Cleveland—In the heart of this city’s downtown, in a region wracked by mortgage foreclosures and falling home prices, Zaremba, Inc., plans to build 550 condominiums at its high-rise Avenue District project.
In December, the first tower, with 62 planned condos, had almost topped out at 10 stories.
Sales prices are rising for the condos, according to Brian Blasinsky, financial manager for Zaremba. By December, 35 were already under contract to sell.
Federal New Markets Tax Credits (NMTCs) made the deal possible. Equity provided by the NMTCs covered some of the profit KeyBank needed to earn from its loan to the developer, allowing the lender to lower the interest rates on much of the project’s construction financing. “From our standpoint, it’s just like a commercial loan,” said Blasinsky.
The low interest rate helped make it possible to offer condos at prices averaging about $300 a square foot. That’s about $100 per square foot lower than the prices of comparable projects in secondary markets like Pittsburgh and Nashville, said Blasinsky.
The prices were low enough to attract homebuyers to downtown. Zaremba has been able to raise prices by as much as 6 percent since the condos first began to sell 18 months ago, while still attracting a steady flow of buyers.
The NMTC program is intended to encourage commercial investment activity in low-income neighborhoods.
Zaremba’s lenders used the equity generated from the NMTCs to make a loan instead of providing equity directly to a mixed-use development. That’s allowed under a provision of the NMTC program that authorizes use of the credits to make loans to businesses located in low-income census tracts.
KeyBank made a $12 million floating-rate construction loan subsidized with NMTCs to Zaremba to build its high-rise. At press time, the loan’s rate was 5.5 percent. Just to compare, the project received a second unsubsidized $12 million floating-rate construction loan from National City Bank. At press time, that loan’s rate was 7.25 percent.
The tower also received an NMTC-subsidized $2 million construction loan from the Cleveland New Markets Investment Fund for the tower’s first-floor retail space. That adds up to a $26 million package of loans. When Zaremba’s own undisclosed equity investment in the tower is added in, the total development cost could come close to the $29 million that Zaremba expects to receive from condominium sales.
Thin profit margins now may be a small price to pay if Zaremba’s long-term strategy pans out. By creating a new market for high-rise condos downtown, the developer hopes to increase the value of the future buildings it’s planning for the project. Zaremba has an option to buy land from the city of Cleveland for later phases at the Avenue District. Plus, it plans to build 64 for-sale townhouses on the site.
“We like to call ourselves pioneers,” said Blasinsky.