Trouble might be an understatement.
If the project is already $70M over budget, that number is for sure going to go up. While lagging sales don't help, the projects biggest problem seems to be the rising costs. Higher costs are always built into estimates, but it sounds like they went much higher than he was expecting.
I still think if he can get this built, he will sell out over the next couple of years, the problem is like the article says he probably isn't going to make much money in the end. He might even just be looking to break even right now.
CalPERS will get their share for their backing, Deutsche Bank will get its money, and Saca will be the last person to make a profit off of this project, if there is anything left.
He's overcome a lot of hurdles to this point, so my guess is he will over come this one as well. Having Bovis Lend Lease on board at this point is definitely a plus. The next couple months will tell an awful lot.
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Towers project facing hurdles
Downtown high-rise residence far over budget; unit sales lag.
It's little more than a giant hole in the ground, but already the 53-story Towers hotel and condominium project is $70 million over its original $500 million budget.
Meanwhile, sales of the Towers' condos are slow, and developer John Saca has switched general contractors.
What all of that means for one of the tallest residential construction projects on the West Coast remains to be seen. Saca is in talks with his backers for more money, and his isn't the first commercial development to overshoot its budget. Contractor changes aren't as common, but Saca says that the swap brings in a more experienced high-rise mixed-use construction firm.
However, one thing is clear: Saca admits the Towers, at Third Street and Capitol Mall, is being pinched between a weak housing market and rising prices for materials such as steel and concrete.
Despite those challenges, Saca, a scrappy local developer who has already brought his project farther along than naysayers thought he would, remains optimistic.
"We're close to a deal with our backers for more money," he said Wednesday. "We're pumping along."
Saca went public two years ago with his vision for a massive twin-tower structure anchored by a luxury hotel, high-end retail and 804 condos rising 600 feet and drastically changing the Sacramento skyline. He figured it would cost about $500 million for the land and construction.
Many thought the building was too ambitious to be Sacramento's first high-rise condo project and questioned whether there were enough customers to fill all those units, priced from $368,000 to $852,000.
Saca, whose father founded the Filco home appliance chain, had a reputation as a savvy land investor and shopping center developer, but had no history with high-rise construction. Still, he gained credibility in April when the giant California Public Employees' Retirement System agreed to invest $100 million in his project.
Two months later, he signed a $375 million loan agreement with Deutsche Bank, contingent on Saca preselling 400 condos. Saca committed his own money to make up the balance.
Construction started, but as massive pile drivers over the summer banged away at the Towers' downtown Sacramento site, Saca realized the initial cost estimates fell short.
He appealed to Sacramento city officials and received an $11 million subsidy in October for the 18-story Intercontinental Hotel that will anchor one of the building's two towers. Now, he's in talks with his other financial backers for more.
"Costs are higher than when we struck our deals," Saca said. "We've had to go back, and we're close to loan closings with CalPERS and Deutsche Bank."
A CalPERS spokesman on Thursday said that the system's real estate representatives "have been in discussions with Saca about more money," but, like Saca, declined to say how much.
Calls to Deutsche Bank's New York offices were not returned.
Sacramento developer Paul Petrovich said that Saca probably will give up more or all of his ownership stake in the project for more construction cash.
"The pot at the end of the rainbow for John at this point isn't money, it's credibility with politicians, other cities and other lenders," Petrovich said.
With the Towers on his resumé, Saca could get into even bigger projects down the road, Petrovich said.
Besides funding challenges, Saca also said the condo market has gone soft with the rest of the housing market, and the Tower's sales are "slowing down." He also has a condo competitor, Craig Nassi, whose Denver-based BCN Development has plans to build the Aura tower two blocks east on Capitol Mall and Sixth Street.
Through September, buyers had made deposits on 364 units at the Towers, according to the most recent figures from Hanley Wood Market Intelligence, a Costa Mesa firm that tracks residential construction.
The slump didn't deter Bovis Lend Lease Inc. from taking over the general contracting duties from Turner Construction Co., which had overseen the project's pile driving phase. Both firms are based in New York City.
Privately-held Bovis is one of the world's largest project management and construction companies.
Bovis' Western Regional Vice President Todd Pennington said that he couldn't yet estimate when the Towers will open.
"We're developing schedules and hiring the trade contractors," Pennington said. "We'll just keep moving from where others left off and keep the progress going."
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7 comments:
It's kinda scary to hear what is going on behind the scenes. Saca will pull it off if not for a profit, for name sake... like the article said.
cxmabSome interesting points in the business journal today. It's amazing the difference in tones from the two articles. Also funny how much more detail the Business Journal has than the Bee...shocking.
- He has a verbal commitment from CalPERS for more money
- He needs about 12 more units to reach the 400 mark.
- Deutsche Bank has restructured the loan to say the units he's sold is 'good enough'
- Work has started on the foundation. That will take a month
- The project has enough equity to go well into 2007. This will allow the project to still move forward while the new deals are finalized.
- With the new deal he will be able to lock in prices for basic materials, plumming, electrical and mechanical. Thus preventing those costs from going up.
1. The Agreement between Calpers and Saca states that there will be no investment UNTIL Saca has the agreement complete with Deutsche Bank and that all Permits and Fees have been acquired
2. Deutsche Bank is currently readjusting their outlook on the economy, becoming much more dissatisfied with Real Estate Investment and focusing on the Bond Market instead
Interesting. With Saca saying there is enough equity in the project to go well into 2007, I would think the project would need the CalPERS equity in order to do that.
I'm sure Saca has money, but I can't imagine he has enough to keep it going that long.
Now that I think about it, I think I may have misunderstood you..in point #1, are you referring to the original deal with CalPERS? or the one that he says he has a verbal on?
Wow! You people don't have any idea of what is happening here. First of all any loan with any bank is always subject to go before a bank credit committee. If there is a delay between a commitment and fulfillment the loan needs to be approved by the credit committee again prior to any deal being inked. The DDeutsche Bank deal is laughable. They were the last in a line of many large banks that passed on this absurdity. The "agreement" that saca need to sell some 400 units prior to get the funding would have to be reviewed again once the benchmark had been met. If Saca ever reaches this benchmark, only then will Deutsche Bank's credit committee review the deal for final approval. Copnsidering what has occurred lately with real esate and the cost over-runs Saca has experienced, a deal is seriously doubtful.
Secondly, where has the $100,000,000.00 Calpers money, $11,000,000.00 City money and $approx. $,000,000.00 down-payment money been spent? Surely that monkey show of pile driving has not eaten up the whole budget. Perhaps a foresic audit committee should begin to account for the spending of public funds.
Thirdly, who at Calpers approved the $100,000,000.00 contribution to the project? Even more importantly - why did that person quit CalPers just 2 weeks after the deal was consummated?
Have you people ever seen the movie "The Musicman"?
Its interesting that the City has valued the towers project at about 225 million instead of the actual estimated construction cost of 450 million or more. This results in a reduction of building, transportation and park fees of about 12 million. A gift of public funds one must ask?
Also the structural design for these towers is similar to that of the Rincon Tower in San Francisco, the design of which is still being debated in the structural engineering community.
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