Tuesday, May 05, 2009

A Funny Thing Happened on the Way to the Fourm
I recently read a quarterly update from a real estate syndicator. This sponsor was supposed to develop, build and lease garden style apartment complexes, and then sell the stabilized complex to institutional buyers. Well, this is not exactly what happened. The limited partnership, sold as a blind pool, has made four investments, three that were condo developments, of which two were side-by-side condo towers. Only one of the three investments was the garden style apartment (and this development has yet to secure construction financing) described in the memorandum. The sponsor had not previously developed condos. The quarterly summary had no financial data and did not specify the amount invested in each property. The building of condos rather than apartments is a huge change to the investment objectives and exposes investors to much more risk, in an already risky investment.

The first tower, which has been put in to bankruptcy, has sold a little over a quarter of its units in nearly two years of effort. The second tower is nearing completion and is being marketed as apartment rentals rather than as condos, and according to the investor letter, will likely be put into bankruptcy, too. The lender for the two condo towers is about to go into receivership, which will add another layer of complexity to this investment. (Why would anyone buy a condo in a building were the adjoining tower is offering rentals? How much will sale prices have to drop to offset the rental stigma? Will the new sales prices make any economic sense? There are multiple questions.)

The third condo development is now in the leasing stage as its condo sales failed. It can be argued that this investment has been hit by the unforeseen events of the credit crisis, housing bust and recession. It can also be argued that the original investment objective of building, leasing and selling of apartments was willfully disregarded in favor of the condo developments. Selling an apartment complex is only one sale and can be operated for income if a sale takes longer than anticipated. A condo is much different investment. Selling condos are multiple, individual sales that extend the investment time horizon. Condos are also governed by the condo association and require association dues. It is hard to end these associations. This is one investment that needs watching.

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