Donald Trump's Troubled Towers in Chicago

The Chicago Tribune reports:

So far, Donald Trump said he has contracts for about 65 percent of the 339 condo-hotel units in the building. Individuals buy these units, often as a second home, and place them in a rental pool when they are not using them, to generate income. Room rates are expected to start at $300 a night.

Trump was not precise about the number of condo-hotel unit sales but said they were slightly more than the 223 units reported in May, and that prices ranged from $500,000 to $9 million.

The project's condo-hotel room sales took off smartly three years ago but have flattened more recently.

"The market in Chicago is dead as a doornail right now, as is the rest of the country, other than Manhattan or Palm Beach, Fla.," Trump said, blaming the nationwide credit crunch. "But that will change. A lot of good things could happen in Chicago's case. It has a great chance of getting the [2016] Olympics ... and if credit becomes available again, that will help."

Meanwhile, he said he plans to retain ownership of unsold units and add them to the hotel rental pool. Trump is juggling an array of other projects in this tough market, including sister hotels in Las Vegas and Ft. Lauderdale.

The 92-story mixed-use tower at Wabash Avenue and the Chicago River, which will be the second-tallest building in the city, after Sears Tower, when it is completed in April 2009, also will have 486 traditional condominium homes. About 77 percent of those are under contract.

Looking at condo-hotel and traditional condos together, "we have sold more than $600 million worth of units," Trump said. This amounts to about three-fourths of construction costs, which Trump estimated at $775 million earlier this year but now says could go as high as $800 million.

Development costs rising

With units selling slowly and development costs potentially rising, observers say Trump may be feeling the pain afflicting other developers around the country who have to increase their equity investment in a project to stay in compliance with the terms of their construction loans and other financing.

Trump said his stake in the project is about $40 million. He also has a $640 million construction loan from Deutsche Bank and a $135 million mezzanine loan, which is shorter-term, higher-cost financing that fills the gap between the equity, the debt and the total project cost.

Usually if there are cost overruns lenders will not advance more of the construction loan until they know who will provide the money to pay for the increased costs, either the equity investor or the mezzanine lender, industry sources say. Until more equity is invested a bank loan may be deemed to be out of balance.

Trump said he is not feeling such stress.

Asked about the potential for costs to rise from $775 million to $800 million, he said, "In my world, that's about the same thing. ... We are on budget and ahead of schedule."

"I have a lot of cash and haven't had to renegotiate my financing," he said. When he secured financing in 2004 underwriting terms were easy, he said, and lenders "were throwing money at you." Trump, one of the first to enter the Chicago condo-hotel market, had the advantage of selling early into a hot real estate market.

But the big question, say industry observers, is how real are the sales of condo-hotel units and condominium residences?

"If Trump really sold $600 million worth of units in an $800 million project that's spectacular," said George Fantini, chairman of Fantini & Gorga Investment Bankers LLC in Boston.

And since 132 condo-hotel units have been sold to corporate buyers that lowers the risk because businesses are more likely to close on the units than individuals, industry sources said.

Given the turmoil in the mortgage market, many individual buyers are having trouble getting mortgages and are not closing on units they agreed to buy. Others may decide to forfeit the deposit and go after a similar but cheaper unit now that prices are falling.

Nationwide, the rate of new-home buyers canceling contracts has spiked upward.

"For the most part, large builders are reporting cancellation rates of roughly 40 percent, up from about 20 percent in the strong housing market of 2002 through 2005," said Stephen Melman, Director of Economic Services for the National Association of Home Builders in Washington, D.C.

And there has been some dramatic cratering in the condo-hotel market.

"I know of one [condo-hotel] project in South Florida that ... was supposed to have been two-thirds sold out but when it opened in July with 158 units, they had seven closings," said Johnson, of Jones Lang LaSalle.

"I can't imagine Trump would have the types of problems that happened in Florida, which is Ground Zero for overbuilding this product, coupled with crazy speculation," she said. "Anything with the Trump name on it and the river location -- that's just a fabulous piece of real estate."

The hotel's decade-old sister property on Central Park West in New York has done "very, very well," she said.

Still, she said, "I wouldn't be surprised if there was some fallout" as deals move to closing.

Already, the condo-hotel trend in Chicago has slackened. While there were at least a dozen projects in the pipeline two years ago, many have fallen away, particularly projects involving new brands or independent properties.

One exception has been the conversion of the Hotel Raffaello, a vintage property at 201 E. Delaware Place, into a condo-hotel. Located in the shadow of the John Hancock Building, it is the first to market.

You'll want to read the whole,long, article on the Donald's Chicago project.