Where Have All The Back-Slapping Bankers Gone?
Posted by Jeff Pruitt - 5/21/08 @ 1:38 am - Filed Under City Council, Featured
Chris Schoen of Barry Real Estate did an admirable job at tonight’s city council meeting describing the current state of the retail and condominium portions of Harrison Square including the challenges they face. He admitted that they only had 5 condos under contract and only 50 more “interested” parties. He described how the current credit crisis is causing them to change their financing expectations - they will probably only be able to get a 1st mortgage for 50% of the project instead of the 75%-80% they originally expected. He also said they will need 50% of the condos and retail space sold before they can expect any financing.
Despite these setbacks he assured council that they are committed to the project and will do whatever it takes to make sure it’s completed per the city’s contract (you can read more details of Schoen’s presentation at Around Fort Wayne). But what I want to know is why are they having such trouble getting financing? During the public hearing on Harrison Square I remember watching a whole stream of bankers walk up to the podium and declare how vital this project was to the community and how it would transform our city.
Now, when the rubber meets the road, these guys aren’t willing to put their money where their mouth is. Shame on each and every one of you for using your influence to peddle this project past the taxpayers while refusing to support it financially…
Update: What’s Going Down(town) has more detail as well
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[...] press: Where Have All The Back-Slapping Bankers Gone? (Fort Wayne Politics) Chris Schoen: “We will finance this project.” (Around Fort Wayne) City [...]
Since I’m not privy to the negotiations of Barry Real Estate, this post involves some speculation. I welcome corrections from those who know more.
According to the papers, Schoen and the City referred to the condo/retail as a 20.3 million project. Schoen, per agreement with the City, must put in 14.5 million in combined hard and soft construction costs. I assume the additional 6 million or so comes from land, demolition, site prep, perhaps the 1 million or so in promised street widening and improvements, and ???. These latter items don’t have to be financed because they have already been paid for (or will be paid for) by the City, with the improved land and the benefits and value therof already transferred to Barry Real Estate.
If you already own free and clear an improved lot upon which you want to build a home, you don’t have to finance the lot, unless you want to pull cash out of the equity in the lot. Instead that equity can be used as collateral to help finance the home.
Schoen said they were trying to obtain 75% financing of a 20.3 million project, and now are looking to obtain 50% financing. Were they trying to borrow 15 million against BRE’s obligation to invest 14.5 million? Already trying to pull 500K out of the project for the Hardball investors?
This is before we factor in the $5 million in negotiable, transferrable Indiana State tax credits that the City has given to BRE to do this poject. My recollection is that those credits sell at about a 5% discount from face value, meaning they can readil be turned into 4.5 million plus in cash. It seems that BRE may have been seeking financing that allows it to pocket over $5 million in profit before construction even begins, while leaving all risk to the lender.
Even if I assume that the 20.3 million represents the amount that BRE intends to spend in construction costs (and that assumption is contrary to every public statement about the project and the Retail/Condo Agreement), and that the value of the improved land given to BRE is separate, the land and tax credits given to BRE by the City has a value far in excess of 25% of the assumed 20.3 million constuction costs, for which he was seeking 75% financing.
It seems to me that the project has not been delayed because BRE has had difficulty obtaining financing. It has been delayed because BRE has had difficulty obtaining financing on terms that will allow Hardball Capital Investors to immediately recieve 5 million or more in profit from their dealings with the City while insulating BRE and HBC from any risk of loss.
In other words, it sounds like Schoen was trying to get 15 million in a non-recourse loan, using only the City donated lands as collateral,. leaving all of the tax credits and the loan proceeds in excess of the required construction costs as immediate ptofit.
Can someone reach a different conclusion?
Mark,
I’m not sure about the exact numbers but I think you’re on to something here. I was told that Barry Real Estate has been trying to finance the project using future proceeds as collateral.
That strikes me as ridiculous even in a good market but perhaps that’s standard operating procedure for large developers. However, it’s clear in this market that such a financing plan probably won’t fly…
No, you are correct, future proceeds from condo sales and rents from retail would finance repayment of the loan. My point is they are trying to borrow more than they need, putting the excess in their pockets immediately and they are using curious numbers to justify delay.
And in the event of default, the bank has land and building as security. If the land is already yours, you don’t include its value in the amount being financed unless you are trying to pull the equity out now, to be repaid later in the manner you described.
Aside from the bankers, where are all the people who insisted that the condos would sell so quickly? Apparently, everybody thought everybody else would buy one (well, with the exception of five people). If you can’t sell downtown condos when gas is $4.00 a gallon, that’s a bad sign.
The initial information given was that BRE would be investing 14.5 million in the retail/condo portion of the project. However, at some point in the last 6 months or so, they increased the amount of their investment to 20.3 million. I need to check my notes, but it seems like they are going with some higher end finishes, materials and construction options to make the building even more upscale. As I said, I do need to check my notes. Sorry, but I don’t think there’s any hidden conspiracy here.
As far as BRE having problems getting financing, what I heard last night was that several negotiations have been underway, but come to nothing. Specifics weren’t shared, leaving the door open to speculation. These negotiations coming to nothing could be for a variety of reasons, one of which is the possiblity banks aren’t willing to loan on the project. Another possible reason is that BRE dropped the ball. Perhaps they thought the financing would be a snap, didn’t put a lot of time or effort into until now when the economy has gone south. Now, they need it, the climate has changed and they’re against a wall. Again, all this is speculation.
I think the important thing here is that Mr. Schoen did appear before Council and was forthright about their situation. He’s now publicly stated that they are committed - and that if bank financing doesn’t happen, he’s not sure how they will fund it. BUT, he reitereated BRE’s committment to the project.
I know the history we in Fort Wayne have with developers - it’s not a sparkling one. However, the community still needs to be behind the project so that if it doesn’t materialize, it’s not because of us. I think with the way things are, we cannot afford to have it be unsuccessful just so we can say, “I told you so!”
Steve - I was there last night also. For the life of me, I don’t know how you saw Chris Schoen’s presentation as positive - I read it as getting the Fort Wayne Common Council ready for a real let down in the near future!
I predicted that this boondoggle would be no different than recent attempts by our city “planners ??” to get into the business of funding financially marginal projects with the justification that without their intervention, these would not happen. Well, again, savy business-minded people are saying no - it cannot be blamed on the “Fort Wayne mentality” as you are trying to do. No, it’s just impossible to wring “profits” out before you put anything into a project like this - and it sure looks like that’s what our “gracious ???” partners ???” from Atlanta were trying to do. Don’t kid yourself, WE WILL BE CHECKING EVERY ITEM THAT HARDBALL “contributes ??” to the new stadium to see if they are taking credit at “cost ??” against their $5 million “gift ???” to the $30K. And, is their contribution for the extra suites also to be “contributed ??” in-kind???
How many items on the list that was furnished detailing the “required equipment” already exist at Memorial Stadium? And will these be used at the new - or will everything at Memorial be discarded?? Questioning Allen County Taxpayers want to know.
I remember Councilman Schmidt getting “slammed” by the Mayor’s office when he wanted to verify that BRE had the financial ability to consumate the deal…
Anyone else remember that?
Mike Sylvester
Having been involved in some commercial developments I can attest to the fact that local bankers want something like 200% collateral to make such loans at attractive rates.Typical collateral would be a mortgage on the property(usually enhanced by a signed 10 year lease with a sound tenant or committments to purchase)a personal guarantee by the developer,and personal guarantees by any partners in the project(all would be required to submit financial statements). Since these developers would not even show City Council their net worth statements I doubt that they are willing to make personal guarantees. In today’s financial situation and falling property values no banker with any sense would give attractive rates based on a mortgage and “future revenues ” without Corporate or personal guarantees.No doubt our City experts knew these issues going in but since they were instructed to “close the deal at any cost” we taxpayers will be left holding the bag eventually.
Mike,
If it was the meeting I’m thinking of (around Sept. 16), it was Councilman Pape that basically told Schmidt to shut up!
All I can say is - Thank God for at-large members or else I wouldn’t have any representation.
I am not sure we have seen the other shoe drop yet. What amazed me is there is still currently a waiting list that they are going through but they are saying who ever comes forth right now (not even being on the list) will be served. It sure sounded like double talk to me.
Also their comments about people coming up and wanting to buy two or three units. There are your future apartments people!
Like many of us said way back when these condos would not sell in Fort Wayne. The YOUNG WANT-A-BE LEADERS said the CONDOS would sell and that is what every young person was looking for. Dahhhh what happened to all these people?
My guess is the first season of baseball will come and go at Harrison Square and the Condo building will not be complete. Don’t be surprised if you see a redesign coming that cuts an entire floor off the condo project. Also the quality of the Condos will be reduced to lower the cost.
Oh, what happened to the naming rights that was only weeks away from being announced months and months ago.
Let us build Maplecrest Ext and add it to the tax bill of taxpayers.
The same thing will happen to the condos that happened to the hotel - there will eventually be a downgrade.
John:
“For the life of me, I don’t know how you saw Chris Schoen’s presentation as positive…”
I saw it as positive because while my attitude towards the project has been guarded to skeptical at times, I try to be positive about it overall. It’s my right to view a presentation as positive just as your right is to look negatively at all things John B. Kalb knows won’t succeed.
No one has any doubt at all that you will be going over every single invoice and figure to make sure everything is done correctly. In fact, the world would truly stop spinning if you didn’t.
You wrote: “Well, again, savy business-minded people are saying no - it cannot be blamed on the ‘Fort Wayne mentality’ as you are trying to do.” I never used the phrase ‘Fort Wayne mentality’, that’s your phrase not mine. Read what I wrote again. If it fails, it needs to fail because it wasn’t a good project to begin with, not because of community lip service or community sabotage. We don’t want to be known as a city that shoots itself in the foot all the time.
I don’t see any way this project could fail due to community sabotage. If it does fail it will be because our politicians were shortsighted in exploring the risk associated with such a large undertaking…
…which is my point. If it’s truly a boondoggle, it will fail because of it’s own lack of merits or make-up. This is a large undertaking and one of the struggles I have with it is lack of diversity in the condo and retail choices. If it fails, it will be because of that.
Here’s the other thing. Developers that could be coming to Fort Wayne are looking at this project and how it’s received by the public. You’re right in that critiscim of this project may not affect it, but, how does it affect future ones? Hopefully future projects won’t have to be so dependent on public funding, at least to this degree, but our collective attitudes might play in the decision to locate here or not.
I’m not buying it Stephen. Developers are going to go where there’s money to be made. Any developer looking at this project wouldn’t view the criticism to mean we don’t want anything - if there’s a buck to be made then developers will be there. The problem we have now, IMO, is that developers expect handouts from local government and they aren’t willing to move on anything without them.
But the truth might be that this town is sick of public-private partnerships and if our discontent towards HS discourages that type of development then that may not be all bad - at least from the public’s perspective…
I think you head it right on the head, Jeff. This town is sick of public/private projects. I wouldn’t be surprised at all if HS is the last project of this type we see for a very long time. It won’t be totally for reasons of public discontent, but also due in part to the property tax/budget situation.