INVESTMENTANALYSIS Hold or Sell? Distressed condo developments t 16
may offer unseen challenges. by Jay Kelley and Juanita Schwartzkopf
The real estate market collapse resulted in countless distressed condominium developments. Lenders are often asked to fund failed condo development completion costs and home owner associations' operating defi cits, with little promise of a positive performance.
How do they determine whether to sell
or hold? T e decision-making process illus- trated below holds true for any investor considering purchasing a distressed condo project. Two 40-unit buildings in a resort area,
originally developed to appeal to second- home and investor purchasers, were com- pleted in 2007. Building one has 15 sold units and 25 unsold units. Building two has sold eight fractional share ownership units and the remaining fractional shares are unsold. T e lender worked with the owner/devel-
oper from 2007 to 2011. T e buildings are currently being leased by the night as vaca- tion rental properties. The lender is not receiving interest or principal payments and is being asked to fund ongoing operat- ing shortfalls. In addition, the wear and tear on the collateral is continuing and deferred maintenance is accruing.
The Lender Approach Before any decisions, a lender needs to understand the true current value of the property: the cash price a buyer would be willing to pay in today's economy. T is may require the lender to actively pursue a third- party buyer to determine the market fl oor. Next
the lender needs to determine
whether it can absorb the loss required to accept the third-party price. If the answer is no, then the lender should fund operations
May | June | 2012 Commercial Investment Real Estate
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