It's been about eight months since Village Green Companies stepped in to take over a prime site in Minneapolis' Mills District where a condominium project had faltered because of weak advance sales.
The Michigan-based rental-property developer planned to replace the condos with 175 upscale apartments, adding them to several other apartment buildings it has in the Twin Cities area.
Developers like Village Green began making the switch from condos to apartments more than a year ago in response to the stagnant condo market. But this fall's economic meltdown has eroded sources of financing for all types of commercial development, leaving a number of apartment projects in limbo.
That is clearly the case for Village Green. It failed to close last week on its scheduled purchase of the project site, which is bounded by 2nd Street S. and Washington, Portland and Park Avenues. The city owns part of the one-block site; the rest is owned by Brighton Development Corp., the firm that had planned to build condos there.
"We're all kind of frustrated here," said Chuck Lutz, deputy director of the Minneapolis Community Planning and Economic Development Department. Lutz said Village Green has been unable to get financing from its lender, J.P. Morgan Chase & Co., whose financial results have suffered because of the deepening global recession. Lutz said the land deal is "in a holding pattern."
Village Green declined to comment. But in an October letter sent to neighbors of the project site, CEO Jonathan Holtzman said "we continue to deal with the current environment of financial institutions possibly delaying our ability to start construction."
Just a few blocks away, One Washington, another proposed project that switched from condos to apartments, has stalled because Milliken Development has been unable to secure financing. City planners recently said Seattle-based Milliken has been trying to sell or to find additional investors for the project planned for the corner of Hennepin and Washington Avenues.
Milliken representatives have declined to discuss the matter.
Milliken bought the site for $14 million in 2005 and initially planned condos as well as a Whole Foods grocery. Last year, the plans changed -- first to an all-retail complex and later to a combination of apartments, the grocery store and other retail space. The developer withdrew its permit application this year.
Action in Uptown?
In Uptown, developers still hope to begin work early next year on Mosaic, another project that morphed from condos to apartments, retail and office space. Stu Ackerberg, whose Ackerberg Group is developing the complex, said his firm is "finalizing financing" but declined to elaborate.
In April, city planners recommended approval of the project on a site bounded by the Midtown Greenway and Lagoon, Fremont and Hennepin Avenues. Becca Farrar, a senior city planner, said this week that her department continues to work with the developer to get the required construction permits.
St. Paul project is revived
Plans for the Penfield in downtown St. Paul were revived this week with news that the languishing condo project has been changed to 208 upscale apartments, plus a Lunds supermarket and a 170-room hotel. The developers expect to begin work next fall but said they are still working to arrange financing for the $88 million project.
Bob Lux, a partner in the development, said the project would have no chance of getting financed if condos were still part of the plans.
"That market is totally dead. There just simply is not enough pent-up demand [for condos]," he said. Besides switching to apartments, Lux also said having Lunds as a long-term tenant should increase its chances of securing financing.
Even so, Lux said the credit crunch has severely limited conventional bank financing for such projects. He plans to seek financing from the U.S. Department of Housing and Urban Development, which would underwrite the project and provide a guarantee for part of the debt. Lux said that, in order to get financing, he and his partners expect to put up about twice as much equity as they would have a year ago.
Ed Padilla, CEO of NorthMarq Capital, a Bloomington-based real estate investment banking firm, said it's not unusual for lenders now to require an equity contribution of 40 percent of a project's cost. That compares with as little as 10 percent a few years ago.
"It's also harder to find equity partners these days. They want more of a return for the risk they're taking," Padilla said.
Lenders also are increasingly wary of commercial developments because they're unsure if their values will hold, he said.
"That's a fundamental question everybody is asking these days," he said. "Is your building, whether it's apartments or something else, going to be worth what you thought it was going to be when you started? There's a lot of uncertainty out there."
Susan Feyder • 612-673-1723