Posted on Monday, 30th August 2010 by Roland_Melnick
According to Tom Daykin of the Milwaukee Journal Sentinel, developer/front man Rick Barrett only had to show real estate assets of $3.3M plus a $1M line of bank credit in order to secure a $9.3M loan from the City of Milwaukee and a $41.4M loan from AFL-CIO pension fund investments for his project, The Moderne; a high-rise condo/apartment building going up at 3rd & Juneau downtown. The juice from the labor union, of course, is guaranteed by the US Dept of H.U.D. which was the long awaited approval needed to move forward.
So, counting non-borrowed monies, Barrett and associates put up 6% in the deal. Seems a little thin to me. The housing bubble that burst like a nuclear mushroom cloud across this country was fueled in much the same way as this deal. How much skin does Rick Barrett have in the game? Enough?
City Comptroller Wally Morics didn’t think so. The only thing that changed following a report by Morics critical of the deal and pessimistic of its future, was the city council, led by Ald. Bob Baumann, demanded and received “personal guarantees.”
You want to buy a house? Go to your lender with 6% down and give him your personal guarantee. That’ll work, right?
I’ve commended Ald. Willie Hines in the past for being skeptical on this. He aptly points out that if lenders don’t want to get in on it, that means they see too much risk and too little chance for the project to turn a buck. Why should tax dollars be spent any less wisely?
And then, from Daykin’s earlier report, there is this little gem of a comment that, from what I’ve seen, has gone totally unnoticed:
“Bauman and other aldermen acknowledged those risks. But even if the condos sell poorly, they said, the income from the Moderne’s apartments and the project’s property taxes would together generate enough cash to pay back the city’s loans.“
Excuse me? Since when are property taxes allowed to go towards loan payments? Aren’t they to be applied to city services and expenses just like everyone else’s? If the Moderne’s taxes are used solely for loan repayment, isn’t that a backdoor tax break? Pyramiding ? Double-dipping? Something.
In the November 2009 report, Daykin said, “So far, four of the condos have been reserved by prospective buyers.” The city comptroller estimated that the 14 condos had to average $939,000 each. It’s been 10 months since. I’d like to know where that number stands today. It’s a question I put in to Mr. Daykin and I’ll share his response with you if/when I get one.
Posted in Labor Unions, Milwaukee Real Estate | Comments (9) |
9 Responses to “Scrape Together A 6% Down Payment (At Least On Paper) and You Too Can Be a Real Estate Developer”
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August 30th, 2010 at 8:40 am
The way the loan can be paid back via property taxes is that it is being made from the Park East TID. Essentially, based on the success of failure (how quickly it rents up and sells out), of this primarily apartment building, the length of time for payback will either be shorter or longer. Additionally, I’d add (if I remember correctly) the change in the “personal” guarantee was to actually back it up with property.
Finally, there’s certainly risk to the city involved in this project but the backing it with TID funds reduces it.
August 30th, 2010 at 10:57 am
Where is Mayor Tom on this?
August 30th, 2010 at 11:51 am
@stalker3 This was approved by the Common Council and Mayor Barrett sometime back… last year I think.
August 30th, 2010 at 10:23 pm
Thanks for the info, Dave. Do you know if it’s typical for a developer to have their stake be such a small percentage of the total deal?
There is real risk to taxpayers. The only people relatively risk free here seem to be the labor union.
Tom Daykin responded to me via email first thing this morning to say he would double-check with the developer on how many Moderne condos were spoken for.
Let me just qualify my statements here by saying I hope this project lives up to its billing. The promotional stuff depicts the Moderne as a stylish bit of high-end architecture that should attract some classy residents. While technically not on the vacant land once occupied by the Park East freeway spur, I hope to see more development in that corridor. There hasn’t been much in the 8 years since it was knocked down. If there wasn’t much demand during the economic boom of the 2000′s, is it a good idea to push it through now?
August 30th, 2010 at 10:55 pm
@Roland I’m no expert, but yes I do believe development projects are often heavily financed with little stake. Tom would definitely know this better than I.
“If there wasn’t much demand during the economic boom of the 2000?s, is it a good idea to push it through now?”
Well remember this is primarily an apartment building now, and for example Corcoran Lofts, and the North End both appear to of done very well despite the downturn. If anything the downturn has pushed the market to apartments instead of condos. The question is more of the location, can that location support the rents, rather than timing as this won’t open for 2 years.
As far as the Park East, the County land specifically, has a series of hurdles that need to be resolved. For one, it would be great if all of the land had actually been marketed for sale, but it hasn’t. The other major problem is the lot sizes are way way too big, which limits the market of potential developers. Two levels of government. The way MKE County handles land sales as essentially part of the budget, as opposed to economic development… I’m sure somebody will mention PERC but quite frankly every project in the Park East has come to the City of Milwaukee with a big TIF request anyhow so this becomes irrelevant as the cost is just shifted, and a TIF would likely have similar requirements anyhow.
As far as risk I was speaking specifically to the City of Milwaukee, and how the risk is essentially backstopped with the TID.
Finally, risk and government involvement aside, just looking at the architecture this could be the sharpest building to go up in Milwaukee in a while.
September 1st, 2010 at 8:38 am
I appreciate your input, Dave. The whole reason I put a lot of questions into my post was to stir up some discussion.
I’m not completely against government investment in projects like this as well as business and industrial endeavors. I just think we need to spend the money wisely and treat them more like loans and less like handouts.
September 1st, 2010 at 8:54 am
@Roland No problem. There is no doubt this deal is different than any (except the Bookends) I’ve followed before… but I do understand the reasoning behind it.
September 1st, 2010 at 10:01 am
What’s your opinion on the Bookends project? On New Land Enterprises?
September 1st, 2010 at 10:52 am
@Roland Well the Bookends is dead for now. As a resident of the area I’m all for more density and its location actually makes it more likely of success than the Moderne. I wasn’t much a fan of the design, and that deal didn’t exactly have the same setup as the Moderne. My guess is it will be back in the news in a year or so.
As far as New Land, I know there is this perception out there about them, but on balance they’ve helped build Milwaukee. I would like them to do higher quality work and better architectural designs, but again for the most part positive.