No money, no labor, no way

Lack of financing, qualified help seen to scuttle high-rises
Jan. 13, 2006
Copyright © Las Vegas Review-Journal
By HUBBLE SMITH
REVIEW-JOURNAL

The difficulty of securing construction financing and signing qualified general contractors who can build high-rise condos at a feasible price has killed several projects in Las Vegas and threatens others, industry insiders say.

Those two basic reasons are offered for the failure of projects such as Ivana Las Vegas, Icon, Aqua Blue and Krystal Sands.

"It's not good for consumer confidence when a developer cancels a project, but developers are not pulling out of Las Vegas because they are unable to sell units," said Steve Fifield, president of Chicago-based Fifield Co. "They are pulling out of Las Vegas because they are unable to build their buildings."

Fifield is developing the 41-story Allure towers on Sahara Avenue, west of the Strip, with a $120 million construction loan from Union Labor Life Insurance Co. and $70 million in equity or mezzanine financing from CB Strategic Partners. Mezzanine financing is the difference between what the banks will loan for construction and the total cost of the project. M.J. Dean of Las Vegas is doing the concrete work and Bovis Lend Lease is general contractor.

With an abundance of luxury condo projects announced not only in Las Vegas but in other markets such as Miami and San Diego, financial institutions are tightening their lending requirements and approaching projects cautiously.

"Especially in areas like Vegas, first of all, they're very concerned about the experience and track record of the developer," said Aaron Yashouafar, president of Milbank Real Estate Services in Los Angeles and developer of the $325 million Sky Las Vegas on the north Strip near Circus Circus.

"And they also require a very high percentage of presales of units. By presales, lenders don't care about reservations. They care about actual contracts and nonrefundable deposits in escrow."

Andrew Woodtli, commercial real estate vice president of New York-based HSBC Bank, said he was looking for a "unique project with a strong and dedicated development team" when he closed on $250 million in construction financing for One Queensridge Place, two 18-story luxury condo towers being developed by Executive Home Builders near Rampart Boulevard and Alta Drive.

"The initial challenge was educating lenders on the demand for high-rise projects not located on the Strip," said David Stepanchak of George Smith Partners, who structured the financing with HSBC on behalf of Executive Home Builders. "Once banks evaluated the strength of the local market, they responded enthusiastically and broadly."

HSBC, which has nearly 400 branches, mostly in New York and Florida, joined several other financial institutions, including PB Capital and Bank Leumi, both of New York, in providing the loan.

"It is very difficult when a loan gets to this magnitude," said Yashouafar, whose Sky Las Vegas project is financed by a $260 million loan from Hypo International. "They like to break it up."

David Norris, an independent mortgage broker in Los Angeles who arranged the financing for Sky Las Vegas, said the banks view Las Vegas much the way they view Florida.

"People are worried that the vast majority of Las Vegas has become a speculative market," he said. "Lenders are cautious of that. There (are) caveats in some of the sales contracts that you can't sell for the first two years."

Banks like to see 60 percent or more in "hard sales" and they want the developer to have a contractor lined up with a signed contract. Yashouafar did a good job in converting a high percentage of reservations to hard contracts, which require nonrefundable deposits of 25 percent of the purchase price to be placed in escrow, and snagging M.J. Dean as general contractor, Norris said.

Construction of the 45-story Sky Las Vegas has reached the 19th floor, with a floor being added about every four days, project manager Matt Joens said. About 85 percent of the 409 units are sold.

"There's no magic. What we do is not brain surgery. It's numbers. They just have to add up," Norris said. "Even other lenders I talked to knew some of those (high-rise condos) weren't going to get built. Vegas is a small town in a lot of ways and there's really only three major builders. There's a dearth of contractors that could do these jobs and people knew it."

Some $3.625 billion in projects have been announced and are under construction. Fifield said high-rise condo developers in Las Vegas are moving inventory at a record pace, which is pushing demand for limited contractor and construction resources. This, in turn, is driving up construction pricing and squeezing developers.

"Developer fallout is a symptom of a very strong and very aggressive market," he said. "We did our homework and paid a good value for the land, which played a very important role in Allure's success. In Las Vegas, there are developers who paid two to three times what land had been selling for a couple years before, which, when combined with construction cost escalation, drove the development costs up, making their projects infeasible."

Even a land price doesn't guarantee success.

In January 2004, The Related Cos. paid $15 million for 4.5 acres on Convention Center Drive that was part of the Silver City property purchased by San Francisco real estate investor Luke Brugnara.

Related announced the $350 million, twin-tower Icon project for the site and said zoning and financing were already in place.

"Bottom line, look at whose projects are on the books here and who has the experience in getting it done," Related Las Vegas President Marty Burger told the Review-Journal in November 2004. "We've never given back a project to the bank."

The project was canceled last week. Related cited high costs of construction and delays from litigation as reasons for Icon's demise.

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