12 November 2009 ?

Bank of America seems to have its hands on many troubled Chicago real estate developments, including Block 37 and the Chicago Spire. Most recently, the developer of the Spire, Shelbourne Development Group, has accused the bank of using a faulty method for calculating interest on their loans. It is fairly standard practice to use a 360 day, rather than a 365 day, year to calculate interest in commercial loans. Shelbourne, however, is accusing the lender of ?intentionally and deceptively? using ?contradictory or ambiguous language? in the loan agreement. Construction of the building has been stalled at the foundation level, and completion of the project will depend on resolution of these financial issues. Shelbourne is currently facing eviction from its $10 million sales center in the NBC Tower, yet another indicator of the project’s difficulties.

11 November 2009 ? The Three Arts Building located at 1300 N. Dearborn may be turned into what some are calling the Midwest?s largest columbarium.  Don?t? have a dictionary handy? This columbarium will have enough space to store the ashes of up to 15,000 dearly departed residents. Built in the early 1900?s, and designated a Chicago landmark in 1981, this four story building was designed by architect Jim Holabird and features a Byzantine-style entrance, beautiful ornate mosaics and a central courtyard. Back in the day, it served as a residence for young woman studying music, drama and painting. For between $1,000 and $10,000, the dearly departed can spend eternity in Chicago?s most expensive neighborhood. That may seem like a lot of money for a cubby hole, but compared to Bill Wrigley Jr?s 13,200 square foot penthouse around the corner at 65 E. Goethe, listed for $14 million, maybe it?s not so bad after all! Creepy? Yeah! Inappropriate? Maybe. But, don?t get too worked up just yet. Although this type of use is permitted by zoning, any changes to a Landmark building must be approved by the city. So there is a chance these uber-quiet neighbors may spend eternity elsewhere.

Boarded Up Buildings Are the Target of HUD's Program

The City of Chicago Department of Community Development put on an informational meeting last Friday for residential developers to learn more about the city’s strategy to acquire and rehab vacant and foreclosed properties to get them back into productive use.

Here is a little background:  In July, Congress approved a new Housing and Urban Development (HUD) initiative entitled the Neighborhood Stabilization Program or NSP for short.  Through NSP, states and cities will receive $3.92 billion to acquire and rehab vacant, foreclosed properties. The city submitted a plan to HUD in late November, 2008 outlining how it intended to use these funds and received preliminary approval on its plan in January, 2009.  The City of Chicago’s NSP allocation amount is $55.2 million. This allocation was based on the number and percentage of:

• completed foreclosures
• subprime mortgages
• defaults and delinquencies

Eligible Uses of NSP Funds in Chicago

There are, of course, regulations that will go along with this program. Among them are the eligible uses. NSP funds can be used to:

• Establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties.
• Purchase and rehabilitate homes and residential properties that have been abandoned or foreclosed.
• Establish land banks for foreclosed homes.
• Demolish blighted structures.
• Redevelop demolished or vacant properties.

Requirements for NSP Funds in Chicago

HUD is requiring that NSP funds be used in the following ways:

• The funds have to serve households at or below 120% area median income (AMI), with 25% of the funds targeted at households at or below 50% AMI.
• The city must commit (spend) the entire $55.2 million within 18-months of signing the grant agreement.
• There must be restrictions in place to avoid over-improvements.
• Single-family homes cannot be sold at a profit, but at a reasonable developer fee is an eligible cost.

Each NSP grantee receiving an allocation of NSP funds must submit an action plan amendment describing the intended use of the funds and all funds must be used within the statutory deadline of 18 months from receipt of the funds.

NSP-Eligible Chicago Communities

The NSP has identified 25 Chicago communities in the greatest need of the HUD application:

1. Auburn Gresham
2. Austin
3. Burnside
4. Chatham
5. Chicago Lawn
6. East Garfield Park
7. Englewood
8. Fuller Park
9. Grand Boulevard
10. Greater Grant Crossing
11. Humbolt Park
12. New City
13. North Lawndale
14. Oakland
15. Pulman
16. Riverdale
17. Roseland
18. South Chicago
19. South Deering
20. South Shore
21. Washington Park
22. West Englewood
23. West Garfield Park
24. West Pullman
25. Woodlawn

Who Is in Charge of Chicago’s NSP Funds

Katie Ludwig with the Chicago Department of Community Development and Bill Goldsmith and Will Towns with Mercy Portfolio Services are working closely together on this project.  Their strategy is to be responsible for negotiating discounted property purchases with the lending institutions that hold those properties. (Properties owned by lending institutions are called  for short.) This agency will hold and maintain the property for the short term and coordinate and oversee a broad network of pre-approved development partners on property disposition, which means sale to owner-occupants, lease-purchases, rentals, or demolition.

They have put out a call to action to the developers around the city.  There will be an application process to become an NSP approved developer and the extent of participation will be based on criteria such as:

• Previous development experience
• Financial feasibility
• Property management capacity (for rentals)

The city and CNSC will help to identify eligible buyers and facilitate connections to end-financing.  They will market support through a citywide campaign with home-ownership counseling.  This counseling will include an eight hour required course which will be coordinated with a range of housing counseling agencies.

My Reaction to Chicago’s NSP Program?Not Good

After attending the meeting I walked away thinking…this is not as organized as I would like to see.  I am worried that due to the 18-month guideline, that the city will spend money needlessly in order to ensure the ability to obtain more funds from HUD in the future. 

Most of the developers that were in attendance, not surprisingly, are interested in making a profit for their time and effort.  This is a neighborhood re-investment program.  It is not set up for large profitability.  There will be cap on the developer fee. When asked if the city will be working closely with the neighborhood aldermen and the Department of Zoning the representatives really did not have an answer casting doubt on how easily improvements will be to make in properties. The idea behind the program is honestly a great idea. But the bureaucratic red tape that goes along with this idea is going to make it a disaster. 

Simple supply and demand are having a strong impact in the South Loop.

A quick search in MRED for condos in the South Loop (I defined it as Congress to 18th, Dan Ryan to Lake Michigan) shows a huge number of condos on the market. If we look under the new, stricter maximum HUD loan of $380,000 we find:

• 391 active with an average price of $289,449, median price of $299,000.
• 144 pending* averaging $305,913 with a median price of $312,900.

For jumbo loans (over $380,ooo), the numbers are:

• 414 active The top price being asked is $3.2 million; the average is skewed by some very high end properties at $695,139; the median is a much more telling number at $539,500.
• 186 pending* The top pending price is $2.5 million with an average of $695,139 and a median of $539,500

Clouds Over South Michigan

I was surprised at the number of pending sales. (Pending is defined as when all contingencies?such as obtaining financing and inspecting the property?to the purchase have been met and there is nothing in the way of the closing). However, as many of us have seen, having a contingency-free deal no longer means the transaction will close. More and more often the deals don’t close due to financing “disappearing” or the buyers just not willing to go through with the deal and willing to lose their earnest money.

Despite all of these numbers, Appraisal Research Counselors is reporting that developers are planning to complete 2,147 more condos in the South Loop, which is 66% MORE than were completed in 2008.

But where is all of this leading us? Well, Crain’s Chicago Business is reporting that Miami developer, Lennar Corp., has sold only 43% of the condos in Library Tower, a 184-unit project at 520 S. State St.. This means that Lennar will likely not be able to pay off their construction loan that is due Jan. 11. The ramifications are huge in this type of situation, especially for those who have closed on a unit in the building and had planned to live in it.

So, where can we see things going in the South Loop? It’s pretty clear that we’re going to see a lot of bankruptcies, longer marketing times, and most importantly, much lower prices.

*Be aware that, amazingly and annoyingly, real estate agents very often do not understand what pending means and label their deals incorrectly as pending when they should be contingent.

Rendering of Proposed Development Near Halsted & North

The Sun Times is reporting that the proposed retail and housing development slated to go on the land where the New City YMCA used to stand at 1515 N. Halsted is, amazingly, still moving forward. The fact that the development, like so many others like it, has not been shelved is news enough. I found a couple of other bits of the article interesting.

J. Michael Drew, principal of Structured Development LLC is planning to start construction on the half-million square feet of retail space by mid-2009, with one major change: there will not be any condos in the project. Originally the plans called for 480 condos to be sold above and along the enormous retail space. The new plans are scaled back considerably, opting for 280 residential rental units. This new configuration has been enough to keep Commonfund Realty Inc. involved. With Structured Development and Commonfund Realty providing 40% of the equity, banks are willing to stay involved.

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The most amazing thing I found in the article is a quote from Drew, “It helps that the stores already in that neighborhood see retail sales at or near the top of their national chains. It has become the prime shopping area of the city, second to Michigan Avenue.” With the number of store fronts looking closed or closing and the number of empty stores I’ve seen while driving past in that stretch of retail, it seems like a sad commentary that it is one of the hottest retail locations nationwide.

All of these plans are subject to approval of a zoning change request.
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