Tacoma Condo Project Foreclosure Auction Reveals Grim Reality

How bad is the condo market in Tacoma? Pretty bad.

Recall this article from June: Tacoma Luxury Condo Project Headed for Foreclosure

The Esplanade, a nine-story condominium on the west side of the near-downtown Thea Foss Waterway, has until Aug. 21 to escape from the imminent foreclosure, said sources close to the project who were not authorized to speak publicly.

Just 10 of the 162 housing units in the building at 1515 Dock St. have been sold, and none of the retail spaces on Dock Street or facing the waterfront walkway has been leased.

According to the the Notice of Trustee sale filed with Pierce County (pdf), the developer (Thea Foss Holdings, LLC) has outstanding obligations of $48,532,793.62 on the project.

Saturday, the Tacoma News Tribune reported that the “winner” at Friday’s courthouse auction was the bank: IStar Financial wins Esplanade

…when the short bidding was done, the lender for the eight-story Esplanade condominium, IStar Financial Inc. of New York, emerged the auction’s winner with a price of $7 million.

Some two dozen spectators watched as attorney Greg Fox read the lengthy auction documents in a light rain outside the second-floor entrance to the government building and then began the auction process about 10:15 a.m.

The sole outside bidder, Northwest businessman Chuck Tomas, halted his bidding at $6.1 million as the bank successively topped each of his bids.

Take a minute to let that sink in…

There was one bidder. The maximum bid was $6.1 million. In other words, the true open market value on this condo project is roughly 87% lower than the outstanding debt. Of course, with over $48 million debt owed on the project, the bank refused to sell for what the market was willing to pay, and bought the project back themselves.

The units that have sold so far went for an average price of $532,350. An open market value of $6.1 million for the whole project puts the average value of the 151 remaining units at just over $40,000 each.

Yowza.

In somewhat related news, Mike Mastro agreed over the weekend to move into Chapter 7 bankruptcy (previous Mastro stories) which most likely means that the dozens of projects his company has fallen behind paying for will not end up in a similar public foreclosure auction situation, thus continuing to mask their true market values.

(John Gillie, Tacoma News Tribune, 2009.08.22)
(Puget Sound Business Journal, 2009.08.21)


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

48 comments:

  1. 1
    Slumlord says:

    I wish I could buy nine stories of luxury units for a fraction of the construction cost…

  2. 2
    The Tim says:

    RE: Slumlord @ 1 – Yes, well obviously you can’t because there’s no way in heck that the banks will allow themselves to realize that kind of loss if there’s any way they can help it.

  3. 3
    AndySeattle says:

    Oh the pain of a correcting economy. It’s like watching a scab being slowly torn off of a festering wound. Poor Mastro gambled like hell and is paying dearly. Greed is a helluva drug.

  4. 4
    Kary L. Krismer says:

    Foreclosure sales do not establish “true market values.”

  5. 5
    Kary L. Krismer says:

    Maybe I’ve missed it here, but what’s the deal with The Sanctuary in Renton’s The Landing area? It’s now a huge apartment complex. Did it start out as condo?

    I find the whole project terribly unappealing. It’s just a monstrosity, IMHO.

  6. 6
    WestSideBilly says:

    By Kary L. Krismer @ 4:

    Foreclosure sales do not establish “true market values.”

    While this may be true, I think the true market value of these condos is closer to the $40k than the $527k.

  7. 7
    Acerun says:

    RE: WestSideBilly @ 6

    That would assume there is actually a market now to live in a condo in Tacoma…

  8. 8
    Scotsman says:

    I think a big part of the problem is that no one knows what a condo in Tacoma may be worth in a couple of years- $40-527K is a huge range that reflects the uncertainty going forward. While $40K seems low we’ve got to add in carrying costs, legal fees, the condition of the building, etc. What are they worth if Tacoma has 125% of the housing it needs 4 years from now? With all the other options out there why take the risk? Why not conserve cash while waiting to see what’s available in a year or so?

    I agree the bank shouldn’t have sold for the high bid, but there is still a lot of pain to absorb here..

  9. 9
    k2000k says:

    Was the $ 6.1 million really even a serious bid? I mean, the bidder has to know that the bank will not sell the property for 1/8 the debt value. I’m imagining this conversation in my head.

    “Hey Joe The Esplanade are going into forclosure.”
    “Really Mark? How much is the current owner in debt for?”
    “Over $ 48,000,000”
    *whistles “How many of the condos have been sold, how much frontage has been leased?”
    “10 of the 162 condos and no retail has been leased”
    “What!!! There is no way they will come even close to getting money to pay for the debt with numbers like that!”
    “So should we even bother bidding?”
    “I don’t know, how much do you think that land is worth?”
    “I’d say 7 million.”
    “OK offer them $ 6.1.”
    “You think they will accept?”
    “Not a snowballs chance in hell. But hey we might get lucky.”

  10. 10
    Sniglet says:

    there’s no way in heck that the banks will allow themselves to realize that kind of loss if there’s any way they can help it.

    Banks really don’t have much of a choice. If they sold the properties with non-performing loans at actual market prices they would go insolvent immediately, since this would put them in violation of capital reserve ration.

    Thus, most lenders will just sit on foreclosed properties for years rather than recognize massive losses which would put them out of business. As Tim has explained before, this is all part of our new “extend and pretend” economy.

    Eventually losses WILL be recognized, but it is going to be a long, and drawn-out, process, and most assets likely won’t be sold for market rates until the lenders themselves go out of business.

    Of course, the government (which will ultimately own the assets of the failed banks) may decide to continue the insanity by refusing to liquidate non-performing assets as part of a mis-guided attempt to prop up asset values. Who knows, maybe congress will pass the “asset demolition bill”, that leads to the dismantling of any non-performing assets the government winds up owning.

    Now there is a great idea to improve the economy (kind of like paying farmers to burn their crops)!

  11. 11
    Slumlord says:

    Tacoma is a decent-sized city and it has been making great advances over the last 20-years. My introduction to the place was a day spent bicycling around Tacoma in 1990. The downtown/ waterfront area was a complete hellhole. There is still a lot to do, but the momentum is in the city’s favor.

    Scotsman is probably right that waiting another year or so is the optimal to preserve capital, but I can’t see anything wrong inherently wrong with buying for less than the cost of construction in an area with good long-term prospects.

  12. 12
    Sniglet says:

    I can’t see anything wrong inherently wrong with buying for less than the cost of construction in an area with good long-term prospects.

    I don’t see what the “cost of construction” has to do with determining whether something is a good value or not. Assets can, and DO, sell for FAR less than the cost of production, for long periods of time. Further, the cost of construction itself is flexible. Material and labour costs today are lower than they were two years ago.

    Who’s to say the cost of construction won’t be considerably lower than it is today in another 2 years?

    Lastly, I fail to see why Tacomo has good “long term” prospects. The entire global economy (including the Puget Sound) is heading into a decade long deflationary depression, and it is inconcievable that Tacoma will somehow be immune. Trade will continue decreasing substantially which will hurt the port facility, and demand for real-estate will continue to plumet, as people downsize their housing needs to meet the new economic reality of rising unemployment and lower wages.

  13. 13
    Marc says:

    One cool part of this guy’s bid is that he had $6.1 million cash in hand (or cashier’s check anyways) since foreclosure auctions in Washington require all funds be paid at the sale.

    Can you imagine going anywhere with $6.1 million in your pocket ready to spend?

  14. 14
    Andre says:

    By Marc @ 13:

    One cool part of this guy’s bid is that he had $6.1 million cash in hand (or cashier’s check anyways) since foreclosure auctions in Washington require all funds be paid at the sale.

    RE: Marc @ 13

    You can actually get a loan for a foreclosure. The bank you loaned to guarantees the funds are available.

  15. 15
    Marc says:

    True, their are hard money lender’s who will front the cash and I’m sure some banks will do likewise for very good clients. Also true that some states only require a portion of the cash in hand. Washington, however, requires 100% cash on hand to successfully bid at the auction.

    It ain’t your average tom, Dick, or Harry who can swing $6.1 mill on a given Friday morning.

  16. 16
    Costco Mike says:

    By Kary L. Krismer @ 4:

    Foreclosure sales do not establish “true market values.”

    How so? Don’t forclosures affect the value of a normal sale in some way? If I saw a forclosure property for less than a similar property it would effect my idea of the value of the normal sale property.

    Just curious on your line of thought.

  17. 17
    hinten says:

    It seems there are more and more properties that are empty, owned by banks but not up for sale. I see it in our neighborhood, homes that are barely maintained and empty but nobody is bothering to sell.

    Would mean that any sign of recovery will be immediately drowned out by more inventory when the banks decide to sell.

  18. 18
    Acerun says:

    By Slumlord @ 11:

    Tacoma is a decent-sized city and it has been making great advances over the last 20-years. My introduction to the place was a day spent bicycling around Tacoma in 1990. The downtown/ waterfront area was a complete hellhole. There is still a lot to do, but the momentum is in the city�s favor.

    Tacoma used to be like Detroit, now it is like Cleveland……

  19. 19
    Slumlord says:

    I think that the downtown and waterfront areas of Tacoma have good long-term prospects for several reasons. The first is a general rationale for in-city real estate. This is that the long-term trend is for increasing energy costs and, I expect, eventual shortages of gasoline. People living in urban areas tend to spend less on transportation than people in suburbs or rural areas do. Expensive energy makes city living more attractive.

    Second is momentum. The UW branch campus in downtown is growing and the finance industry built up around Russell Investments tends to be more cautious, and therefore resilient, than finance as a whole. As long as Russell remains in Tacoma, Tacoma will fare reasonably well. (Yes, this is a big “if”.)

    Third, the Port of Tacoma is extremely competitive. Yes, global trade is declining and it is likely to continue to do so. However, I expect Tacoma container traffic in Tacoma (and Seattle) to decline less than in LA/Long Beach. If this is correct, then the relative position of Tacoma is likely to improve.

    Fourth, investment capital is not rational. It follows trends and exaggerates them. If Tacoma’s relative position gets better, it will see an increasing share of investment.

    If my assumptions above hold true, then the downtown and waterfront areas of Tacoma should be able to resume their long-term trend of improvement and eventually there will be new construction again. Anyone who can buy at less than the cost of construction today, and hold through the temporary bubble collapse, will come out very nicely in the end. Yes, there will be dips in the cost of construction too, but $40k per unit on new concrete and steel construction is a screaming deal by any measure.

    As a final point, my optimism is for downtown, Ruston, and Old Town areas of Tacoma (and possibly for the Hilltop as well). Surrounding areas such as Lakewood and Puyallup are doomed. Also, bear in mind that I am talking about rundown areas gentrifying over time. These may not be the best places to live today, but they will be in 20 years.

  20. 20
    Indy says:

    By hinten @ 17:

    Would mean that any sign of recovery will be immediately drowned out by more inventory when the banks decide to sell.

    My view is that the banks are indeed holding back at every stage of the process because they have to spread the absorption of their losses and pace the write-offs on their balance books over time in order to avoid technical insolvency. But banks are not in the property business and can’t be comfortable outside their professional competency of providing financial services.

    They will rid themselves of toxic real estate just as quickly as they deem feasible, but their analysts clearly think the optimal strategy is to stretch things out over several years. This trickle will put some pressure on supply and pricing, and may forestall or delay any recovery, but it’s impossible at this point to precisely estimate the full extent of the effect.

  21. 21
    Pegasus says:

    I will be curious to see if the US government will buy these units from IStar and rent them out to the low income people. Will they pay the full 48 million owed to bail IStar through a backdoor deal spending taxpayers’ money so IStar won’t have to report a loss??

  22. 22
    Markor says:

    RE: Indy @ 20

    The banks clearly have another strategy, which is to claim they are too big to fail, hence the gov’t must give them huge sums of money to prevent failure and then they reward themselves with giant bonuses for surviving.

  23. 23
    Markor says:

    RE: k2000k @ 9

    Good story. I have read of some other rock-bottom deals that did go through, like in Miami.

  24. 24
    Markor says:

    RE: Kary L. Krismer @ 5

    Agreed. The nearby big-box stores and freeway would be soul-sapping too. The movie theater should be a plus.

  25. 25
    pfft says:

    “he entire global economy (including the Puget Sound) is heading into a decade long deflationary depression, and it is inconcievable that Tacoma will somehow be immune”

    according to whom?

  26. 26
    WestSideBilly says:

    By Acerun @ 7:

    RE: WestSideBilly @ 6

    That would assume there is actually a market now to live in a condo in Tacoma…

    At < $300/month P&I, there would be.

  27. 27
    Kary L. Krismer says:

    By Costco Mike @ 16:

    By Kary L. Krismer @ 4:

    Foreclosure sales do not establish “true market values.”

    How so? Don’t forclosures affect the value of a normal sale in some way? If I saw a forclosure property for less than a similar property it would effect my idea of the value of the normal sale property.

    Just curious on your line of thought.

    At any point in time, good markets or bad, foreclosures tend to sell for much less than normal sale transactions. Part of it is just uncertainty as to the condition of the property. There are no inspections, no feasibility studies, etc. Part of it is fewer financing options. There are no FHA loans on foreclosures.

    About the only way a foreclosure would establish “true market value” would be if there had been no sales for some time, and you had a few foreclosure sales that were higher than the most recent sales months prior. Very unlikely to the point of being basically impossible.

    Even in today’s market, REOs and short sales sell for less than other listings, so they’re not establishing “true market value.” At some threshold, however, they do hurt the market.

  28. 28
    harbord says:

    Correct me if I wrong, but 46 mil + 7 mil = 53 mil / 151 units = 351k per unit ownership costs. ( I know there is overhead)
    I still think that’s a little rich for a condo in t-town, but it brings the curve way down for getting out with a profit.
    There are an awful lot of $500k + condos in downtown tacoma.
    This will excelerate the darwinian flush

    Slumload @ 19: I drove through the hilltop to get my sandwich on, it’s still scary during the daytime

  29. 29
    Slumlord says:

    RE: harbord @ 28

    It is still a bit scary, but it is far better than it was. Here is gem from the good ol’days when the Hilltop Crips were bold enough to shoot it out with the army reserves…

    http://www.nytimes.com/1989/09/27/us/off-duty-soldiers-trade-gunfire-at-a-house-linked-to-drug-sales.html

  30. 30
    Markor says:

    [I deleted my comment]

  31. 31
    Mariner22 says:

    While 40K per unit may seem like an amazing deal (really isn’t a deal, it represents only the maximum outside bid at this point in time) keep in mind waterfront condos in big cities tend to have fairly significant homeowner dues – I know, I live in one. I see some fellow owners renting out their condos in lieu of taking a big haircut, and between homeowner dues and taxes, there isn’t a whole lot left for mortgages.

    In Tacoma, 505 Broadway must also be troubled – who in the world would want to take a chance that their 500K condo won’t have neighbors paying cut rate rent (section 8?) when the SHTF! Besides, what bank would close on a mortgage knowing the value ranges from 40K-500K.

    “Foreclosure Sales do not set market value.” Yeah right. I’m sure realtors respresenting sellers are repeating that line quite often, but I think the bankers with underwater mortgages on many condos are not so agreeable.

  32. 32
    ray pepper says:

    Hey I’ve been to the Esplanade. Nice place with lots of concrete. 100k-200k per unit is very reasonable…But then again……..

    http://www.cnbc.com/id/32541066

  33. 33
    Scotsman says:

    RE: Slumlord @ 29

    That’s too funny in a very dark way!

  34. 34
    Seattlepilot says:

    I understand the concept that foreclosure and REO sales do not set market values, but how does artificially choking supply create a market value? Taxpayers are subsidizing banks so they can fool buyers into carrying a bigger nut for the banks. If slow deflation of the real-estate bubble is the key, then that makes pawns of the people paying 2009 prices.

  35. 35
    what goes up must come down says:

    b>RE: The Tim @ 2 – Why should they?

  36. 36
    what goes up must come down says:

    RE: Seattlepilot @ 34 – Well said.

  37. 37
    Pegasus says:

    RE: Seattlepilot @ 34

    Exactly. When two thirds of the real estate sales are foreclosures and related sales it’s about time the appraisers started using those sales in their comps.

    “Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage. And only a third of the remaining one-third – roughly 10% of overall sales – comes from something we could call a normal selling process.”

    Investment Advisor John Mauldin

  38. 38
    mark says:

    RE: Slumlord @ 29
    They were actually active duty Army Rangers at the time.

    One of the guys arrested at the time is still at it.

    http://www.co.pierce.wa.us/cfapps/linx/calendar/GetPerson.cfm?person_id=51331&person_name_seq=1

    The TNT should do one of those where are they now stories and profile some of the actors in this case.

  39. 39
    Sara says:

    I just moved out of the building right next to 505 Broadway. I lived on that street in another building for years. Firstly the water view aint that hot. Secondly there have been luxury condos for sale in the area for as long as i lived there. Nice places 2000 plus square feet with huge verandas for the same price as these new condos which are way smaller with tiny decks. It truly luxury condos can’t sell why would these new condos move. Doesn’t make sense. By the way my water view top floor apt rented for 700 utilities included.

  40. 40
    J101 says:

    From what I have heard it was IStar’s plan all along to take the building back. I heard they were going to make it difficult for anyone to buy it at auction (not sure how other than outbidding) and now they will be funding the buyer’s mortgages themselves so they don’t have to deal with the FHA loan requirements.

  41. 41
    cc12 says:

    The bank took it back via a credit bid (against the amount it was owed) not a cash bid. The fact that the bank is owed $40M-$50M (and could credit bid that high, if need be), there was probably little competition and does not represent a market sale. The concept is that the bank now owns it and can sue for a deficiency judgement (i.e. the delta between their balance and the $6.1M) if there is any guarantor.

  42. 42
    meg says:

    In Seattle, The Gallery & Brix Condo auction is happening in a couple weeks… with some pretty steep discounts, too. I’ve heard it’s a depressing state of affairs for owners who paid full price.

    http://seattlecondosandlofts.com/2009/08/gallery-brix-condo-auctions

  43. 43
    Kary L. Krismer says:

    RE: meg @ 42 – If I were those owners I wouldn’t be worried so much about what they paid, but about the association being able to pay it’s bills, or even the possibility that the condo will somehow be undone. Whenever you buy you know prices can go up or down, but you don’t anticipate additional financial trouble because of your neighbors (or lack of neighbors).

    Even in the good times we would advise clients to stay away from new condos or new conversions. I think we’ve only had one client buy into one (a conversion) and his sale was the last or second to last sale.

  44. 44
    meg says:

    RE: Kary L. Krismer @ 43 – True, I know they were anxious for the many empty units to be sold. But discounts above 50%, nearing 60%, are making some people I know feel pretty stupid, that’s all. I said, way back, it was foolish to pay such high prices. But that advice was seen as just a dark cloud that tried to rain on their party, and real estate was always going UP, etc. Anyway, now it’s regret-time.

  45. 45
    ruban says:

    The above comments work if the macro economy of real estate itself is looked for recovery out of this slump. There comes a point when other macro economies such as defense, new tech ventures or other in comparison to real estate become less feasilble. And this would pump financial resources from these other sectors into real estate which would fuel the recovery.
    The thing I see in Canada would work here as well if the Obama administration is smart enough to see why the Canadian real estate market has not taken a down turn. I believe it is because of their real aggressive immigration policy in which a large number of capable and highly talented people are entering the country on an annual basis. The basics are that every economy is fueled by people in the end. Hence if you can emulate that then I thing we will have a good base for recovery and long term prosperity. But it also begs for support systems to help the new immigrants initially establish and it takes 10-12 years for one to be able to make a purchase of high dollar items such as real estate.
    Something to thing about…

  46. 46
    ruban says:

    why the dog on every comment can we not choose…
    no pun intented I have a lab myself…

  47. 47

    […] the sales manager for The Esplanade replied, “What market?”  The Esplanade building was foreclosed on in 2009 and it seemed as if Tacoma would become a perfect example of failed gentrification: […]

  48. 48

    […] the sales manager for The Esplanade replied, “What market?”  The Esplanade building was foreclosed on in 2009 and it seemed as if Tacoma would become a perfect example of failed gentrification: […]

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