What can be done to complete this troubled condominium project?
On Dec. 5, 2007, a man, who was a husband and father, was killed in a garage collapse. The debris has long since been cleared, and the remainder of the garage has been torn down. Once the issues with the garage were settled, the real estate market had gone south. There was no demand for condominiums. Now, an empty skeleton sits against the Jacksonville skyline.
Such are the issues with the Berkman Plaza II Condominiums at 500 E. Bay St. Currently, there's an uncompleted tower instead of half a major Downtown housing complex. What can be done to complete this project and fill this vacant property?
According to a June 2012 Florida Times-Union article, 91 percent of 651 downtown residential units are occupied and 89 percent of 890 condos are sold. At the end of 2011, 3,266 people were living downtown. The 2012 numbers are still being compiled at this time, though Downtown Vision expects no significant change.
Donald Harris, Downtown Investment Authority chairman, said downtown residential properties are currently at 110 percent occupancy and now is the time to move forward with completing Berkman. He said the unfinished building is an eyesore and all the surrounding properties consider it a nuisance as it stands now. He said the city should move forward with all possible housing projects on the table to populate downtown as rapidly as possible.
A friend at The Peninsula Condos said only two units were available in the 37-story building as of Feb. 12. Downtown housing is certainly becoming popular. The unfinished Berkman property is supposed to add 206 units, yet it sits empty.
After the litigation involving the garage collapse was resolved, the developer apparently was unable to complete the development. This may have been due to the housing collapse of 2007-’08. This may also be due to an unwillingness of the parties involved to work together on a solution.
The main lien holder, according to a story on jacksonville.com in May 2011, is Wells Fargo Bank, which is owed $14.6 million. The bank won a lawsuit against developer David Berkman for breach of contract. Berkman had moved $23 million in liquid assets, including $15 million needed to back the loan from the collateral account, to a new corporation titled BTA Fund LLC.
Another lien holder mentioned in the article is Chote Construction, which is owed $12 million. An arbitration panel has said that $10 million can be applied as a lien on the property. In addition, another jacksonville.com story lists $2.1 million in requested liens from subcontractors. This brings the total losses to just under $27 million.
The article also states that the city of Jacksonville provided $9.3 million in incentive money to the project. It must be remembered that city incentives are not the same as handing the developer a check. The incentives are usually tax breaks amortized over a period of 10-30 years, depending on the incentive package. The exception was The Shipyards (but that's another story). The city should not “lose” $9.3 million due to Berkman II's problems.
As the lead lien holder, Wells Fargo should offer the other parties 50 cents on the dollar to buy out their portion of the liens and then be willing to take up to a 50 percent loss on its part of the lien. If the property is sold at auction, all of the parties including Wells Fargo will be lucky to receive a few pennies on the dollar.
If Wells Fargo agrees to this deal, the total losses it suffered on the loan and from paying a 50 percent settlement on the other lienholders' equity would be almost $21 million. This doesn't have to be a loss for the bank. There's an option that banks do not usually follow that should completely mitigate the loss. First, let's look at the property status.
The condominiums are just short of being topped out. A new garage would need to be built to provide parking. If 2.2 spaces are provided per unit, that would be 454 spaces needed. This assumes an average of one visitor for each 10 units during a given segment in time. The garage is the only major amenity needed.
Berkman I has tennis courts, a swimming pool and a marina. All of these amenities are within a couple hundred feet of Berkman II. It would be redundant to spend a few million dollars to build a second set of amenities. This would reduce the costs of completing the condo. These costs are actually fairly reasonable.
They should probably complete the development of the site. The bank could hire a commercial real estate developer for $2 million or less to manage the project, and bring in an architectural or engineering firm for about $2-$3 million more. Emporis lists the estimated construction costs as $36 million (according to the BLS inflation calculator, that would be just over $41 million in 2012). The project is about 30 percent complete, making completion cost about $29-$30 million.
Wells Fargo could prove itself to be a good community partner and hire a consultant for a few hundred thousand dollars to determine the exact cost of completing the project. They could also ask fellow lienholder Chote to provide the estimate. Even if project completion means a slight loss, the lienholders are better off than taking pennies on the dollar at auction or waiting until after The Shipyards is developed to sell at a better price.
Using the current listings in Berkman I, the average price is $266,000 per unit. The recovered amount should be about $55 million. Parking spaces could be sold for about $6 million. This assumes two spaces for $30,000 ($15,000 each). The condos would need to pay about 7 percent in sales costs and 2 percent in closing costs, lowering the total to just under $56 million. Wells Fargo would assume $21 million in losses and $34 million in costs for a total of $55 million and a net gain of $1 million after the units are sold. The loss from selling at auction for Wells Fargo would likely be at least $11 million.
The other possible incentive for new residents is that Wells Fargo could offer the mortgage below market rates. The LIBOR rates are still in the .25 percent range, give or take five basis points. The bank could offer mortgages at 3 percent and still make a profit. Offering low-interest mortgages on the building would encourage buyers who'd otherwise be reluctant.
Taking control of the distressed property and turning it around would be a way for Wells Fargo to show its commitment to support downtown redevelopment, plus mitigate its losses and the losses of the other Berkman II lien-holders. There's plenty of bargain-rate riverfront property available on The Shipyards site bordering Berkman II. The creditors would be lucky to get a quarter of their losses at auction.
Arranging a settlement and completing the project is the only solution that makes sense. Otherwise, we'll end up with an extension of vacant property for another 600 feet to the west.
Another winner from completing the project is the taxpayer of Jacksonville. The property is valued at $3.5 million, the building at $206,000, per the Duval County Property Appraiser’s Office. This would generate about $38,000 per year in taxes. If it were completed and sold as condos and parking spaces, the taxes would be $569,515 per year before incentives. The tax collection, minus homestead exemptions and incentives over 20 years, would be about $2.1 million, versus $760,000.
Fouraker previously worked for a law firm specializing in municipal finance and has worked in banking for the past 20 years.