5th & Main Condos in Nashville Lose FHA Certification, Again

Fifth and Main condos NashvilleCall it fate, bad luck, the yo-yo effect or whatever you may, according to HUD’s website, the 5th & Main condos have lost their FHA certification for the second time in the past 9 months.

As you may recall, the condos entered into receivership in February 2009, but began to show signs of life as the construction lender began to pour money into a new advertising campaign while simultaneously dropping the condo prices. This effort coincided with the development re-obtaining FHA certification in late January 2010 after a concerted effort by the project’s preferred lender, CityLife Wells Fargo. This gallant effort appears to have been thwarted at the end of last week as an FHA audit did not agree that the development currently met all of the FHA prerequisites.

Why FHA Certification so Important

FHA certified (or approved) condo developments allow buyers to put down as little as 3.5% (another way to say this is that you are getting a 96.5% LTV loan) and be confident that you are buying into a financially stable HOA approved by the lender. This is HUGE in a market where a couple of homeowner associations are in financial straits. To qualify for FHA mortgages, developments must:

  • At least 30% of the condos must be sold or currently under contract
  • No more than 50% of the all loans may be FHA loans
  • Maintain a reserve equal to 10 percent of the annual budget
  • Make sure no more than 15 percent of its owners are more than 30 days late with condo fees
  • Allow lenders to review their financials and insurance policies
  • No more than 10% of the units may be held by a single owner
  • No more than 25 percent of space is allowed for commercial use

Why 5th & Main Lost FHA Certification

The answer is unclear at the moment as it is not outlined on HUD’s website, but I am left to speculate that their “purchase with early occupancy” contracts were viewed simply as “leases with an option to purchase” contracts by regulators. I am not convinced that the terminology actually describes a different type of transaction, but the prior sure sounds better. Sort of like calling a used car a ‘pre-owned vehicle’ or saying that the tires are ‘gently worn’ rather than worn down. Same difference, right? Maybe.

What the Future Holds for the Fifth and Main Condos

5th & Main can quickly get back to viability via several routes. The first is to simply reapply with HUD for FHA certification based upon a revised audit of the building. The second is to bulk sell condos to institutional investors who can quickly get the development’s ratios back to within FHA guidelines. The third is to auction off 20-25% of the condos much like what the West End and Terrazzo did earlier in the year. The final method would be to simply drop prices to the point where buyers would be willing to come back to the building a third time and take the risk that the project may not be financeable.

Investors and Condo Vultures are Both Interested

The truth of the matter is that the 5th & Main project is of good enough quality and location that a few large investors could be interested in buying the entire development, at least, they were a year ago. This could potentially solve the whole conundrum as that group would most likely offer privately backed loans that would be as good as, if not better than, the current FHA terms and rates. Not only would the financing piece of the puzzle be solved, but so would the price issue. Should an investor be able to purchase the development, a significant savings would most likely be passed down to end purchases to help encourage them to come back to the development.

To address the vultures, I get the sense that the construction lender does not have an appetite to sell the entire development at a price that would attract condo vultures. In my opinion, the only development close to Nashville that may have a shot at going that route would be The Braxton in Ashland City.


Due to the renewed annual optimism brought about by the warmer weather coupled with the first-time buyer credit expiring in just over a month, I believe that condo developments will see an incredible amount of sales activity over the next 30 days. This will be especially true for the more moderately priced 1 bedroom condos in desirable FHA approved high-rises like the Icon in he Gulch, Terrazzo and Encore. However, I am expecting a Sunday morning after your best friend’s bachelor party-like hangover in the coming summer months that may cause the more expensive condos to come down in price.

Depending upon what happens at Fifth & Main, this may not affect that particular development, but I would expect 2 bedroom condo buyers to be able to secure a better deal in the later summer months or certainly, by the fall/winter. BUT, and this is a big but, mortgage rates may have risen a half point to three quarters of a point by then, so be prepared for your borrowing costs to rise should you be planning on financing your purchase.

Happy condo shopping!