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Home > BizTimes Daily > Archives > October 23, 2009
Comptroller's report raises concerns about The Moderne
Published October 23, 2009 - BizTimes Daily
The City of Milwaukee Comptroller's office today released a report that raises some red flags about the proposal to loan $9.3 million of city funds for The Moderne development in the Park East corridor.
The loan proposal will be reviewed by the city's Zoning, Neighborhoods and Development Committee on Tuesday.
"We're not saying do it or don't do it," said Michael Daun, deputy comptroller for the city. "If the city officials want to get into this, they should understand they are assuming a good deal of risk and are entering into a new (policy) by investing in condominium (development)."
Rick Barrett, the lead developer for The Moderne project, said he was not surprised by the results of the comptroller's office report.
“(The comptroller’s report) came back much as expected,” Barrett said. “We remain very positive and excited about the prospects of the project. We continue to feel it’s a win for the city creating 1,000 union jobs, growing the tax base and providing a boost for development in the Park East corridor.”
The Moderne is a proposed 30-story building that would be built on a vacant lot at the southwest corner of Juneau Avenue and Old World Third Street. It would have 203 apartments, 14 condominiums and first floor retail space.
The $55.2 million project has a $41.4 million loan from the AFL-CIO Investment Trust, which would be serviced by Capmark Financial Group and is guaranteed by the U.S. Department of Housing and Urban Development (HUD)'s 221(d)4 program. The Moderne developers, a group of investors led by developer Rick Barrett, are providing $4.5 million in equity and past expenses for the project.
The $9.3 million in loans from the city would be the final piece to the financial puzzle to the project, which Barrett says could break ground in a few months. The city loans are necessary because the financial industry meltdown during the recession has made it extremely difficult for developers to obtain financing from the private sector for a major development, he says.
The city loans would be a $3.3 million mezzanine loan with a 14 percent interest rate and a $6 million construction loan with a 6.5 percent interest rate.
The vast majority of the city loans would be used to support the condominium portion of the development, even though the condos make up a small portion of the project. According to the comptroller's report, $7.8 million of the city loan funds would support the 14 condos, while $1.5 million of the city loans would help support the 203 apartments in the project.
The apartment portion of the project is primarily supported by the $41.4 million loan guaranteed under the HUD 221(d)4 program.
As proposed, the condos would be supported 100-percent by city loan funds. That could cause some concerns, because the downtown Milwaukee condo market has been in a major slump for more than a year.
"Both the success of The Moderne project and the repayment of the city's $7.8 million loan funds depend upon the successful sale of the condos," the comptroller's report states.
But Barrett said the entire financing package supports the whole project.“It’s one building,” he said. “In reality the project is one project and it can’t be split like that (separating apartments and condos).”
The Moderne condos are priced at $243,000 to $2.4 million, with an average cost of $939,000.
According to the Department of City Development, four of the 14 condominiums in The Moderne have been reserved with up to 5-percent reservation commitments, which at closing could result in as much as $5 million in proceeds.
"Even so, private financing could not be obtained for the project," the comptroller's report states. "Given current credit constraints and the depressed state of the local condominium market, city financing of the condo component is clearly a speculative venture facing major financial risk. Whatever the result, unlike the apartment component, should condo units remain unsold, the incidence of financial loss falls to the city."
Later, the report states that if the loans are approved, "The city of Milwaukee is assuming a significant risk of non payment given the current state of the downtown condominium market. No one knows what this market will look like two years from now, but we do know that commercial lenders are not willing to assume the risk."
The comptroller's office report indicates that it requested a general default provision be incorporated into the loan term sheet. However, the details of that provision have not yet been negotiated with the developer. In addition, conditions under which the city would take title to the condominiums have not been negotiated.
The comptroller's office report says that the project is projected to have a 23 percent annual rate of return on investment for the developer over the 10-year life of the project.
“Given the limited future developer's investment (up to $1.8 million) and the extensive risk by the city for sale of 14 condominiums, we find this rate of return well above what would be expected relative to the level of private investor risk incurred,” the report states.
The comptroller's report says that aldermen may want to consider making a request to change the project to focus more on the apartments.
"Financed principally with city of Milwaukee loan funds, the condominium component of The Moderne project provides added profit to the developer, a portion of which may be beyond the amount necessary to get the apartments component accomplished," the report states. "If proved feasible, this modified approach could reduce the city's financial exposure well below the proposed $9.3 million in city loans."
But Barrett said the condo portion of the project is necessary to pay down the project’s debt and to keep the apartment rental rates at affordable levels.
The report also points out that if loans for The Moderne are approved, that level of support for a market-rate housing development would be a dramatic policy shift for the city, and aldermen should expect more developers to make similar loans requests. Officials should consider establishing criteria for evaluating those requests, the report suggests.
Another proposed high rise apartment project, the Bookends North development proposed by Milwaukee-based New Land Enterprises LLP, is seeking a $3.5 million loan guarantee from the city. The comptroller's office said it has not received enough information about that project to conduct an analysis. That project will also be reviewed by the Zoning, Neighborhoods and Development Committee on Tuesday.
