Brighton Development has decided to bag plans for a condo project on the riverfront, but the city is planning to put the block back on the market to seek out other redevelopment opportunities.
The Portland project at South 2nd Street and Portland Avenue was proposed to be five stories and 44 units, one of the smallest Downtown condo projects on the market.
Peggy Lucas, co-founder of Brighton Development, said that although they sold three units worth more than $1.5 million, instability in the lending market led them to suspend plans. A Sept. 26 letter distributed to “Mill District Neighbor[s]” cited a national credit crisis.
“We also think it neither fair to the neighborhood nor good business practice for us to continue to simply hold the empty parcel of land to wait for market conditions to improve,” stated the letter.
A second Brighton project now off the market is Washington Live-Work, a project with plans that never solidified. The site at the corner of Portland and Washington was originally slated to become 28 market-rate condos, but the developer decided last year to devote some or all of the space to commercial tenants.
The city purchased both sites when it acquired the Milwaukee Depot in 1992. It bought the Depot and seven nearby blocks for $2 million to preserve the area’s historic significance and restore its contribution to the community.
Chuck Lutz, deputy director of Community Planning and Economic Development, said the city plans to buy the Washington Live-Work site back from Brighton. Brighton will allow its purchase option on the Portland site to lapse, and Lutz said the city would likely combine the two sites and request proposals for redevelopment at some point.
Not all developers have a bleak outlook on the market, however.
Brian Gorecki, a project manager with Sherman Associates who is working on the Zenith project nearby in the Mills District, said he is tired of stories like this one that provide negative news about condos.
“Good condo deals never get any press,” Gorecki said, adding that the Zenith project is doing very well. “People have to be a lot smarter and work a lot harder than they have in the past, but we have been pretty darn successful down here. … Nobody is discounting units in the Mills District.”
The Portland site could eventually become a positive news story for developers. For one thing, the site will not be a dirt pile anymore. Lucas said the city will put down sod on the block.
In addition, Brighton Development has not completely closed the door on the Portland. Brighton might be a contender for the property when the city works to sell it again, according to Lucas.
“We still like it,” Lucas said of the project. She said some buyers say they are still holding out for a reincarnation of the Portland project, rather than looking elsewhere for a Downtown condo.
“It seemed like a good thing to just stop, let the whole thing settle, and hopefully come back with the same product,” she said.
Brighton Development’s presale threshold required to secure a construction loan had climbed from 35 percent to 50 percent, Lucas said.
“Until they sort out this credit crunch, it’s going to be hard to figure out where the goal posts are,” Lucas said, referring to the number of required presales. “It’s really changing with the new credit problems. All the lenders are getting really spooky.”
She said that because some buyers are walking away from their purchase agreements rather than closing, lenders are more wary and are looking for higher presale requirements.
“A purchase agreement isn’t what it used to be,” Lucas said.
She said construction costs have also risen somewhat, but the developer was already prepared for that cost increase.
Sachin Darji, an adjunct associate professor who teaches real estate courses at the University of Minnesota Law School, said the presale standard required before developers can break ground is typically 50 percent. The standard drifted down to 35 percent when the market was hot, he said, and the standard became stricter again as the market grew tighter. Some lenders can require as much as 65 percent in presales, Darji said.
He said a lender could change those standards in a loan agreement through “lender insecurity” contingencies. Other factors that could tweak financing requirements might relate to advances on a loan and whether a borrower satisfied all requirements of a loan agreement, Darji said.