Condo loan rules stifle sales

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LONG ISLAND, N.Y. — Since developer Mike Kelly started selling units in his company’s new $50 million condominium community in Patchogue last fall, he’s been up against more than just a sluggish housing market.

Kelly, who is partnered with beer distributor principal Sean Rose in the project known as River Walk, has so far built 27 condos of the 163 residences planned and sold 19 of them.

But nearly a year after the first condo went into contract, Kelly said sales could be a lot better if prospective buyers were able to qualify for mortgages insured by the Federal Housing Administration, which only happens if the condo development can meet the agency’s strict guidelines.

Built on the 12.5-acre former site of the Clare Rose beer distributorship – which relocated to 34 acres in Yaphank – River Walk is just a half block from the Patchogue Long Island Rail Road station and has been hailed as a model for transit-oriented development and adaptive reuse of the old warehouses.

Priced between $290,000 and $375,000, the condos attracted interest. But the FHA requires a 30 percent down payment for conventional condo mortgages, which many buyers in that price range don’t have. And while an FHA mortgage can be had with as little as 3.5 percent down, the entire condominium complex must be qualified for FHA lending before an individual buyer is eligible for that type of loan.

For a condo development to be certified for FHA lending, it must adhere to a host of rules, including keeping a reserve fund equal to at least 10 percent of its annual maintenance fees; pre-selling at least 50 percent of the condo units (or at least half of each phase of construction); and changing bylaws to remove any restrictions on condo owners being able to lease their units.

And in some cases, municipalities restrict any leasing of condo units.

To get River Walk FHA certified, Kelly hired consultant Orest Tomaselli of National Condo Advisors in White Plains. Tomaselli presented Kelly’s case to the Village of Patchogue’s zoning board, which decided to allow at least one of River Walk’s condos to be leased by its owner, clearing that FHA hurdle to secure the complex’s certification.

National Condo Advisors typically charges $1,500 to $4,750 to consult with condo owners and help them become FHA certified, according to Tomaselli.

He said condo developers need to have a plan to get their units sold, which includes making sure the complex meets FHA lending standards.

“It’s one thing to build it. It’s another thing to sell the condos and get out from under that short-term construction loan,” he said. “It has put some projects under.”

Where municipalities will allow it, some new condo developments have made the switch to rentals, mostly to take advantage of the higher demand for that product, but also because they didn’t comply with FHA condo lending rules.

Hawthorne Court, a 90-residence condo development under construction by the Dennis Organization in Valley Stream, was recently sold to Zeus Cottage for about $23.5 million. The new owners, who received incentives from the Hempstead Industrial Development Agency for taking over the project, will convert the complex into luxury rental apartments. Sales of the condos, priced at $300,000, were slowed, developers said, because many prospective buyers were unable to obtain mortgages since the project wasn’t certified for FHA lending.

Before banks tightened borrowing a few years ago, federally backed mortgages, either through Fannie Mae or Freddie Mac, were readily available for condos whether or not they were FHA certified, according to Mike McHugh, president of Continental Home Loans in Melville. That’s all changed.

“Now it’s not offered or it’s very limited,” McHugh said. “There’s high equity required, as much as 40 percent down, and buyers need higher FICO (credit) scores.”

Scott Burman, a principal in Garden City-based Engel Burman Group, which is now selling the last of the 404 condos at its Seasons in East Meadow community, said the FHA’s 50 percent presale requirement is the toughest for new developments to overcome.

“It’s prohibitive,” Burman said. “Fifty percent is a pretty serious threshold.”

The Seasons is FHA certified, something that he said all new condo projects should strive for in order to survive.

“To have a successful project, you need it,” Burman said.

FHA certification also affects existing condo communities, especially for owners trying to resell or lease their individual condos.

Real estate broker Jamie Winkler, of Winkler Real Estate in West Islip, said many of the condo complexes she deals with are cognizant that they must limit rentals of condos to 50 percent or less to be FHA compliant.

“Because if they go above that mark, the complex becomes ineligible for those type of mortgages,” she said.

Owners at non-FHA-certified condo communities also can’t get a reverse mortgage, which is an FHA product.

Nationally, Tomaselli said at least 30 percent of condo buyers use federally insured mortgages to purchase a condo, a big chunk of potential business that non-FHA-certified complexes and their individual owners are doing without.

For Kelly and River Walk, the FHA certification means a new lease on life for condo sales as he gets ready to start phase two of construction.

“It’s opened us to a whole other area,” he said. “That puts us over the edge.”

WINZELBERG writes for Long Island Business News, a sister publication to The Mecklenburg Times.