Divide and conquer

Carving condos into pieces is helping some NYC developers get Fannie Mae-backed mortgages -- a few floors at a time
By Candace Taylor | July 01, 2010 07:00AM

transforming from a human into a werewolf. In real estate, a different
kind of phasing is transforming new condos into more viable sales
operations.

Since the beginning of the downturn, new condos have faced a
paralyzing problem: Mortgage giant Fannie Mae has required them to sell
51 to 70 percent of their units before it would insure loans in their
projects. For a time, that made it nearly impossible for buyers to get
mortgages from traditional lenders in new condos, making it difficult
for developers to sell apartments.

But at long last, developers are finding a way out of that bind, in
the form of a special approval from Fannie Mae that allows them to
split their projects into different sections, or phases.

In buildings that apply and are approved, Fannie Mae will back
loans once a certain sales threshold is reached within each phase,
rather than a whole project. That means buyers in that phase can get
financing from the vast majority of banks, and close their units,
without waiting for the majority of the project to sell out.

Fannie Mae instituted this new system of slicing up buildings last
year, but more New York developers are now actually completing the
laborious approval process necessary to use it. And while phasing can’t
fix all the problems facing new developments, experts say it is a big
help.

“Phasing is a really important part of the process now, and we’re
seeing it in almost every single project,” said Orest Tomaselli, the
CEO of National Condo Advisors, a Westchester-based condo project
approval service that is working with a number of city developments.

For very large developments in particular, he added, “it is a game
changer, because there was no solution, and now there is a solution.”

Phasing falls under Fannie Mae’s Project Eligibility Review
Service (PERS) approval process. In early 2009, Fannie Mae raised its
presale requirements for new buildings to 70 percent. But for buildings
that complete the PERS approval requirements, the presale requirement
is only 51 percent. In New York, obtaining a PERS approval often means
the developer must make a number of time-consuming changes to the
condo’s budget, reserves and bylaws, Tomaselli explained.

As part of the PERS process, developers can elect to divide their
projects up into different phases — usually several floors at a time.
Then, once they hit a certain percentage of presales in each phase — a
figure predetermined by Fannie Mae — buyers can start closing with
Fannie-backed loans in that phase.

For example, the Edge condo in Williamsburg has 565 units in two
towers. Without PERS approval, nearly 400 units would need to be sold
before Fannie would back any loans in the building (even if the
developer releases only a few units for sale at a time). Because the
Edge received a phased PERS approval, however, the developers only have
to sell around 67 units in the first phase before buyers can get
Fannie-backed mortgages.

When the Edge went on sale in 2008, “the world was a different
place,” said Highlyann Krasnow, a principal at new development
marketing firm the Developers Group, which is handling sales at the
project. “There were no presale requirements.”

After the real estate crash, “all of a sudden you had to be at 51
percent for more banks to close a loan,” she said. For such a large
building, “that was very problematic.”

So when the sales team found out about PERS approval and the phasing option, it got started on the process right away.

“We knew that we had a large project and we had to find other options,” Krasnow said.

The project has now been divided into four sections; the first
includes the 133 units on the bottom nine floors of the south tower.
Once 51 percent of the units in that phase are sold (40 percent have
sold so far), Fannie will start backing loans, which means “we can open
it up to all different banks, and people can go to any lenders they
want,” Krasnow explained.

Stephen Kliegerman, executive director of development marketing at
Halstead Property, said this divide-and-conquer approach was
successfully employed at 80 Metropolitan, also in Williamsburg. There,
Fannie Mae said it would back loans in the first phase once 70 percent
of units in that phase had been sold.

“It helped us close loans faster than we would have been able to, had we not had the phasing,” Kliegerman said.

But this new approach isn’t a panacea. First of all, in the New
York area, Fannie Mae only backs conforming loans that are less than
$729,750. And PERS approval does nothing to help the first few buyers
in a building get mortgages; to do that, developers have to find
lenders with no presale requirements.

Fannie Mae also requires the phasing to be logical groups of units
— it can’t be a random assortment of apartments throughout the
building. That means that once a building is divided into phases, “you
really have focus on getting the units in that phase sold,” Kliegerman
said.

“Let’s say it was floors two through four — you’ve really got to
focus on floors two to four,” he said. “But maybe you have buyers who
are coming and asking for something on the seventh floor. You don’t
want to disappoint them, but you don’t want to waste an opportunity to
fill the phase. So it’s a little bit of a double-edged sword.”

He said developers usually solve this problem by grouping the units
into phases in the order that they are likely to be finished. For
example, Tomaselli said one of his clients, 2280 Frederick Douglass
Boulevard in Harlem, put all of the affordable units into the first
phase, assuming they would sell first.

Krasnow said most large buildings get different certificates of
occupancy for different sections of the building — something the Edge
did.

Still, she said, the Edge last month cut the prices on the
remaining 90 units in the first phase “so we could do a push and get to
the Fannie Mae approval on that phase.”

Another problem with phasing, experts said, is that the PERS approval process is not easy.

Krasnow said the Edge got the green light in December, but the
process took the better part of a year. Most developments in the city,
she said, are still in the process of applying for their phasing
approval.

It’s not free, either. Fannie Mae charges $1,200 for the first
phase, plus an additional $30 per unit. For each subsequent phase, it’s
$600, plus $30 per unit. Most developers also pay expeditors or
consultants to help guide them through the process.

Nonetheless, phasing is quickly becoming the norm for large projects. “In most cases, it makes sense to do it,” Tomaselli said.