What do you do when you’re seeking to acquire a fractured asset in a tight lending market coming out of the economic bust? Call Camilo Rodriguez and Joffre Colbert, head of lending at Federal Savings Bank of Chicago and Senior Broker at @Properties, respectively. Together, Rodriguez and Colbert shepherded the first condominium sale in Chicago since the 2008 economic downturn, turning a distressed, non-warrantable, fractured condominium into $60 million in sales and providing new homeowners with luxury living in a fast-growing market.
The Guild, built in 2009, was one of the many condo developments that succumbed to the economic downturn, having sold only 35 units before a default on a loan sank the project into foreclosure in 2011. Despite its desirable location and modern design, it took another year before an investor, California-based Oaktree Capital/Sabal Financial, acquired the asset from Fannie Mae, who assumed ownership of most of the building’s units when the developer defaulted. With a partially-sold, non-warrantable building on its books, operating in a market with not a single condo building sale since the downturn, Oaktree needed to partner with a lender and investment sales team that could quickly reinvigorate the property.
Oaktree’s problem wasn’t a new one. Non-warrantable buildings are a particularly finicky asset to financially manage and ultimately sell. A condominium building is normally viewed as “warrantable” by lending institutions when the following conditions are met:
If the property does not meet the above criteria, it is deemed “non-warrantable,” dramatically hurting its ability to obtain attractive financing for not only the developer itself, but individuals seeking to purchase units within the building. The Guild fell into this group: 81% of the units were owned by the developer and 59% of the units were being rented out by the individual condo owners.
“When we got the call from the asset manager to ask for help on The Guild, we immediately knew the challenge,” said Camilo Rodriguez, Senior Vice President at the Federal Savings Bank of Chicago. “It was extraordinarily difficult for a bank to close a loan for a non-warrantable project coming out of the downturn.”
“A traditional mortgage simply wasn’t on the table for prospective home-buyers,”
Rodriguez’s team facilitated what is referred to as “stack” solution to ramp up financing and sales in tandem to provide an affordable option to prospective buyers and satisfy Fannie Mae requirements for the loans being offered:
Step 1: Establish a “portfolio” loan, directly with The Federal Savings bank, with 10% down-payment terms and immediately begin offering condos for sale. “One of the big challenges initially was selling condos without a single comp to reference for over six years,” said Joffre Colbert with @properties, the lead broker spearheading sales for the remaining condos. “There simply wasn’t a market for condos until The Guild and no affordable financing options. There were lenders willing to do 20% + down with interests over 5%, which really turns off a large chunk of buyers. We had to think creatively, because we knew that The Guild was going to be the catalyst for the renaissance of the South Loop and really create comps for the rest of the market.”
Fannie Mae usually has a 33% pre-sale requirement for units for them to agree to a loan. The portfolio loan, a common financing vehicle for developers, allowed Rodriguez and Colbert to get traction on sales and ramp up to the 33% requirement.
Step 2: Introduce VA and FHA loan programs. Veterans Affairs (VA) and Federal Housing Administration (FHA) loan programs provided the team with the ability to offer low-cost financing options to a broader buyer pool and rapidly meet the unit-owner requirements for a standard Freddie/Fannie loan. VA/FHA loans ended up financing 20% of the units in the building.
Step 3: In lockstep with the portfolio and VA/FHA loan programs, Rodriguez worked closely with Fannie Mae to obtain a Project Exception Request Approval (PERS) such that the team could immediately facilitate selling units under standard Fannie Mae loans when they hit the 51%-unit mark required by the agency.
The result: Over a two-year period, Rodriguez, Colbert and their teams facilitated $60 million in gross condo sales and closed out every unit in the building. The Guild would become not only the very first building in Chicago to be Fannie/Freddie approved after the crash, but also the first condo-conversion project to hit the market since the bottom of the recession.
“We had the right team and had the proper tools at our disposal to make this deal work in a timely manner,” said Rodriguez. “We’re thrilled at the results and are excited to put the strategies to work again.”