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Developer says it wants to cut Sterling Lakes losses
(by Sali McSherry - January 21, 2010)
Developer says it wants to cut Sterling Lakes losses
By SALI McSHERRY
The developer of Sterling Lakes in Pepper Pike said it wants to minimize its losses, which include monthly principal and interest payments as well as maintenance costs.
Sterling Lakes, under the parent company Forest City, has proposed increasing the number of townhouses at the Pointe, which is on the other side of Brainard Road from single-family dwellings in the gated community. The units would be priced in the low $200,000s and low $300,000s, compared to the originally planned $400,000 and up.
"At some point, it doesn't make sense to continue," Forest City representative Thomas Gerber said. The company could consider turning the property over to the bank, he said.
The area is approved for 93 units, but Forest City has a potential deal with national builder Pulte Homes if a development agreement is amended to increase the number to 132.
The reality is there probably won't be any profit when the area is fully developed, Mr. Gerber said. The company is a "non-recourse borrower," he said, because it is a publicly traded company, and it pays a premium for it. With a traditional home loan, whatever the balance is on the note, the bank will go after the borrower if he defaults, he said. As a non-recourse borrower, Sterling Lakes can give the property to the bank and walk away, he said. While it's an option, the company believes Pepper Pike is of value, and it wants to reach an agreement, he said.
Sterling Lakes has more interest and likelihood of maintaining the property and sustaining the quality and character of the property to preserve its future potential market than the banks do, David Hartt, planning consultant to the city, said. If the banks took over the land, homeowners association responsibility and maintenance on the property would be much more difficult, he said. The banks are looking at the situation from a monetary standpoint and would sell the land for significantly less, he said.
His opinion is that the differences between the proposed amendment and the current plan are minor, Mr. Hartt said. The most significant difference is the narrower and smaller units proposed along Interstate 271, he said. Homes already built at the Pointe substantially exceeded the minimum zoning requirements, he said.
Mr. Hartt said he believes it's more in the public interest and the interests of the existing Pointe residents to approve the amended agreement as proposed "than wait and hope for the market to be restored sufficiently to the original plan."
Councilwoman Gail Mayland asked Mr. Gerber if the company has considered reducing the purchase price of the existing units as an alternative to changing the plan.
He said they reduced the price but still cannot find buyers in that price range.
Councilwoman Paulette Morganstern said she was surprised that Forest City and other developers did not have a "plan B."
Mr. Gerber said, while they have gone through recessions and downturns before, they could not have foreseen the significant economic decline. The company had commitments from the builders before starting the project, he said. All the lots would have been sold by 2009, but the builders, whom they had done business with for years without problems, started defaulting on the project, he said. It's a unique situation, Mr. Gerber said.
He said they have not sold a lot in the gated area of Sterling Lakes in two years.
Mr. Hartt said, typically, a developer's plan B would be to build into the proposal a lot of profit, overhead and an overly projected sales period with interest costs. The developer would need to be very conservative about all of that in the proposed contingencies for additional costs and a slower market, he said.
On the request of Councilwoman Jill Miller Zimon, Forest City agreed to provide Pepper Pike with marketing data that supports the claim that there are buyers for the less expensive units at the Pointe.
Mr. Gerber told City Council they hired a firm to provide the market research and the report would be ready by next month's road and safety meeting.
Mr. Hartt shared a written summary of his oral presentation from earlier this month.
Mayor Bruce H. Akers and Councilman Frederick Taft said it's advantageous to the city to share Mr. Hartt's report with Forest City. With their combined advice and feedback, council will have the information needed to make a decision, they said.
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