|
COVER STORY, JULY 2006
REDEVELOP & REDISCOVER
Developers’ transformations of old properties help to rejuvenate cities while renewing possibilities for residents.
Brianne Gloski and Brian A. Lee
Like real estate doctors, redevelopers are revitalizing areas of the West with challenging but unique projects. The results are better economic health, multi-faceted appeal and increased community pride.
The Montage
 |
The Montage in Reno, Nevada
|
|
When L3 Development began demolition in March of the 21-story Golden Phoenix Hotel & Casino in Reno, Nevada, it was building on success. The developer had won critical acclaim with its early 2005 completion of the conversion of Chicago’s Ambassador West Hotel into 38 luxurious condos called The Ambassador Residences. In late 2007, the Golden Phoenix will have been transformed into $150 million The Montage.
“The Montage will unquestionably be the largest vertical residential project ever constructed in Reno,” says Fernando Leal, managing partner of Chicago-based L3 Development. “We think the enormity of this project and the speed in which we have been able to move forward will send a very strong and credible message that the revitalization of downtown Reno is truly underway.”
When completed, The Montage will consist of 379 condominiums, 661 parking spaces, more than 20,000 square feet of lifestyle retailers and restaurants, and a “rooftop oasis” featuring a heated pool, spas, gardens, a clubhouse and a fitness center. True to its name, the development will offer a medley of living options all ensconced in quality, comfort and convenience. Residents will be able to choose from five different residential types: walk-up rowhouses, Chicago-style lofts, tower residences, duplex penthouses and 3-story townhomes boasting private terraces and direct access to the rooftop gardens.
The demolition phase of the project started in late March and will wrap up at the end of this month. “We are taking the original building down to the concrete super structure,” says Leal. Antunovich Associates is the project architect, UPA Group is the general contractor and Corus Bank provided the financing. The Montage is located at Sierra and 2nd Street, two blocks north of the Truckee River.
The Montgomery
 |
The Montgomery in San Francisco
|
|
The former home of San Francisco newspaper The Call will bring new life to the Financial District. New Urban Properties is converting the historic Class B office building, located at 74 New Montgomery St. adjacent to The Palace Hotel in San Francisco, into a residential/retail development called The Montgomery. Originally built in 1914, the building is listed on the San Francisco historic register.
The Montgomery will feature ground-floor retail space and 107 residential condominium units. Tom Sherlock, managing partner of Buchanan Street Partners, the firm that arranged financing for the project, believes that the demand is there for living in the Financial District.
“There is pent-up demand for residential units in the urban areas as evidenced by the growing sales volumes over the past 3 years in the Bay Area,” says Sherlock. “The Montgomery will benefit from a pricing structure that is very attractive to younger professionals.”
Once completed over the next year, “The Montgomery” will provide a solution to the urban housing demand in San Francisco. Soon the city’s residents will have another opportunity to live and play close to where they work.
Brookhurst Triangle
Brookhurst Triangle, Urban Pacific Builders’ $300 million mixed-use project in central Orange County, will deliver a variety of housing options and well-located commercial space to an area targeted for redevelopment for some time by the city of Garden Grove, California.
Located at Brookhurst Street and Garden Grove Boulevard, the redevelopment will feature 800 housing units ranging from high-rise living to three- and four-story lofts, flats and townhomes. The commercial/retail component will be a pedestrian-friendly urban village full of upscale stores, shops and coffee houses.
Long Beach, California-based Urban Pacific Builders, which has been creating design and development ideas for the 15-acre site since 2002, will develop Brookhurst Triangle in several stages and could deliver the first residential units in 2009.
THE FINANCIAL SIDE OF REDVELOPMENT
One of the best ways to chart the real estate marketplace’s course is by monitoring its redevelopment activity. Considerable redevelopment has been occurring throughout Southern California, including the following markets:
• Most redevelopment in San Diego has happened downtown, often near Petco Park and in the Gaslamp Quarter. Projects include ground-up condominium construction typically involving demolition of industrial properties, office properties converted to hotels and condos, and some retail expansion.
• In Los Angeles County, redevelopment has included apartment-to-condo conversions. Some office buildings are becoming for-sale condos and hotels. Rezoned, underutilized infill land has been built up as high-end retail or mixed-use properties. Some new office construction is also occurring.
• In Orange County, multifamily sites have become for-sale condos, a trend apparently winding down. Some open-air malls are being enclosed, and others are being redeveloped and re-tenanted. In general, though, new development seems to outpace redevelopment. Most new construction involves office properties, high-rise condominiums and retail.
But what are some of the financing structures of these redevelopment transactions? Redevelopment transactions, especially condo conversions, entail a reasonable amount of structured finance, typically involving multiple layers of financing. This usually includes a bridge or interim loan in conjunction with mezzanine loans and/or an equity component.
It is common for borrowers to approach these projects utilizing highly leveraged financing structures, thereby committing minimal capital into any one particular project and maximizing their potential returns. Mortgage intermediaries add value for developers by providing a financing package that includes the required various debt components versus having them arranged individually.
In a typical financing package, senior debt comprises up to 75 to 80 percent of the cost, with mezzanine financing bringing the leverage up to 80 to 90 percent. The equity component can raise this to 90 to 98 percent of cost, with the remainder covered by the borrower’s capital.
Redevelopment transactions are generally priced over 30-day LIBOR. Because LIBOR is usually used for the senior component, borrowers often put on larger mezzanine or preferred equity pieces as interest rates rise. With an increase in rates, the structured component tends to rise accordingly.
Looking ahead, three financial factors will impact redevelopment trends. First, rising interest rates will affect the cost of redevelopment, potentially requiring a higher cash component from the borrower. Second, a slight increase in capitalization rates, as is occurring now, can have a nullifying effect on these interest rate increases because buyers will typically pay less for assets as cap rates rise. Finally, the property must be right for redevelopment. Redevelopment must make sense, whether the property is a Class A apartment complex, an infill retail site or a tired, downtown office building.
Older downtown areas tend to see more conversions to hotels or condos. When newer multifamily properties are converted to condos, developers try to create a product that offers maximum amenities and appeal with minimum conversion costs. By contrast, ground-up condo development inherently offers higher densities and better design flexibility and amenities. New retail development, especially in core markets, takes advantage of the changing use and demographics as redevelopment occurs.
Gary Bechtel is managing director of Corporate Initiatives and Strategies at Meridian Capital Group in Los Angeles. |
©2006 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 554-6054.
|
