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Presales assume new role

<i>It's not about buzz anymore as developers must sell to secure loans</i>

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Advance notice has long meant advance revenue for developers of high-end condos, a market niche where success is measured partially by the number of preconstruction sales.

In September 2005, for example, The Real Deal reported that an entire floor at 15 Central Park West had gone into contract before construction began.

Developers used presales to increase buzz on projects, and presales were favored by some buyers who followed the logic that unit prices would increase once there was a tangible building in progress.

Today, however, it’s less about buzz than necessity. Some developers — particularly those who have projects in the pipeline outside Manhattan’s most desirable neighborhoods — are doing preconstruction presales because if they don’t, banks won’t finance their construction loans.

According to developers and analysts, banks are reluctant to invest in some projects unless a developer can demonstrate a certain amount of buyer interest through signed contracts and deposits.

“No developer is going to tee up a whole project unless they have a bank lined up for it,” said Greg Belew, a co-founding partner of the development firm Fifth Square Partners. “Banks are saying they won’t give you a construction loan until you have a certain amount of presales.”

Belew’s Fifth Square Partners is developing an 88-unit project at 76 North 4th Street in Williamsburg called the Steelworks Lofts. The firm now relies on presales, and has yet to start construction on the condo, which is a conversion of an old warehouse.

“In our particular case, there was a tightening up of lenders’ standards from when we started discussing financing with banks,” said Belew, noting that Fifth Square was able to secure an acquisition loan for the Steelworks property, but that its lender is requiring presales for a construction loan.

While Belew would not say how many presales the bank was requiring in order to dole out the construction loan, he noted it’s “not a large number” of the total number of units slated for the project. Listings for the building show units ranging from $515,000 to north of $1 million.

The presales for Steelworks involve prospective buyers putting down deposits of 10 percent for the units. The money is held in escrow and, as with other presale arrangements, is returned to the contract holders if the condo doesn’t get built.

Belew said that Fifth Square intends to start construction on Steelworks this month using the firm’s own funds in advance of an anticipated construction loan. The firm is marketing the building via an off-site sales center.

Another developer, Muss Development, is also using presales. The firm is building Sky View Parc, a mixed-use project in Flushing, Queens that will grow to 1,100 units under its current plan. The first phase will feature 448 units spread out over three towers, the first of which has already topped out. Muss is now preselling the second tower, which is not yet under construction. Prices range from the high $300,000s to more than $2 million.

Jason Muss, a principal at Muss Development, said presales on the second tower were driven more by demand than lender requirements. He said sales on the development’s first tower moved briskly, and it made sense to the firm to commence sales on the second tower.

Muss said that the sales center for Sky View has spurred presales. The center contains a 14-foot model of the development and five 60-inch flat-screen televisions that showcase various aspects of the project, including an elevated park, an outdoor swimming pool and 800,000 square feet of
retail.

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“We’ve found the center really helps with presales because it gives people a real idea
of what this huge project is going to look like,” Muss said.

He said presales “make sense” for large-scale projects, and that the firm used them for its Oceana development on Brooklyn’s Brighton Beach, a 15-building, 865-unit gated community built in the late 1990s.

“With Oceana, people who bought presales got a better value than buyers who waited until we completed construction,” he said.

Luigi Rosabianca, founder of real estate law firm Rosabianca and Associates, echoed Muss’ assertion that presales were often attractive to buyers because “there’s
usually a reduction in price if you’re taking that leap of faith and just buying off an architect’s rendering.”

And when the city’s new residential development market was thriving, presales were also attractive to developers.

“First of all, a bird in the hand is worth two in the bush,” Rosabianca said. “But it also helped developers negotiate better loan rates, because they could prove to lenders that they didn’t have a volatile business plan.”

Rosabianca said his firm is seeing prospective buyers “shy away from presales,” primarily because of uncertainty about securing mortgages (see related story on page 58).

Be that as it may, developers may not have a choice.

According to Eric Anton, the executive managing director at real estate investment firm Eastern Consolidated, far more developers are finding themselves in situations where they can’t start construction until they secure a certain number of presales.

“In New York, you’re bleeding on the land value, because you’re not building,” he said. “But banks are scared, and they aren’t taking risks now. Many would actually prefer to finance rentals rather than speculate on condos.”

Anton mentioned one development on the drawing board where its lender is requiring a certain number of presales before construction can commence, but he is bound by a confidentiality agreement to not name it.

“What I’m seeing nowadays is that you can’t get banks to finance anything unless
you can prove a certain amount of buyer interest,” he said. “And you can forget about
anything that’s not in a prime location — 72nd Street and Fifth Avenue is one thing, but Williamsburg is a totally different story. Everyone’s running away from risk.”

Fernanda Forman, managing director of the property marketing group at Bond New York, also said that the location of a new development likely has significant bearing on whether or not — or to what extent — lenders are requiring a certain number of preconstruction presales.

Forman knows of one Queens condo project where the lender is requiring its developer to sell half the building before releasing a second round of construction financing.

“I would expect that [preconstruction presales] would be more likely to be required if a project is in a fringe neighborhood, or a developer doesn’t have a solid reputation,” she said.

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