The 8 year saga of the Palladio ended on Friday with the filing of a Trustee’s Deed.  The retail spaces and condo 710 (the last unsold unit, listed for $249,000) went back to the bank for $761,862 on a remaining principal balance of $6,120,079.  That seems like a decent estimation of current market value.

Marketing for the Palladio kicked off in early 2004, the land was transferred from the Redevelopment Agency for $275,000 in May 2004, and the first Purchase Agreements started showing up in August 2004.  $28,550,000 in construction financing was obtained from Merrill Lynch May 2005, and construction kicked off.

The Palladio was ALMOST a grand slam for the developer, but construction problems surfaced almost immediately that slowed the initial occupancy by 6-9 months.  Cost overruns, water infiltration into the basement, utility problems.  The first closing was delayed until June 2007, just before financial Armageddon.  Downtown Makeover has a pretty giddy discussion about the Palladio, a video tour, and discussion of the developer’s attempt to cut cost by deleting the (unfortunately) signature green metal gable roof.

$42,234,551.  The total amount paid by buyers for 91 of the Palladio’s 92 units plus the second floor raw shell commercial space, or about $340 per square foot.  Remember, $/psf included the cost of common spaces, elevators, pool, and garage.  I kept a spreadsheet on unit sales for years, and just updated it after ignoring it for a while .  It is HERE if you are interested.

Risk / Reward.  The more equity a developer brings to a project, the greater their potential profit (or loss).  I suspect that Palladio BCN Development brought in 50%.  With the $28.5M construction loan, it would have meant a $57M project cost.  I think the overall loss on the project was about $15M, or about 25% – actually not to shabby given the market.

–  NOD filed on 6/30/2011 on a missed 9/30/2010 payment.  Remaining principal on the $28.5M loan is recorded as $17,243,620.

–  NOS filed on 12/1/2011, with a remaining principal balance listed as $6,120,079.

–  TD filed on 1/6/2012, with a remaining principal balance listed as $6,120,079.

In very broad strokes, this is how condo financing usually works.  Say a lender loans $1,000,000 to build 10 condos at $100,000 each.  If the developer sells a unit for $125,000, the principal owed the lender is paid down the $100,000, a Partial Reconveyance is recorded for the unit removing it from the master loan, and the developer pockets the extra $25,000.  Sometimes the entire purchase price is applied to the loan principal, paying off the lender early and pushing the developer’s profit margin into the sales price of the last units standing.

Something is amiss at the Palladio.  Despite selling virtually all of the units, the principal was only paid down to $17.2M from $28.5M by the time of the default.  It looks like the developer was getting paid of on its investment ahead of the lender.  Then between the NOD and NOS, the principal owing dropped $11M to $6.1M.  Did Merrill Lynch write down the loan, or did Palladio kick in $11M as a settlement?  In either case, it is a recording error that will have to get fixed some day.  My best supposition is that the bank and the developer each ate $7-8M.

Now for those early unit buyers, some of whom paid over $500 psf, the losses may be much greater.  REO sales in the building are running about $150 psf.


As an aside, I’ve added a “Resources” page to the blog.  It contains links to the Recorder, Assessor, Secretary of State and other sites you might need in your property research.  Let me know if there are other links you find helpful that I should add.