Locked Out

Rollin Street Flats, a brick and steel condo building in South Lake
Union, enchanted Chip Serkland and his
fiancée in early
2007. The couple put down a $22,000 deposit with the developer, Vulcan Real Estate, for one of 208 spacious condos,
plus another $26,000 for custom upgrades, including more power outlets
and a kitchen island.

Vulcan said residents could probably occupy the building by April of
this year. But in February, Vulcan sent Serkland and others who signed
contracts for condos a letter indicating that new federal lending rules
prohibited them from moving in.

Government-controlled lender Fannie Mae established regulations in
March that block most condo developers from closing deals with buyers
if the developer has sold fewer than 70 percent of the units in a
building. (Previous rules only required a presale rate of 51 percent.)
The new rules—which fellow mortgage giant Freddie Mac is expected
to adopt as well—will apply to most condo loans in the United
States.

“Rollin Street is not 70 percent presold, nor will it be by our
originally projected closing dates,” a Vulcan representative wrote in
the letter.

“Most of the projects around town that are currently being sold” are
affected by the new rules, says Matthew Gardner, principal of
real-estate analysis firm Gardner Economics.

Many of the large condo buildings currently being built in Seattle
are below the 70 percent threshold—meaning that hundreds of
people who’ve already put down deposits may have to live elsewhere even
after the buildings are completed. Equinox, a 204-unit condo under
construction in Eastlake owned by Schnitzer West, was only 30 percent
sold earlier this month, according to a sales representative. And at
the Danielle, a 31-unit building in Ballard that should be completed
this summer, not one unit has been sold.

Developers can apply for exemptions to the new 70 percent rule, but
Vulcan spokeswoman Lori Mason Curran would not say whether Vulcan had
done so.

The new restrictions are designed to protect lenders and borrowers
from assuming risky debt on massive projects that have only a handful
of tenants—a problem plaguing Miami and parts of California.

If developers can’t presell 70 percent of a building’s condos before
opening—a steep expectation even in a strong market—market
forces may push developers to convert their buildings into apartments
or drastically reduce prices.

In its February letter, Vulcan said that no sales would be closed
until April 15, 2009. But when The Stranger contacted the
company on April 13, Mason Curran could not give any timeline for
moving in residents.

“I am not in a position to discuss it until we’ve had a chance to
communicate further with the buyers,” said Mason Curran. When
will Vulcan “communicate further” with buyers? “As soon as we
have something we can tell them,” she said.

Serkland, who currently lives in Auburn with his wife, says the
company has been frustratingly “tight-lipped” about its plans. Fellow
buyers have retained lawyers and are running down the clock until July,
when contracts require Vulcan to either let tenants move in or refund
their deposits.

“As buyers, we are all in limbo,” says Serkland, a former delivery
driver for DHL who now runs his own business as a personal
assistant.

Last month, Vulcan lowered prices at Enso and Veer Lofts, two of its
projects in South Lake Union. Condos at Enso now range from $350,000 to
$499,000. As prices on unsold condos drop, some buyers may choose to
walk away from deposits rather than hang on to units that have lost
much of their original value, real-estate analyst Gardner says.

The new rules may also discourage high-density condo construction in
the city, because condo projects require many separate sales, which
makes reaching the 70 percent mark more difficult. Instead, the rules
could favor sprawling single-family houses in the suburbs, which can be
sold one at a time.

“If those rules don’t change, developers will think twice about
developing condominiums,” says Mason Curran. “There is potentially a
huge negative impact on the urban environment.”

But Dean Jones, president of Realogics, one of Seattle’s preeminent
development consultants, thinks fewer new buildings could be a
temporary benefit in the city’s slow real-estate market. “The silver
lining is that the market won’t get overbuilt,” he says.