City leaders are sticking to their guns: They want a residential tower on the former Market Square Arena site downtown. And they want developers to start construction before they ask potential residents to buy.
The idea is to eliminate the stumbling block that derailed previous redevelopment efforts, but observers say the requirement will make it difficult to line up financing-unless the city kicks in some money.
Mayor Bart Peterson hasn’t ruled that out, but he remains resolute on one point:
“I’m not going to commit to anything if there’s a pre-sale requirement,” he said. “We’ve tried that … and it didn’t work.”
In most residential high-rises, developers fund construction with a bank loan. To lessen the risk, banks can require the developer to pre-sell some units-often as much as 40 percent in a market like Indianapolis, where condo towers are unproven-before beginning construction.
But if the units don’t sell, the project doesn’t get far-as Market Square Partners LP learned after failing to meet pre-sale requirements on a $70 million, 31-story condo building that was to be the first phase of redeveloping the MSA site. The city canceled its agreement with the developer last month and will solicit new proposals.
Developers have a couple of alternatives to the pre-sale requirement: finding private investors to pony up about 20 percent of costs so a bank would cover the rest with a less-restrictive loan, or finding a bank willing to assume all the risk.
Some doubt either would work here.
“A high-rise with no pre-sales seems like an extremely unlikely scenario [in Indianapolis],” said Jim Thomas, a partner with locally based Hearthview Residential Inc., part of a group that pitched a condo tower when the city chose Market Square Partners.
Other developers-including some who bid on the project before-echo his concern. But there’s at least one local dissenter.
Indianapolis-based Flaherty & Collins Properties lines up private investors to get around a pre-sale requirement on almost all its projects, including a 50-story condo tower under construction in Charlotte, N.C.
“We’re big on being able to start construction and then start sales,” said principal David Flaherty. “People won’t know that it’s a real deal until you start construction.”
Flaherty & Collins, which bid on the MSA project before, hopes to try again.
It may draw on its experience in Charlotte, where the developer tapped longtime backers for help, including Indianapolisbased House Investments. Through capital commitments from them and a long-term relationship with its bank, it got started on the project without pre-sales.
Now that the cranes have started moving dirt, the company has sold more than 80 percent of the 416 units-even though they won’t be ready for residents until mid-2008.
Still, skeptics say Indianapolis is no Charlotte. Although that financing model works there, high-rise condos are popular in North Carolina’s largest city. In spring 2005, seven high-rise developments were in the works.
Indianapolis has just one high-density high-rise: apartments in Riley Towers downtown. Other high-rise residential projects are smaller and less risky, like the 15 condos at the top of the Conrad Hotel.
Flaherty agrees Indianapolis still has a way to go to catch up with the high-rise trend increasingly common in peer cities. But no pre-sale financing is a must in newer markets, he said. And such pioneering projects usually get public money.
Peterson said he’s open to discussing incentives, but the city would want a return on its investment.
City officials are still working on details of the bidding process, something they expect to finalize by January. Developers who show they can do the project without a pre-sale requirement will have a “leg up” in the process, the mayor said.
IBJ reached leaders from four of the five remaining original bidders, all of whom said they’ll submit new proposals.
Flaherty said he’d like so see the city use an alternative bidding process this time, first selecting the most qualified developer and then negotiating the details.
Although many of the bidders may be the same, new proposals could surface, too.
“There’s been so much that’s happened downtown since [the first bids], it may even entice a few others [to participate],” said Terry Eaton, chairman of Eaton Investments, part of a group that originally bid on the site. “I’m anxious to see the new call for proposals.”