Friday, February 6, 2009
Kotz Bankrupt Condo Developers May Be Good for Nashville
Posted by Pete Kotz on Fri, Feb 6, 2009 at 12:13 PM
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The pending bankruptcy of East Nashville's 5th & Main condos got me thinking about a friend. We were talking about the collapse of the commercial real estate market in the 1980s. (Yes, we're the losers who have such conversations.) This particular collapse stemmed from overbuilding office towers in downtowns across the country, and I was lamenting all that lost money to all those people.
The friend, a former city planner in Minneapolis, looked at me with that "What? Are you some kinda moron?" look. His theory: It's a great deal for cities when developers go broke.
It works like this: Large projects like condos, office buildings, etc., are usually funded by some combination of investors and loans. So once they're built, they have to charge a certain rate for leases/sales to cover construction costs and loans. And that rate is often too high for the market.
Enter the miracle of bankruptcy. The original lenders, investors, banks and contractors take a hit, but a new owner comes in and buys the building for, say, 50 cents on the dollar. Suddenly, the cost of the project has been halved. And the new owner can afford to charge much lower rates. The city ends up with a more stable, viable structure.
I'm not sure the theory applies to 5th & Main. Given the banking and real estate climate--in addition to downtown Nashville's condo glut--and it may be impossible to to find a new buyer. But there could be a silver lining in the misery of the headlines.
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