Lenders Warm To Condos

November 20, 2006
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GRAND RAPIDS — Many of the loans Treadstone Mortgage broker Zac Ellerbroek is writing today would likely not have been possible a year ago. Condominium developments such as the high-rise Plaza Towers in downtown Grand Rapids have historically been considered high-risk investments for lenders, but that perception is rapidly changing in the wake of a boom of condo development locally and nationwide.

“I’ve seen it change dramatically within the last six to eight months,” Ellerbroek said. “In the past I couldn’t even do loans at Plaza Towers; now I can do them all day long. I did the first loan that closed at Union Square, and if you asked me a year ago to do it, I would have said I couldn’t do it.”

Ellerbroek specializes in single-unit condominium financing with a particular interest in the downtown market. He has written loans for the likes of Union Square, Plaza Towers and the Peck Building, among others, and is one of the preferred lenders of Second Story Properties. In past years, many of these loans would have been difficult to achieve, bordering on special financing. Today, the banks he works with have essentially opened their portfolios to condo buyers in urban markets, with a lesser but significant easing of restrictions for low-rise developments.

Historically speaking, condos have not been well regarded in the housing market. The average and median sales prices have long lagged behind that of single-family homes, according to federal data; the gap has closed only in the past two years. And while the traditional housing market has not experienced a contraction in total residential mortgage debt in the modern age, the 22-year-old condo market has done so on three occasions (1991-1993).

“It has been very difficult to get financing in the past,” said Mary Witte, owner of r.o.i. Design and co-developer of the 11-story Tall House condo project on Ionia Avenue downtown.

In her experience, primarily in the resort and hotel market, condos have often been too complicated to apply under standard single-family home criteria. Lenders have found it difficult to measure the actual value of a unit, when so many of the amenities are shared. Likewise, the appropriateness of collateral and insurance are unique concerns, as the lender has no claim to the physical structure or financial relationship with its stewards.

In the case of vacation and investment units, these issues are especially noteworthy, Witte explained. Salable amenities such as a famous golf course nearby are not factored into appraisal values.

There is no readily accessible, reliable data separating the different condo types, and none separating new and existing sales. Anecdotally, it appears that high-density urban developments have driven the national and local markets, and while the availability of financing for all types has increased, the growing number of owner-occupied units has forced a change in lender behavior.

Most notably, Fannie Mae and the Federal Housing Administration standards were substantially rewritten last year. Fannie Mae guidelines were streamlined to create a straightforward process, and less restrictive eligibility criteria were adopted — including the reduction of presale requirements and a loosening of investor concentration limitations.

Prior to this, applicants generally had to document how much of a development had been purchased as investment property, and financing would not even be considered unless 60 percent to 70 percent of the units were spoken for. Some situations also called for certain shared amenities, such as a fitness room or roof access, to be complete.

“We’re not worried about that as much anymore,” said Tom Clark, underwriting manager for Fifth Third Bank in Grand Rapids. “We’ve seen over time that this type of ownership has no difference from a normal single-family, stick-built home.”

Clark did not place credit for the shift with local bankers, but with the secondary market, where condos have now proven a sound investment.

“In the past, this was considered a high-risk property,” he said. “Now the secondary market has shied away from that, and has determined the performance of these loans is acceptable.”

There are stricter guidelines for individuals purchasing units as investment or recreational property, Clark said, but financing of that type is also readily available.

“It’s part and parcel with the downtown condos that have been somewhat pioneering,” said Mark Augustyn, senior vice president of Mercantile Bank in Grand Rapids. “That hadn’t been tested, and the risk was encapsulated in that whole market. I’d say the more difficult finance is just getting these projects up and off the ground.”

In many of the current Grand Rapids developments, lenders have not only been open to financing construction, but are actively promoting the trend. The strongest example of this is National City Bank’s NCHAMP program — below-market interest rate mortgages for projects in which the bank’s Community Development Corp. has made an equity investment. The incentive has made projects such as The Fitzgerald, Boardwalk and Tall House competitive with those in tax-free Renaissance Zones, and has cemented National City as the preferred lender for those projects.    

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