The Icon

There is a new massive 400+ unit condo building rising from the ground in the area of Nashville know as “The Gulch” that might become the symbol of national real estate investment greed. The Icon was pre-sold almost 2 years ago in a cloud of heavy speculation and an atmosphere of such frenzy that I felt like a New York Stock Exchange floor trader that day. Literally hundreds of investors and Realtors crammed themselves into the relatively small sales center on 11th Avenue South in Nashville and jockeyed for the best condos. At one point the Icon representatives would simply yell out a condo’s unit number and the first person to yell back or physically grab the contract from the representative was the lucky buyer. Condo prices were shooting up every 30 minutes and the fever pitch lasted until the last condo was sold in the tower portion of the building.

Fast forward 2 years and now we are facing a national recession (maybe), oil prices over $110/barrel which will surely lead to $4.00/gallon at the pump, and domestic real estate investors have fled every market in the United Stated. So here is the question: When the Icon begins to close condos in the next 3 months, will the buyers buy or will they flee? The answer to that question is more complicated than usual for the following reasons:

•1) The condo deposits were unusually low; only $5,000 for a 1 bedroom and only $7,500 for a 2 bedroom
•2) The concentration of out-of-state investors was unusually high – some estimate about 25%
•3) The developer has already sent out letters that slyly mention “specific performance”
•4) This is the largest condo project in Nashville’s young history and it delivers at the worst possible time

Many of you who are reading this are astounded by the super low condo deposits, many condo investors in the United States are used to a minimum of 10% deposits. In this case, the $5,000 deposit was equivalent to around 2%…yes 2%! So if you were a half-way savvy investor who did not see the economic downtown coming, you would have jumped this thing like a mugger on a moonless night…and that is what happened. Before many of you jump to the conclusion that this is a paper thin development with no redeeming factors, let me say this: The Icon is a very, very cool 22-story building located in a very cool area of Nashville called The Gulch. Many of the condos have panoramic views of the city, the finishes are very modern, and the amenities will be counted among the best in the city when built. The building itself is not the problem, it’s the timing.

The reason I mentioned specific performance in the “unusual” category above is that Nashville has never heard of a developer threaten to sue their buyers until now. By sending out a welcome letter that included those simple words, they put all of their buyers on notice that Tennessee is a specific performance state and that they have the law as a tool to force you to close. Will they have to use it? Well, that is the real questions isn’t it?

Some solutions: The developer is going to offer a 1 year free property management and leasing service to all of those who do complete their purchase. This program will be limited to some undefined number of participants, but it definitive helps. The only other real solutions are out of the developer’ hands. Mortgage interest rates need to come down and consumer confidence needs to stabilize.

Let me add one gripe to this story. Wells Fargo is the only lender who has condo approval for this project and hence is the preferred lender on this building. Wells Fargo is a good lender, but the guys in charge here have a long history of passing the buck, meaning they will offer you closing discounts and incentives, but then raise the rate on you so they can make that money back. There are not giving you market rates. So if you look at the loan over a period of time, you didn’t save anything. I would like to see a second or even a third lender obtain project approval in order to create an atmosphere of true lending competition and not monopoly. In order for that to happen a couple of lenders have to step up and absorb the cost of obtaining project approval and the developer has to step up and remove their head from the sand…one lender is not the best solution in a down market! Think of it from the buyer’s perspective: The buyer is going to be closing on an investment they really don’t want right now because of the economy and now they are force feed a loan that is not quoted at market rates…come on, even I want to slap someone. I would feel much better talking with
2 or 3 lenders to see who really wanted to give me the best deal and that would make me feel a little better about having to buy an investment that I really don’t want.

In conclusion, I think that The Icon in the Gulch is a really great condo building that is located in a really great area. What I don’t like is the line that is being drawn in the sand. I certainly understand that the economy has a lot to do with what is happening, but I feel that there are better solutions and ways to get to those solutions than what I currently see being done. 2-3 years from now we will all look back on this and laugh, but right now it feels a little like us versus them.

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