar is asking that the interest rate go from three points above the London interbank offered rate, a common benchmark interest rate, to six points above Libor. The bank is also asking for a $6 million fee to reprocess the loan.
An iStar spokesman, Andrew Backman, declined to comment on this specific project, but in a statement said in general the lender works with troubled borrowers to "find an appropriate resolution for any issues," and that may include "an appropriate extension fee and a new 'market interest rate' which will compensate us for these concessions."
Messrs. Wood and Bashaw declined to comment. People close to the company play down the problems and note that the project has presold 70% of its units for $190 million, or $2,300 a square foot, considered high even in New York.
Making matters worse, however, the Manhattan real-estate market, once seen as an island separated from the national housing decline, has shown signs of weakness. Inventory of condos and co-ops are up 37% in July from the year before, according to Miller Samuel Inc., a market-research firm. Jonathan Miller, Miller Samuel's chief executive, says market prices are "moving sideways," and he is concerned about how the market will perform in 2009.
But internal project documents reviewed by The Wall Street Journal paint a troubled picture. Cape Advisors, like many real-estate developers, failed to keep costs down amid construction problems and sprung for even more lavish fixtures and finishing touches midway through development. Units that lack full river views and that face a women's prison are proving a tough sell.
Cost overruns were "less relevant when sales prices were going up every week and Wall Street bonuses going up and the pool of buyers growing," says Ronnie Levine, a managing director at Meridian Capital Group, a brokerage that arranges financing for real-estate projects. But in today's credit-constrained environment, even a high-profile project in the less hard-hit Manhattan market is struggling to raise cash.
Cape Advisors acquired the small plot of land in December 2005 for $47 million. It sits next to architect Frank Gehry's swooping IAC/InterActiveCorp's headquarters building and among trendy art galleries. Most apartments will have Hudson River views; the women's prison is on the other side.
Well-heeled buyers include R. Martin Chavez, a partner at Goldman Sachs Group, Inc., who is slated to purchase the top floor for $20 million. A limited-liability company attached to shipping heir Michael Recanati purchased eight apartments over two floors to join into a single $24.5 million manse, according to the documents.
Insiders also took pieces, including three brokers with the Corcoran Sunshine Marketing Group, the brokerage handling the building. A spokesman for Mr. Recanati declined to comment. Mr. Chavez didn't return calls. Blackstone's Mr. Tosi didn't return requests for comment. A spokesman for Mr. Testino, the photographer, declined to comment.
But the documents show how costs escalated quickly. Foundation work found mudlike pudding instead of bedrock, causing a 10-month delay. The cost of concrete swelled from a budgeted $8.3 million to $14.3 million. The developers upped the ante on the interior design, tripling the price for flooring to $3.1 million.
Mr. Nouvel's intricate facade proved complicated and is currently being assembled in China and expected to cost $14 million, $1 million more than budgeted. The marketing budget increased from $1 million to $4 million. Because of design changes Mr. Nouvel is now expected to charge $1.3 million instead of $600,000. The fee for the local architects, Beyer Blinder Belle, went from $700,000 to $2.7 million. Mr. Nouvel, the lead architect, declined to comment.
In total, the budget has swelled to $205 million from $151 million, and the target opening of Dec. 1, 2008, has been pushed back six to nine months. As costs mounted, Cape Advisors in the spring tried to raise money by replacing its $110 million construction loan from iStar Financial with a $126 million loan from condo specialist lender Corus Bank. But the Corus deal didn't gel, forcing Cape to look for more equity from outside investors. Cape has put in $19 million in cash as equity in the project, according to documents. Representatives for Corus declined to comment.
Buyers, who had once expected to take ownership by year's end, now aren't slated to move in until summer 2009. Their deposits are in escrow. The sales contract will make it difficult to pull out without litigation. However, if delays push the closings into 2010, the buyers could have greater recourse to pull their deposits, according to people familiar with the project.
