In the article two of my competitors mentioned that the best option for the unsold units was to rent them.  This led me to wonder if renting them was even an option.

My mom use to say, “if you don’t know the answer to something… look it up” so I started digging in to answer the question.  Little did I know just how challenging this would be.

First I went to the “Condominium Declaration for The Summit at Copper Square, a Condominium”, otherwise known as the Condo Dec.  Per Answers.com, “The recorded instrument that is sometimes called a Declaration of Condominium is the legal document that actually creates a condominium development under relevant state law.”  It further states that, “In some states the Declaration (decs) includes the Covenants, Conditions, Restrictions and Rules (CC&Rs), the By-laws and other amendments forming the basis for the association’s governing documents. The association’s board of directors uses these governing documents to conduct the business of the association, including collecting assessments from owners and paying bills for services to assets owned in common.”

Ok, so you can see that the Condo Dec not only legally establishes a condominium development but also outlines the rules and rights under which the owners of individual condos live.  This is where the Home Owner Association (HOA) rights and rules are spelled out.

Section 4.16 of the Condo Dec for Summit at Copper Square is entitled “Leasing Restrictions.”  It clearly states, “No more than twenty percent (20%) of the Units may be leased at any one time.  No Unit shall be leased by a Unit Owner, or occupied by an Occupant, for hotel or transient purposes or for an initial term of less than one (1) year.  No portion of a Unit which is less than the entire Unit shall be leased.”  Ok, so per the HOA rules which govern the condominiums, no more than 20% of the units can be rented out at any one time and no nightly or short term leases for less than a one year period are allowed.

BUT, if you keep reading to the very last line of the section you’ll see, “The provisions of this Section shall not (emphasis added) apply to the leasing of a Unit by the Declarant (emphasis added) or the Association.”  Ah, maybe the owner of the 75 condos does have the right to rent them out, assuming that that entity would be the “Declarant” or the “Association”.

So who or what is a Declarant?

The answer to that is on the first page of the Condo Dec.  There it reads, “This Condominium Declaration for The Summit at Copper Square, a condominium, is made as of this 28th day of June, 2005, by The Summit at Copper Square, L.L.C., an Illinois limited liability company (the “Declarant”).”

So, the original developer set up a legal entity called The Summit at Copper Square, LLC as the Declarant and it had the right to rent out more than 20% of the condos and to do so nightly (like a hotel) or for other periods shorter than a year.  Since the developer is now gone and Stearns Bank took the condos over in foreclosure does this mean that Stearns Bank can rent out over 20% of the condos etc?

I found a great document on the web by Carol Jane Brown which helped me a lot.  What I got from the document is that if a lender is simply foreclosing on a condo building then the lender is typically not liable for things that the developer did or did not do unless that lender begins acting like a developer (building units etc…) and exercising declarant rights that were originally reserved for the developer or its affiliates.  Brown wrote, “[a] lender that succeeds to all (emphasis added) special declarant rights is exposed to a broad range of potential liability. Essentially, the lender becomes liable to unit owners for everything except the developer’s misrepresentations, breaches of warranty, breaches of fiduciary duty, and obligations resulting from the developer’s acts after the transfer” (p. 18).  Therefor a prudent lender will not succeed to all special declarant rights but instead will succeed only certain special declarant rights, and thereby limit its liability.  Brown said, “[i]f the complex is complete [a la Summit at Copper Square], the second alternative would be more attractive to the foreclosing lender. This alternative allows the lender to maintain models, sales offices, and signs on the common elements, and to advertise and sell individual units. The lender’s only potential liability would be for failure to issue a public offering statement. Because a lender can avoid liability by simply filing the required papers, the lender can eliminate virtually all liability. Thus, if the lender can sell the condominium units without additional construction, the lender should choose the second option” (p. 19).

Turns out the State of Arizona further specifies which “special declarant rights” can transfer to a foreclosing lender without the lender assuming any of the liabilities mentioned by Brown.

Per ARS 33-1202 paragraph 21, “Special declarant rights” means any right or combination of rights reserved by or granted to a declarant in the declaration to do any of the following:

(a) Construct improvements provided for in the declaration.

(b) Exercise any development right.

(c) Maintain sales offices, management offices, signs advertising the condominium, and models.

(d) Use easements through the common elements for the purpose of making improvements within the condominium or within real estate which may be added to the condominium.

(e) Appoint or remove any officer of the association or any board member during any period of declarant control.”

Per ARS 33-1202 paragraph 14, “Development rights” means any right or combination of rights reserved by or granted to a declarant in the declaration to do any of the following:

(a) Add real estate to a condominium.

(b) Create easements, units, common elements or limited common elements within a condominium.

(c) Subdivide units, convert units into common elements or convert common elements into units.

(d) Withdraw real estate from a condominium.

(e) Make the condominium part of a larger condominium or planned community.

(f) Amend the declaration during any period of declarant control, pursuant to section 33-1243, subsection E, to comply with applicable law or to correct any error or inconsistency in the declaration, if the amendment does not adversely affect the rights of any unit owner.

(g) Amend the declaration during any period of declarant control, pursuant to section 33-1243, subsection E, to comply with the rules or guidelines, in effect from time to time, of any governmental or quasi-governmental entity or federal corporation guaranteeing or insuring mortgage loans or governing transactions involving mortgage instruments.”

ARS 33-1244 addresses the transfer of special declarant rights.  In it it states that a lender like Stearns Bank will succeed to all the special declarant rights [defined in ARS 33-1202] and that successor “is subject to liability only for his own acts in the exercise of those special declarant rights.”  However, nowhere in ARS 33-1202 do I see anything about renting out more than 20% of the condominiums.  If I am correct in this, then Stearns Bank by assuming a special declarant right to lease out more than 20% of the condominiums may forfeit it’s protection provided by ARS 33-1244 and subject itself to undesired liabilities.  I really really doubt that they did this.

Let’s assume for a moment that Stearns Bank succeeded the special declarant right to rent out all the condos (again I’m not sure that is the case) the question is whether or not that right would transfer to a new buyer of the condos.

In all my reading I saw nothing that said that the special declarant rights of a foreclosing bank transfer to a subsequent buyer nor would it make sense.  Read Brown’s article.  In it she states that the laws protecting lenders of failed condo buildings were designed to protect those lenders.  The idea was that by offering reasonable protection to condo lenders of failed buildings future condo lending would be preserved.  The laws were not designed to protect bulk buyers of busted condos from the condo lender.  Whoever buys the 75 condos is a buyer of, not a lender to, the condo complex.  For that matter I wonder if the laws even protect Stearns Bank.  After all, Stearns Bank is not the original lender but rather bought the construction note with government help when the original lender went under.  Hmmm.

Finally, if a buyer of the 75 units is not the developer, not the construction lender, not the buyer of the construction loan note then is he or she just a buyer?  And if so, isn’t that buyer subject to the same HOA rules that every other buyer/owner at Summit at Copper Square is subject to?  If the 90 people who already own condos there are not allowed to rent out more than 18 condos then why would the buyer of 75 condos be allowed to rent them all out?  And let’s not forget, if an investor does buy all 75 condos and rents them all out, then it will be impossible for the current owners to sell their condos as no bank will loan money on a building with so many rentals.  I would expect the current owners to fight this for sure.

Gang, I spent way more time researching this issue than I ever imagined I would.  And shoot I have more questions now than when I started this quest.  What’s worse is I’m not an attorney and despite my best efforts I don’t know if anything I wrote makes sense or is correct.  I do however wholeheartedly believe that there is one convoluted situation at Summit at Copper Square.  Please, if any of you have a different view on all this, chime in.  I’m anxious to read your input and I’m really anxious to see how things work out at Summit at Copper Square.

The issues that we had been concerned with were rumors of electrical and air conditioning problems.  Now Fox News is reporting that residents are suffering with no heat in the building due to two broken boilers.

We say it all the time, hire an experienced and knowledgeable real estate agent.  I think the issues at Landmark on Central drive that point home.

No one can know the mind-set of all the various sellers or potential sellers in the Valley.  Additionally, the evidence does not support this person’s opinion.  “Closings”, the number of properties that sell each month, are way up.  In fact, in Phoenix as a whole, the number of closings each month is approximately 1,700 homes and condos.  That’s over four times as many as in January 2008, the period with the fewest closings in seven years.  The 1,700 is as many as what was selling in 2004 and 2005, the boom years in Phoenix.

Some people don’t want to see the new reality, that market activity is up, more and more people are buying, and as a result, inventory is going down.  Now, just like I said last week, these numbers are for real estate in the Valley as a whole and are not condominium or urban condo specific.  While some urban condo buildings have not yet “hit bottom” there are many others that are performing nicely and offer great buying opportunities.  At We Know Urban Realty, we study the urban market daily, we analyze the numbers, we talk to other experts, and we develop solid buying and selling strategies for our clients.  If you are considering buying a high rise condo or loft, give us a call.

Real estate agent lock boxes are no longer allowed on the property!  This means that agents looking to show OBT to prospective buyers or renters will have to make appointments with the various listing agents to do so.  Can you imagine trying to coordinate a client’s schedule with three or four or more Realtor’ schedules?  This policy will discourage agents from showing the building.

It is true that some other high rise buildings prohibit lock boxes.  However, those buildings have doormen or other on-site personnel who make it easy to show the property.  OBT is one of the only buildings, perhaps the only building,  in the valley which doesn’t have a doorman or on-site personnel but outlaws lock boxes.  In contrast, some buildings have actually spent money to make it easier for agents to show their condos.  For example the Home Owner Associations at Third Avenue Lofts and Biltmore Square installed metal bars in central locations so that all Realtor lock boxes can be hung in one, easy to find and secure area.  Doing so eliminated the “clutter” of lock boxes being hung in random places around the property and it makes it super easy for an agent to show multiple properties.  I can tell you from personal experience that before Biltmore Square installed the bars I HATED showing the community and rarely did.  Now that the HOA installed the lock box bar it is super easy to show properties there.  It seems to me that Third Avenue Lofts and Biltmore Square are encouraging agents to show their condos.  In light of the current economic mess that sure seems like the right attitude to me.  Optima Biltmore, how ’bout making it easier to show condos there, NOT harder!

I understand and appreciate the value of security.  Great security is one of the reasons that I live in a high rise.  But there are better solutions that banning lock boxes.  This is a big mistake and believe me this policy will hurt property values in the building.  If Realtors find it very difficult to show a building then guess what?  They won’t show it.  If people stop showing the building then values will go down.  If you are an owner of a condo at Optima Biltmore Towers then I strongly encourage you to contact your management company and insist that they come up with a better solution.

The reason I question the claim that the building is worth $19M is that at that price and with 141 condos remaining that equates to a value of approximately $135,000.  This may sound cheap until you know that only 40 or so of the remaining condos are finished, that there are rumored to be infrastructure issues (namely problems with one of the two chiller units and rumored sewer issues), the previously mentioned debt to value disparity and potential legal battles with the developer, AND the fact that whoever buys the note or property will want to make a profit in a currently stagnant (at best) high rise condo market!  $19M seems high to me.

Having said all this I really do want to see Century Plaza succeed.  I really like most of the floor plans, the common areas are fantastic, the location is one of the best in the Valley (that is if you are into using light rail and walking and enjoying great (non-corporate) restaurants and bars etc…) and more.  I just think that it will be a while before the dust settles and I feel confident enough to recommend that people buy there.

The purpose of this post is to clarify some points made and to further explain others.

It is our understanding that the original construction money consisted of two loans; one for $54M and the other for $10M.  The second loan was originally funded by a separate party but was ultimately refinanced by FNBN, the lender on the first note.  FNBN ultimately went under and was “taken over” by the Feds but prior to that happening the developer of Summit at Copper Square sold 91 (not 74 as reported in the Business Journal) of the 165 condos and paid off $40M of the $64M.  When FNBN went under the value of the notes were approximately $28M ($64M – 40M + 4M interest = $28M).  Upon the collapse of FNBN, the FDIC bundled a large number of outstanding notes and auctioned them off.  The Summit at Copper Square note was bundled into a $700M pool of these notes.  Stearns Bank (of Scottsdale) paid about $161M (or ¢23/dollar) for the $700M pool.  To do so, it came in with approximately 20% of its own money and used government backing or funding for the remaining 80%.  If we apply the ¢23/dollar formula to the $28M remaining on the construction loan then we know that Stearns paid approximately $6.4M for the Summit at Copper Square note.  What’s crazy is that it got the $28M note for $6.4 but only had to come up with $1.288M of its own money to do so (remember the government financed 80%).

According to David Wallack, developer of Summit at Copper Square, he is working with Stearns to pay off the note.  Also, according to Wallach, he and Stearns have a good working relationship and that Stearns filed the Notice of Trustee Sale as a matter of procedure.  Notices of Trustee Sales can be postponed so the action on the part of Stearns is not necessarily ominous but it certainly gets everyones’ attention and keeps pressure on Wallach.

Something to keep in mind is that with Stearns buying the $28M note for just $6.4M and only $1.288M out of pocket, the bank is in a VERY safe position.  And with such a low basis Stearns can sell the $28M note for just $6.658M and make a 20% profit (not counting expenses).  I would think that David Wallach has an opportunity to get himself into a better position than he was in.  Afterall, if he can put the money together to buy the note from Stearns he would effectively reduce his debt by over $21M!!!  Just as importantly, by reducing the debt to approximatley 24% of what it was, Wallach has a chance to make some money when all is said and done.  It’s true that Stearns might want to see if it could make even more money on the note but I’d take 20% profit in today’s market all day long; heck I’d take 10%.  So, don’t be surprised if Wallach can structure a buy-out of the note.

At WeKnowUrban we are waiting and watching what’s going on at Summit as well as the other newer high rise buildings.  There are definitely issues to be aware of but all is not as bad as our local media would have you believe.  Remember, sensationalism sells.  I’m not saying that the press is sensationalistic for the sake of getting eyeballs but the “stories” rarely tell the whole story.  I’m also not saying that we “know it all” but the fact that we study high rise and loft living every single day does give us some advantages over the folks that are reporting the demise of a high rise condo one day and covering a chili cook-off the next.  Come to us if you want to know what’s going on in urban living in Phoenix, Scottsdale or Tempe.

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……

“June 9, 2009 

As you may know, the real estate industry has faced unprecedented economic challenges in the last year.  Crescent Resources is no exception.  In this environment, we have been working over the last several months to strengthen the company’s financial position and improve our ability to continue to provide the high level of services for which we are known.

 As a part of this, Crescent Resources, LLC and certain of its subsidiaries have filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court in the Western District of Texas, Austin Division. This step will allow us to bring our capital structure in line with the current economic environment and will provide significantly improved resources and financial flexibility going forward.

Importantly, we have secured $110 million in new financing to fund our business activities through this process.

At Crescent, we know that the value of our communities is directly impacted by the quality of the clubs and recreational infrastructure we have created. It is our goal to continue to work to enhance value by maintaining the high level of service that we have established.

We have many very attractive assets, a highly experienced team and strong relationships with industry-leading partners. Our focus remains on doing what we do best – to create, manage and sell first-class developments, communities and real estate.

 Sincerely,

 Andrew Hede

Chief Executive Officer”

Furthermore, the broker for Portland Place has assured us that the bankruptcy will not adversely affect transactions at the midrise condo building other than possibly slowing negotiations and contract acceptance minimally.  He also stated that the bankruptcy will not affected the developers approach to prices.  Will Daly

We just learned (fifteen minutes ago) that Crescent Resources, the owner of Portland Place in downtown Phoenix filed Bankruptcy yesterday.

An article in the Charlotte Observer stated:

“Duke [Duke Energy - a Fortune 500 energy producer] created Crescent in 1969 to manage its surplus land along the Catawba River, transferring title to 300,000 acres. By the 1990s, Crescent had become a prominent developer. Duke sold a 49-percent share to Morgan Stanley in 2006.

But the company reported a net loss of $420 million on $407 million in revenue last year as it liquidated properties in Arizona, Florida and Texas, three states hit hard by the real estate meltdown.

Restructuring its debt last June left it with a $50 million payment due by the end of 2009, $75 million in 2010 and $100 million in 2011, with the rest of a $1.2 billion loan due in 2012.

Rating agency Standard & Poor’s lowered Crescent’s corporate credit and bank loan ratings in April to noninvestment grade or “junk” status.”

We don’t know yet how this will affect Portland Place but we have calls out to find out.  We would expect one of two solutions to develop; either a restructuring of the debt for Crescent allowing some “breathing room” so that it can eventually sell the condos, brownstones and lofts at Portland Place or the sale of all the remaining condos to a major investor.  We’ll look into this further and post our findings.

Oh and for those of you who don’t know, Portland Place is a FANTASTIC building; one of my personal favorites.  So, if you’re into great architecture and a fun urban location, definitely watch this blog for news, as prices MIGHT be on the verge of going down.

4:00pm June 11, 2009 – Just learned that there should be no worry of Portland Place getting slapped with mechanic’s liens or anything like that as, according to our source, Portland Place has no outstanding debts.  So hopefully, this BK will buy Crescent time to restructure and come out stronger.  WD

Last week I learned of another sale that fell through for the same reason but at a different condo community; this time 525 Town Lake.  In this case the HOA receipts at 525 Town Lake are 36% under budget.  Expect prices there to drop as a result.  But be careful not to get lured just by the low prices as there is potential risk in buying in a community where the HOA is unstable or at financial risk.  I’m not saying not to buy there, just know what you’re getting into and know potential risk before doing so.

The AZ Rep reported today about problems at Summit at Copper Square.  I’m not privy to the financial matters at Summit but I will say this; the owner David Wallach is very hands-on and working hard to see the high rise condo building through these tough times.   He is currently renting out condos at very very competitive prices (contact us for details or to see the condos).  The added cash flow from the rentals will hopefully keep things afloat.   It’s amazing what a difference just a few months made during the boom/bust cycle.  Summit delivered condos starting roughly December 2007 and closed approximately half the units.  If construction had finished six months earlier I think that most of the condos would have closed.  But then again, if construction had been completed six months later I bet only 10% of the condo buyers would have closed.  

BTW, Mr. Wallach if you’d like a venue to refute or add to today’s article, feel free to e-mail me your observations or comments and I will gladly post them to this site.

Things have been pretty quiet at Century Plaza, at least in our circle.    For a while there we were hearing from prospective investors every single week.  Over the last month we have only heard from one party.  The guy was very very confident that he and his company would soon own Century Plaza.  IF they do buy the high rise and IF they are able to offer the condos at the prices he shared with me then expect some really great bargains in the future.  Keep watching this web site or give us a call to learn more.

I swung by Stella to shoot more photos last week; what a great community!  I’d put the quality, style and overall look up against ANY (except Galleries at Turney) infill row house style project in town.  I’ll post the photos in the next couple days so you can see for yourself.

Stay tuned for more…