Downtown highrise project loses lender

John Rebchook, Rocky Mountain News

Tuesday, September 11, 2007

A German bank has pulled the plug on its deal to lend $160 million for a 41-story condominium project under construction downtown - the largest example in Denver so far of how the turmoil in international lending markets affects a local market.

HypoVerinsbank, with more than $150 billion of assets, is backing out of its construction loan for the $175 million Spire at 891 14th St., across from the Colorado Convention Center. The deal represented one of the largest construction loans ever made in Denver.

The lack of financing should not jeopardize the construction timetable for the project, said Randy Nichols, the developer of the Spire, on Monday. The Spire, scheduled to open in summer 2009, is the first new residential high-rise built in the central business district in almost 25 years.

Rather, it forces Nichols to use equity financing in the short term, until it can be replaced with a construction loan.

"It has sent us scrambling," Nichols said.

So far, more than 2,000 people have put their names on an interest list for the development, aimed at young professionals working downtown. Units are priced from about $200,000 to $1 million.

Nichols started construction in May without any pre-sales, unusual for condo projects because loans are paid back by the sale of condos and lenders often want to be certain the demand from buyers is there before they put up the money.

But East West Partners had great success earlier selling units in the Glass House in its Riverfront Park neighborhood behind Denver Union Station, without pre-sales. Typically, lenders require at least 20 percent of the units to be sold before construction begins.

"One option is that, in the next week or two, we might start contacting people on our interest list and tell them they could get good deals if they buy now," said Nichols, whose previous projects include Clayton Lane in Cherry Creek.

Clayton Lane includes retail, expensive condominiums, the J.W. Marriott Hotel and the headquarters for the Janus family of mutual funds.

Nichols said the problem is not the Denver-area market or his project.

Nichols said the "obvious reason" that HypoVerinsbank is backing out of the deal is because of rapid changes in financial market conditions, which began several weeks ago with the meltdown in risky subprime housing loans and quickly spread to unrelated real-estate financing.

While it is frustrating to have to deal with last-minute changes with lenders, Nichols said, he has been through it before.

"At Clayton Lane, we didn't have our construction loan until we were seven months into construction, and we're only four months into construction at the Spire. So we're three months ahead of the game," Nichols said.

Mike Cantwell, president of Johnson Capital, a mortgage bank investment firm that has worked with Nichols, said there are complicated reasons for the change in lending practices.

Until the domino effect of the subprime meltdown, lenders were aggressively competing to lend money to buy and develop income-producing properties.

Real estate was attractive to institutional investors, such as pension funds and insurance companies, as well as Wall Street groups, because it was considered less volatile than the stock market. Also, interest rates were so low for many years that investing in bonds provided extremely low returns.

These construction loans, like subprime mortgage loans, are typically packaged and sold to investors, which can range from mutual-fund companies to rich individuals.

"Clearly, people who were buying (investment) paper have exited the market," Cantwell said. "Until (the cost) of risk is repriced, that makes for a very shallow market where these packaged loans can be sold."

The Spire at a glance

• Developer: Nichols Partnership, which also developed Clayton Lane in Cherry Creek North

• Details: $110 million, 41-story, 504-unit condominium development at 1400 Champa St., across from the Colorado Convention Center

• Prices: $165,000 to more than $500,000

• Amenities: First-floor retail space, fitness and social clubs, a business center, pool and hot tubs, parking and 24-hour concierge service

rebchookj@RockyMountainNews.com or 303-954-5207