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Exceedingly Large Holes, 3% Down

Correction: We erred last week (as did the SF Business Times) by implying that Mark Leno's AP728 is a new law. It dates back to September 2003 and permits developers to demand 3% non-refundable deposits before construction.
[More amplification: An early morning tipster tells us that AP728 had expired and was only revived in January '06. And that One Rincon Hill is being super friendly to realtors, obviously realizing they'll sell more the wider they cast their net. We love tips. -Ed.]

We also caught some flack, understandably, from realtors who didn't like Curbed SF's post about Florida-style development, with the use of sales centers and non-refundable deposits to secure construction financing. Baffling, really, because condo sales centers are a realtor's worst nightmare: developers throwing millions of additional dollars into marketing directly to consumers.

Why build a sales center? With Bay Area appreciation rates declining, lenders are demanding better performance with pre-construction marketing and non-refundable deposits. Lenders and private equity groups do not make money thinking reservation means sold- closed escrow means sold. Why ask now, suddenly, for a non-refundable 3% deposit?

One condo developer has bailed on their entire project at 535 Mission Street- to a developer of office space. Last month, 66 properties closed escrow in Zip Code 94107, where most of the new development is complete or well on it's way. So based on the number we keep hearing, at even double that rate it will take twenty months to... close escrow. And with appreciation sinking to the very low single digits and jumbo CD's hovering at 5%, investors will wait. Meaning if someone actually puts down a deposit at one of these sales centers, chances are they expect to move in when the building's finished.

Realtors in San Francisco have no incentive to represent clients in new condo developments. Some developers actively discourage buyers from their own representation- The Watermark, for example, will compensate a buyer's realtor (with a "fee") only if they've registered at the first visit. A realtor's incentives come at resale- selling investor units. It's the job if the marketing staff to keep saying "we're almost sold out!" and realtors naturally parrot them. Yes, the world will implode if San Francisco evolves into- gasp- a buyer's market.

One can only speculate if the exclusion of realtors from the new-development market (unlike New York City, for instance) has inadvertently created more realtor-guided and Ellis-Acted TIC's, a business area where the realtor can collect a commission on the sale, the financing, and the title insurance. Plus any cruise tickets that might come their way.
· Condos [SF Biz Times]
· Curbed Shoots- and Misses [Socketsite]
· Developer Drops Plans for Condo Tower SF Biz Times]
· Appreciation Declines [Data Quest]
· Jumbo CD's []
· Doing it, Florida Style [Curbed SF]