Any finance folks care to weigh in about investors & new development?
Started by tina24hour
over 17 years ago
Posts: 720
Member since: Jun 2008
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I have a question regarding what appears to be a catch-22 for developers. If you have a new development with 100 units, and you have 45 individual buyers in contract, chances are those buyers can't close. Even if you have a TCO and everything is ready to go, unless the buyers are all-cash, they can't get financing unless the total number of units in contract is at 50 (or more likely, 70). Sure,... [more]
I have a question regarding what appears to be a catch-22 for developers. If you have a new development with 100 units, and you have 45 individual buyers in contract, chances are those buyers can't close. Even if you have a TCO and everything is ready to go, unless the buyers are all-cash, they can't get financing unless the total number of units in contract is at 50 (or more likely, 70). Sure, you can keep their deposits if they didn't have a financing contingency, but then you have to market the units again, and those folks lose their down payments. Not good for anyone, I'd say.
But what if you find an investor who is willing to take 25 units off your hands at a discount? Brings you up to 70% sold, right? Wrong. Because it's an investor, those units don't count against the ownership quotas. Yes, they will be used as rental units, but the buyer/investor is still responsible for their common charges, not the sponsor. And all 45 of the other buyers may be planning on renting out their units from day one as well.
At the risk of sounding naive I ask, why do we make the distinction?
Tina
(Brooklyn broker)
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Response by columbiacounty
over 17 years ago
Posts: 12708
Member since: Jan 2009
fear of concentration + thought that investors are more likely to walk away than individual owners. bottom line is that the world has changed in ways that were unthinkable a few years ago; this is just one more manifestation. talk to people who live in michigan, ohio or indiana about the impact on them from the automakers. we would benefit from being a little less nycentric.
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Response by stevejhx
over 17 years ago
Posts: 12656
Member since: Feb 2008
Those regulations are for conforming loans (including jumbo), but not for nonconforming loans (including jumbo). Nonetheless, most banks have adopted them.
There is a further restriction, that no single investor or investor group can own more than 10% of the units. Therefore, if an investor takes 25 units out of 100, it will disqualify borrowers from Freddie and Fannie loans.
It also has the effect of nullifying "noneviction" plans under NYS law.
The reason is to limit risk.
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Response by stevejhx
over 17 years ago
Posts: 12656
Member since: Feb 2008
It limits risk by preventing nonpayment by a single entity from materially affecting the building's finances. If a condominium owner defaults, his common charges are distributed proportionally among the other unit owners. When the amount is 10%, it gets pricey.
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Response by nyc10022
over 17 years ago
Posts: 9868
Member since: Aug 2008
This is also so develops don't help each other out buy "buying" apartments as a temporary measure. You buy 10 of mine, I buy 10 of yours, we fix our problems.
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Response by tina24hour
over 17 years ago
Posts: 720
Member since: Jun 2008
Does anyone think there might be a remedy to this situation, though? If we are trending toward a private/public partnership with regards to other bailouts, might there not be some leeway here?
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Response by columbiacounty
over 17 years ago
Posts: 12708
Member since: Jan 2009
no. this is exactly how we got into this mess in the first place. yeah, these rules are boring and seemingly contradictory. lets not spread the losses any further than they have already gone. the sooner we get through this (which means feel the pain) the better for most of us.
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Response by columbiacounty
over 17 years ago
Posts: 12708
Member since: Jan 2009
damn...this is where you broker people get yourself into trouble.
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Response by tina24hour
over 17 years ago
Posts: 720
Member since: Jun 2008
No, this is why I'm asking.
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Response by columbiacounty
over 17 years ago
Posts: 12708
Member since: Jan 2009
ok...sorry...it was the "some leeway here." comment that got me. in a perfect world, leeway works. we are not in anything close to a perfect world. unfortunately, due to the actions of a few, we need more rules and less leeway.
fear of concentration + thought that investors are more likely to walk away than individual owners. bottom line is that the world has changed in ways that were unthinkable a few years ago; this is just one more manifestation. talk to people who live in michigan, ohio or indiana about the impact on them from the automakers. we would benefit from being a little less nycentric.
Those regulations are for conforming loans (including jumbo), but not for nonconforming loans (including jumbo). Nonetheless, most banks have adopted them.
There is a further restriction, that no single investor or investor group can own more than 10% of the units. Therefore, if an investor takes 25 units out of 100, it will disqualify borrowers from Freddie and Fannie loans.
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0834.pdf
It also has the effect of nullifying "noneviction" plans under NYS law.
The reason is to limit risk.
It limits risk by preventing nonpayment by a single entity from materially affecting the building's finances. If a condominium owner defaults, his common charges are distributed proportionally among the other unit owners. When the amount is 10%, it gets pricey.
This is also so develops don't help each other out buy "buying" apartments as a temporary measure. You buy 10 of mine, I buy 10 of yours, we fix our problems.
Does anyone think there might be a remedy to this situation, though? If we are trending toward a private/public partnership with regards to other bailouts, might there not be some leeway here?
no. this is exactly how we got into this mess in the first place. yeah, these rules are boring and seemingly contradictory. lets not spread the losses any further than they have already gone. the sooner we get through this (which means feel the pain) the better for most of us.
damn...this is where you broker people get yourself into trouble.
No, this is why I'm asking.
ok...sorry...it was the "some leeway here." comment that got me. in a perfect world, leeway works. we are not in anything close to a perfect world. unfortunately, due to the actions of a few, we need more rules and less leeway.