Century Plaza Condo Controversy

I recently received an e-mail from an urban living fan who wanted to let me know that she heard “from a reliable source” that the construction note for Century Plaza had sold or was about to sell to an investor for $27M (this is unverified).  I responded that if that was the case the number sounded very very high as other bids that had been seriously considered by the lender were in the $11 – 13M range.  I GUESSED that if someone was willing to pay $27M that it might be the original investor (plus I had heard that he and some investors/partners had made a bid previously for similar numbers – again unverified).

The person who had sent me the e-mail was outraged to think that the original investor would be able to buy the note at a discount, roughly one third of the original construction loan amount.  I don’t quite agree.  I do agree that it seems odd or perhaps even a little shady that a developer can go into receivership and then buy the note at 39 cents on the dollar if no one else will buy the note then what’s the big deal?  If someone is willing to pay over two times as much for the note as anyone else, shouldn’t the bank take that money and run?  And IF the new note holder can turn the high rise condo building around into a viable project then the entire real estate market wins, even the folks who paid for and closed originally (well they don’t win but they’ll be better off than they would have been).  Think about it, if you paid $400 per square foot for your condo and the developer goes under then your investment is at serious risk.  If someone comes along and buys the note for 15 cents on the dollar then that new owner can sell the condos CHEAP and still make a ton of dough, leaving you with an asset worth maybe $130,000.  If instead an investor pays 39 cents on the dollar for the note and can still sell the condos for a profit then maybe your place is worth $260,000; still a far cry from $400k but certainly better than the first alternative.

Frankly, I think it will be very hard for someone to pay $27M for the construction loan and make the condo project a success.  Afterall, IF the market value of high rise condos are rougly half of what they were during the boom then that doesn’t leave much room for error (or a stagnant market or unforseen problems etc…) .  But then again, who knows?!  I hope that I’m wrong and that Century Plaza turns out to be an enormous success.  I have heard that sometimes the first investor buying a construction note fails and then a second investor will come along and pick up the pieces for a much lower price and ultimately turn the condo project into a success.   We will see……