Want to Know What’s Really Happening in Maine Real Estate? The MEREDA Index Has More Than Just The Numbers.

The MEREDA Index, a key economic indicator for the state of Maine, was presented yesterday at the Maine Real Estate & Development Association’s (MEREDA) 2019 Annual Forecast Conference.  While the Index was little changed in the last six months, declining by 0.2% since the first quarter of 2018, the individual components of the Index—commercial, residential, and construction—help tell the story beyond the numbers.

“When we elected to embark on this project in 2013, we understood that this was information that over time would become more meaningful, as a way to compare and chart the progress of the real estate industry in Maine,” says Gary Vogel, MEREDA President and attorney at Drummond Woodsum.

The MEREDA Index is a measure of real estate activity designed to track changes in Maine’s real estate markets.  The Index is a composite of nine seasonally adjusted measures reflecting both new development and transactions involving existing properties and it covers both the commercial and residential markets statewide.  This most recent release covers the middle two quarters of 2018.

“We asked our commentators to share their ‘boots on the ground’ perspective for their sectors so we can all have a deeper understanding of what the nine data points of the Index demonstrate not just for the real estate industry, but also for everyone in Maine,” continues Vogel.  “Relating the broader market data to individual experiences and local variations is part of what makes this project so interesting.”

The MEREDA Index was tabulated by economist Dr. Charles Colgan with commentary from Roxane Cole of Roxane Commercial Real Estate, LLC; Tom Landry of Benchmark Residential & Industrial Real Estate; and Tim Hebert of Hebert Construction, LLC.

Overall, the Index showed small changes in this edition, the result of growth in the residential and construction components offset by declines in the commercial component.

Per Dr. Colgan’s report, the commercial component recovered to pre-recession levels in 2013 and peaked in the second quarter of 2016.  Since then the volume of transactions and the total volume of building square feet leased and sold has been declining.  Over the past six months, these have declined 10% and 20% respectively. However, the per square foot lease and sales price indexes have showed continued growth over the past six months, the former Index up 2.4% and the latter up 8.7%.  Overall, the commercial component declined 2% over the past two quarters.

“The commercial component continues to show great energy even with the slight decline measured in the Index,” says Roxane Cole.  “While the bulk of the activity is in southern Maine, the pockets of activity throughout the state are equally interesting.  One example is the investments being made in downtowns around the state.”

Sales of existing houses and permits for new residential construction continued to grow at 1.9% and 2.3% respectively over the past two quarters.  Mortgage originations also grew apace with sales of existing units at 1.3%.  But the seasonally adjusted median price showed little change through the first three quarters of 2018, falling 0.5% from the first to second quarter and rising 0.4% from the second to third.  Overall, the Index for the median price fell 0.2% over the past two quarters.  The net effect of these changes was a rise in the residential component of 1.3% over the past 6 months.

“It’s all about location, location, location,” says Tom Landry.  “[I]t’s a great time to invest in Maine’s urban areas,” Landry continues.  “And it’s not just Portland, smaller cities and towns like Westbrook, Yarmouth, Brunswick, and Biddeford, for example, are investing in their infrastructure, business community and town centers as well.”

The construction employment component also showed strong performance over the past six months up 5.1%.  At 29,100, construction employment in Maine is still 2,300 below the pre-recession peak of 2006Q1, but 5,000 above the lowest level in the recession in 2009Q4.

“I would equate the current pace of the construction industry to that of a startup company,” says Tim Hebert.  “Opportunities arise faster than there are people available to perform the work.  Contractors are turning away work because the projects have such accelerated timelines for the work to be under contract and complete.”

This edition of the MEREDA Index was underwritten by Eaton Peabody, with support from Benchmark Residential & Investment Real Estate, Katahdin Trust Company, Redstone, Reger Dasco Properties, and XPress Copy

To download a copy of the report or watch a video about the MEREDA Index, please visit www.mereda.org.

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MEREDA’s Morning Menu Breakfast Event – Everyone Needs an Affordable Home: Building on Housing Solutions That Work

Safe, affordable housing is a basic human need. It can lower stress, bolster health and reduce transiency, enabling children to perform better in school, adults to retain jobs, and neighbors to feel connected and safe. Unfortunately, Maine is experiencing a fundamental mismatch between its housing stock and its housing needs, and that mismatch is creating enormous problems for our families and our state’s economic well-being. For tens of thousands of Mainers, the price, quality, size and location of the homes available to them are simply out of synch with their needs and resources. This housing market failure affects wide swaths of Mainers, but seniors on fixed incomes, people with disabilities, and lower-wage workers are particularly affected. Come hear a panel of experts in the housing policy field present the latest data on Maine’s affordable housing crisis, its impact on Maine people, and a major new initiative being considered by the state Legislature to increase the rate of production of affordable homes statewide.

Join MEREDA for breakfast on February 7 from 7:30 AM – 9 AM at the Portland Regency Hotel for a panel discussion with experts in the housing policy field. Amy Cullen from The Szanton Company will moderate the conversation as our panelists present the latest data on Maine’s affordable housing crisis, its impact on Maine people, and a major new initiative being considered by the state Legislature to increase the rate of production of affordable homes statewide.

About the Event:

February 7, 2019 – 7:30AM to 9:00AM

Portland Regency Hotel
20 Milk Street
Portland, ME 04101

Breakfast: 7:30 AM Program: 8:00 – 9:00 AM

About the Panel:

Amy Cullen is a development officer at The Szanton Company, where her responsibilities include financial analysis, performing due diligence on potential sites for projects, completing financing applications, and coordinating with lenders, attorneys, architects, contractors and others on all aspects of The Szanton Company’s development projects. Amy also serves as the President of Saco Falls Management, where she is involved with the planning, implementation, marketing and operating strategies for a variety of properties in Maine and New Hampshire.

Greg Payne is the Director of the Maine Affordable Housing Coalition, a diverse association of more than 135 private and public-sector organizations committed to ensuring that all Mainers are adequately and affordably housed. He is also a developer of affordable rental homes at Avesta Housing, a non-profit housing agency based in Portland. Greg has more than 20 years of experience on issues related to housing and homelessness, and currently serves as the chairman of the board of the National Low Income Housing Coalition.

Jess Maurer is the Executive Director of the Maine Council on Aging, a broad, multidisciplinary network of more than 75 organizations, businesses and community members working to ensure we can all live healthy, engaged and secure lives as we age in our homes and in community settings. In this role, she advances statewide public policy initiatives, provides leadership within Maine’s aging network and supports Maine’s Legislative Caucus on Aging. Her areas of specific focus include housing, transportation, workforce, “aging in place” and care across all settings.

Dana Totman is the President & CEO of Avesta Housing, a nonprofit affordable housing provider with 45+ years of experience as a leader in affordable housing development and property management in southern Maine and New Hampshire. He has led Avesta through significant growth over the past 18 years, with a focus on staff leadership, cultivating partnerships and opportunities, and organizational change. Dana’s career has focused on nonprofit and government management and leadership, specializing in guiding organizations through significant change.

Rick McCarthy is the Managing Director of Eaton Peabody Consulting Group, the government relations and economic development affiliate of Eaton Peabody. Prior to joining Eaton Peabody Consulting Group, Rick served as Chief of Staff to several Maine Senate Presidents. He is recognized in the State House as a skilled consensus builder who is well versed on the major public policy issues of the day. His experience in state and federal budget and finance is particularly strong, along with the topics of transportation, housing, and early care and education.

Registering for this Event:

MEREDA Member: $45 each  | Non – Member: $55 each

Register After January 31:  Member: $55 each  |  Non-Member $65 each

Your RSVP is requested by January 31, 2019. Payment is expected at the time of registration. No refunds will be granted to anyone who registers, but fails to attend or who cancels after January 31, 2019.

This MEREDA Morning Menu Breakfast Event is Sponsored by Norway Savings Bank. 

Click here to register now.

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The Right Equation for Responsible Development: Spotlight on Huston Commons

In multi-part series, exclusive to the Maine Real Estate Insider, we’ll provide an up-close look at the most notable commercial development projects of the past year that are helping to fuel Maine’s economy in terms of investment and job creation.  MEREDA is proud to recognize responsible development based upon criteria including environmental sustainability, economic impact, energy efficiency, social impact and job creation.

Please join with us in celebrating Huston Commons.

MEREDA:  Describe the building and project.

Huston Commons: Huston Commons is a Housing First development for 30 disabled individuals who have experienced chronic homelessness. Through a unique series of nonprofit collaborations, Huston Commons provides essential 24-hour support services, including a medical care room to accommodate regular practitioner hours and telemedicine services for residents, all of whom have disabilities. Avesta Housing is the developer and property manager for Huston Commons, and Preble Street provides 24/7 support services. The project includes a partnership with Greater Portland Health to address specific health concerns and more generally ensure that residents have access to the health and personal care services that medically-compromised individuals typically benefit from in their homes. The onsite medical care room allows Greater Portland Health to schedule regular practitioner hours and telemedicine services for use in treating residents. Portland Housing Authority provides rental assistance to all of the residents to make the rent affordable.

MEREDA:  What was the impetus for this project?

Huston Commons: The impetus for this project was an urgent need for safe, affordable, permanent housing for homeless individuals in Portland. The target population for Huston Commons is disabled, medically-vulnerable individuals who are experiencing chronic homelessness. There is an immense need for permanent supportive housing for chronically homeless individuals in the Portland area. The number of people seeking emergency shelter has increased by 20% over the past four years, and City shelters have been full for years, creating the need for the continued maintenance of overflow shelters. These overflow shelters have also become filled to capacity, forcing dozens of people to spend their nights sitting in chairs in local government offices or worse. Maine’s most recent annual Point-in-Time survey identified 1,200 experiencing homelessness statewide, and more than half identified themselves as having a chronic disability. In Portland, 497 people were identified as experiencing homeless, and 48% had a chronic disability. A Task Force on Homelessness was formed by the Portland City Council in December 2011 to create a strategic plan to prevent and end homelessness, and one of its key recommendations was the development of three “Housing First” projects with in-house supportive services for residents. Huston Commons represents the first of those three projects. Studies have shown that such Housing First projects achieve savings by reducing the need for shelter stays, emergency room visits, jail stays and mental health hospitalizations.

MEREDA:  That sounds like quite a process.  How long were you in the planning stages before construction started?

Huston Commons: We began working with City officials to identify a site in early 2014, applied for and received an allocation for tax credits in late 2014, received planning board approval in July 2015, and began construction in April 2016.

MEREDA:  Tell us about the most challenging aspect of getting this project completed

Huston Commons: Huston Commons had a unique development challenge in that the property it sits on had three separate zones running through it. Avesta Housing worked closely with the City of Portland to convert the three zones into one new zone to allow for the construction of Huston Commons.

MEREDA:  Something unexpected you learned along the way was…

Huston Commons: Working with mentally and physically handicapped individuals who have been homeless for as much as a decade prior to moving in presents copious challenges that need to be addressed by the entire team – property management, support services, etc.

MEREDA:  Now that it’s complete, what feature of the project do you think makes it the most notable?

Huston Commons: The number of people seeking emergency shelter in Portland has grown 20% over the past four years. Homelessness is a growing problem with shrinking budgets and solutions. All 30 units are restricted to individuals who have experienced chronic homelessness and have medical challenges. Needless to say, Huston Commons filled up rapidly. Between Avesta’s three Housing First properties in Portland, there are over 100 people on the waitlist – all of whom are homeless today, most of whom have been homeless for quite awhile. The feature of this project that is most notable is its ability to serve our community’s most vulnerable residents with the help of unique organizational partnerships.

 

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Maine’s Leading Real Estate Experts to Gather for Economic Analysis of Industry on January 17th in Portland

On Thursday, January 17, 2019, nearly 900 of the state’s leading real estate experts will gather in Portland at MEREDA’s Annual Forecast Conference and Member Showcase sponsored by TD Bank. Real Estate continues to be a significant driver of the Maine economy and the MEREDA Forecast Conference provides an opportunity for industry luminaries to share their insight with peers on the health of and challenges faced by their industry. In addition, MEREDA will unveil the MEREDA Index at the conference, a key economic indicator measuring the pulse of the real estate industry.

“We are now in our 5th year of generating the Index and it continues to provide informative analysis that becomes more and more meaningful for our industry,” said Gary Vogel, president of the board of MEREDA and an attorney at Drummond Woodsum.

“While the Index is regarded as a great tool, the Forecast Conference is an event where the important conversations happen—we gather some of our industry’s best minds in one place to reflect on and discuss the trends and factors influencing real estate of all types in Maine,” continued Vogel.

MEREDA’s Annual Forecast Conference is geared towards builders, developers, brokers, attorneys, architects, engineers, municipal leaders, bankers, and accountants.  Continuing Education credits are available for brokers, attorneys, architects, and appraisers.

According to Shelly Clark, MEREDA’s Vice President of Operations, MEREDA’s Forecast Conference will be held at the Holiday Inn By the Bay in Portland from 9am to 5pm.  Registration is available at MEREDA.org and is expected to sell out.

MEREDA’s Annual Forecast Conference is sponsored by TD Bank.

MEREDA’s upcoming edition of the MEREDA Index is sponsored by Eaton Peabody, Benchmark Residential & Investment Real Estate, Katahdin Trust Company, Reger Dasco Properties, Redstone, and XPress Copy.

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The Right Equation for Responsible Development: Spotlight on Huston Commons

In multi-part series, exclusive to the Maine Maine Real Estate Insider, we’ll provide an up-close look at the most notable commercial development projects of the past year that are helping to fuel Maine’s economy in terms of investment and job creation.  MEREDA is proud to recognize responsible development based upon criteria including environmental sustainability, economic impact, energy efficiency, social impact and job creation.

Please join with us in celebrating Huston Commons.

 

MEREDA:  Describe the building and project.

Huston Commons: Huston Commons is a Housing First development for 30 disabled individuals who have experienced chronic homelessness. Through a unique series of nonprofit collaborations, Huston Commons provides essential 24-hour support services, including a medical care room to accommodate regular practitioner hours and telemedicine services for residents, all of whom have disabilities. Avesta Housing is the developer and property manager for Huston Commons, and Preble Street provides 24/7 support services. The project includes a partnership with Greater Portland Health to address specific health concerns and more generally ensure that residents have access to the health and personal care services that medically-compromised individuals typically benefit from in their homes. The onsite medical care room allows Greater Portland Health to schedule regular practitioner hours and telemedicine services for use in treating residents. Portland Housing Authority provides rental assistance to all of the residents to make the rent affordable.

MEREDA:  What was the impetus for this project?

Huston Commons: The impetus for this project was an urgent need for safe, affordable, permanent housing for homeless individuals in Portland. The target population for Huston Commons is disabled, medically-vulnerable individuals who are experiencing chronic homelessness. There is an immense need for permanent supportive housing for chronically homeless individuals in the Portland area. The number of people seeking emergency shelter has increased by 20% over the past four years, and City shelters have been full for years, creating the need for the continued maintenance of overflow shelters. These overflow shelters have also become filled to capacity, forcing dozens of people to spend their nights sitting in chairs in local government offices or worse. Maine’s most recent annual Point-in-Time survey identified 1,200 experiencing homelessness statewide, and more than half identified themselves as having a chronic disability. In Portland, 497 people were identified as experiencing homeless, and 48% had a chronic disability. A Task Force on Homelessness was formed by the Portland City Council in December 2011 to create a strategic plan to prevent and end homelessness, and one of its key recommendations was the development of three “Housing First” projects with in-house supportive services for residents. Huston Commons represents the first of those three projects. Studies have shown that such Housing First projects achieve savings by reducing the need for shelter stays, emergency room visits, jail stays and mental health hospitalizations.

MEREDA:  That sounds like quite a process.  How long were you in the planning stages before construction started?

Huston Commons: We began working with City officials to identify a site in early 2014, applied for and received an allocation for tax credits in late 2014, received planning board approval in July 2015, and began construction in April 2016.

MEREDA:  Tell us about the most challenging aspect of getting this project completed

Huston Commons: Huston Commons had a unique development challenge in that the property it sits on had three separate zones running through it. Avesta Housing worked closely with the City of Portland to convert the three zones into one new zone to allow for the construction of Huston Commons.

MEREDA:  Something unexpected you learned along the way was…

Huston Commons: Working with mentally and physically handicapped individuals who have been homeless for as much as a decade prior to moving in presents copious challenges that need to be addressed by the entire team – property management, support services, etc.

MEREDA:  Now that it’s complete, what feature of the project do you think makes it the most notable?

Huston Commons: The number of people seeking emergency shelter in Portland has grown 20% over the past four years. Homelessness is a growing problem with shrinking budgets and solutions. All 30 units are restricted to individuals who have experienced chronic homelessness and have medical challenges. Needless to say, Huston Commons filled up rapidly. Between Avesta’s three Housing First properties in Portland, there are over 100 people on the waitlist – all of whom are homeless today, most of whom have been homeless for quite awhile. The feature of this project that is most notable is its ability to serve our community’s most vulnerable residents with the help of unique organizational partnerships.

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Thinking about renting space to a marijuana operator? Take care and consider these important caveats.

By Hannah E. King and Edward (Ted) Kelleher, Attorneys at Drummond Woodsum.

The marijuana industry poses profitable possibilities and serious challenges to the real estate industry.  As Maine continues to work on the regulatory structure of its recreational marijuana marketplace, a land rush has already started as businesses begin to position themselves for legal marijuana sales.  Warehouse space for cultivators and processors and downtown storefronts for potential marijuana retailers are renting out at multiples of usual market prices.

However, while the economic excitement is justified by the track of record of the marijuana industry in other states, here are some important caveats that should be considered soberly and clearly by any property owner thinking about renting space to a marijuana operator.

Federal illegality:  Marijuana is still completely illegal under federal law.   Every business person growing, processing and selling marijuana under a state legalization regime is breaking federal law every day.  The Obama administration had a cautious hands-off policy toward the industry, but the Trump administration position is very unclear.  Landlords expose themselves to potential direct criminal liability, and also the risk of civil asset forfeiture.   The practical reality of these risks is hard to assess.  One clear guidepost however, is that if tenants are violating state law, by for example, growing or selling more than they are allowed to, selling over interstate lines or selling to minors, they attract law enforcement attention and put the landlord at risk as well.  Thus vetting tenants is even more important in this industry than usual.   Additionally, the federal illegality of marijuana may affect things like the ability to get title insurance, to get property and casualty insurance at affordable rates and many commercial banks are beginning to expressly prohibit marijuana operations in properties they finance.

Municipal control.  Under Maine’s marijuana laws, municipalities have enormous power to regulate marijuana operations within their jurisdictions.  Many Maine towns have moved very slowly and have not yet grappled with zoning or local permitting issues.  Tenants and landlords both need to understand what kinds of rules and processes the local municipality will put in place, and what kinds of obligations these rules will impose on property owners.

Operational concerns.  Marijuana cultivation creates odor issues and uses huge amounts of electricity for indoor lighting.  Cultivation and retailing both pose security concerns because of the valuable nature of the product and the cash-based nature of the businesses, since marijuana businesses have difficulty getting credit card services.   Landlords need to understand the operational issues posed by these kinds of businesses and make include appropriate lease provisions to address them.

Timelines.   The Maine legislature approved a final version of the legalization law in May 2018.  Now, the State is in the process of creating the specific rules that will govern the recreational marijuana industry.  The rules will likely be final at some point in mid-2019.  The state then needs to accept and process licensure applications, which likely means first sales of recreational marijuana in Maine in early 2020.  This schedule, could of course, slip farther out into the future.  Landlords and tenants need to recognize these timelines since they directly affect the ability of a location to produce the cash-flow that will support rent levels.

The marijuana industry has caused excitement in many circles in Maine because of the economic potential just around the corner, but care must be taken, especially by landowners, in assessing and jumping into this business.

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2019 Annual Real Estate Forecast Conference & Member Showcase

Each January, over 900 of the state’s leading real estate experts attend MEREDA’s  TD Bank Sponsored Signature Event, the Annual Forecast Conference & Member Showcase.  Scheduled to be held on January 17, 2019 at the Holiday Inn by the Bay in Portland, this unique conference brings together the largest gathering of commercial real estate professionals in Maine, and is specifically geared toward developers, brokers, architects, bankers, attorneys, accountants, and other industry professionals. Each year, MEREDA assembles some of Maine’s top real estate leaders to provide an economic overview and outlook on the profession’s key economic indicators, along with the popular market overview by property type, focusing on both commercial and residential real estate forecasts.

This course is approved for 4 Hours of Broker, Legal and Appraiser Continuing Education Credits. Approval for Architect credits is pending.  

This event is well-known as an annual “must attend” for anyone involved in, or touched by, the real estate industry. You should attend if:

  • You want to network with Maine’s top industry professionals.
  • You could benefit from a sneak peek into Maine’s real estate industry – and would like to learn about key trends and transactions in regions and market segments (i.e. Southern Maine vs. Bangor region etc., and multi-family vs. retail transactions, etc.)
  • You desire a front row seat for forecasts from leading insiders about industry and the economic recovery.
  • You are in need of continuing education credits.
  • You believe that Maine’s real estate sector is an important economic driver and want to support the future of the industry. 

Supplementing the conference each year is MEREDA’s popular Member Showcase with MEREDA members exhibiting their products and services. The exhibition has become an integral part of our annual event providing a unique opportunity to network with MEREDA members.

Click here for more information and to register now. 

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The Right Equation for Responsible Development: Spotlight on 65 Munjoy Street Condominiums

In multi-part series, exclusive to the Maine Real Estate Insider, we’ll provide an up-close look at the most notable commercial development projects of the past year that are helping to fuel Maine’s economy in terms of investment and job creation.  MEREDA is proud to recognize responsible development based upon criteria including environmental sustainability, economic impact, energy efficiency, difficulty of the development, uniqueness, social impact and job creation.

Please join with us in celebrating 65 Munjoy Street Condominiums.

MEREDA:  Describe the building and project.

65 Munjoy Street Condominiums:  65 Munjoy is a partnership between local Portland developers Peter Bass of Random Orbit and Ethan Boxer-Macomber of Anew Development.

65 Munjoy Street is a three-story, walk-up building offering 8 high-quality and amenity rich condominium units in a range of 1, 2 and 3-bedrooms. 65 Munjoy presents the best of modern design and materials while respecting the traditional architectural forms, organization and massing that characterize Munjoy Hill.

Most importantly, 65 Munjoy is a unique and innovative response to Portland’s call for quality and efficient ownership housing created to be affordable to middle-income buyers. While the housing units at 65 Munjoy would appeal to buyers in any segment of the market, they were designed and developed to be sold at reduced price points and made available exclusively to buyers with maximum household incomes at or below 120% of the Portland area median income. 

MEREDA:  What was the impetus for this project?

65 Munjoy Street Condominiums:  As Portland has grown in recent years it has actively produced hundreds of new workforce housing units for low-income residents as well as scores of new houses and condominium units for people of higher than average means. However, in that same period, the typical moderate-income resident experienced a concerning decline in affordable housing options.

Being Portland residents themselves, Bass (Peter) and Boxer-Macomber (Ethan) had each participated over the years in an ongoing community dialogue about the problem of suppling new housing opportunities for middle-income residents. While this problem had been the topic of much study, discussion, and debate- Peter and Ethan had seen few tangible solutions had come out of the development community.

They decided it was time to apply their housing skills and experience toward creating a tangible housing project that would seek to address the problem and perhaps provide a model that could be replicated.

MEREDA:  That sounds like quite a process.  How long were you in the planning stages before construction started?

65 Munjoy Street Condominiums:  Before ever starting the project, the developers had spent years contemplating and sketching potential ways to viably create affordable middle-income housing, but it wasn’t until 2014 that a feasible and tangible opportunity presented itself.

In that year, The City of Portland released a Request for Proposals (RFP) for the sale and reuse of an 80’ x 85’ vacant parcel of land it owned at 65 Munjoy Street. The City’s RFP was crafted in such a way that it required the creation of affordable housing generally, but was wisely left flexible and non-prescriptive in terms of affordability strategy; e.g. apartments vs. condos, level of income targeting, design of units, legal framework for income restrictions, etc. The City’s RFP also offered ways that the City could potentially assist in the creation of affordable housing through both the terms of sale and with various potential forms of soft secondary financing.

It was the City’s flexible, non-prescriptive approach to the RFP, combined with flexible finance opportunities that made it possible for the developers to see a feasible path forward towards creating middle-income condominiums.

The developers planned and prepared their response in late 2014 and submitted a response to the RFP in January of 2015.  The developer’s response was reviewed through a series of public meetings and accepted by the City Council later that year. Through late 2015 and into late 2016, the developers negotiated project costs, financing, and City and State land use and environmental permitting.

Construction of 65 Munjoy started in the summer of 2016, was completed in the spring of 2017. The final unit was sold in the summer of 2018.

From first consideration to the sale of the final unit, the project took almost exactly 4 years.

MEREDA:  Tell us about the most challenging aspect of getting this project completed.

65 Munjoy Street Condominiums:  Over the 4 years that the developers planned and implemented the project, they experienced numerous challenges such as environmental mitigation, legal and financial terms negotiation with strategic partners, a frivolous NIMBY law suite, escalating material and labor costs, and all of the delay and expense associated with each.

While each of these challenges was significant, they were all potential risks that the developers understood and had prepared for. In the end, it was the challenge least expected that turned out to be the greatest….

*See “Something unexpected” below.

MEREDA:  Something unexpected you learned along the way was….

65 Munjoy Street Condominiums:  When the developers managed to devise a plan that would create hi-quality, highly desirable new units in the heart of Munjoy Hill priced aggressively below market value, the assumption was that all 8 units would probably be under contract before construction ended. In the end, however, only one unit went under contract during construction and it took a full 14-months for the market to absorb the remaining seven.

The slow absorption at 65 Munjoy was by no means for lack of excitement in the market. Each passing month the sales team fielded a steady stream of would-be buyers that enthusiastically inquired about the property, scheduled showings, and floated offers.

The problem was that the very large majority of inquires hit dead ends with the would-be buyers earning either too little or too much to qualify. Several of the buyers assumed that they would be 120% AMI income eligible but came to find that they were just slightly over income. Others had income soundly below 120% AMI but then struggled to pull together the down payment and loan approvals needed to satisfy their lender.

The window of Portland area buyers who who’s earnings were modest enough to meet the income restrictions but high enough to secure financing turned out to be far more narrow than expected.

MEREDA:  Now that it’s complete, what feature of the project do you think makes it the most notable? 

65 Munjoy Street Condominiums:  The developers are extremely pleased and proud to have contributed positively to the current urban renaissance of Munjoy Hill following over 60 years of disinvestment, deferred maintenance, and population loss. The 65 Munjoy project addressed pre-existing environmental concerns, added to the social and economic vitality of the neighborhood and created and sustained local jobs while also adding new revenue to the City’s tax rolls.

However, despite all of these successes, 65 Munjoy’s most notable feature is clearly the way that it provides precious, one-of-a-kind opportunity for middle-income residents to own a quality new condominium unit on Munjoy Hill at price point they can afford.

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Are you in for a (price) shock?

Strategic considerations in allocating risks of Tariffs, price escalation and supply chain disruptions in construction contracting

By:  Robert Ruesch, Esq., Verrill Dana, LLP

Compared to where we were ten years ago, the real estate and construction segments of our economy are booming.  The uptick in development in hotels, condominiums, apartments and commercial facilities, particularly in southern Maine, has been well documented.  Beyond Maine, metropolitan Boston, southern New Hampshire and indeed many parts of the United States are enjoying record growth.  This positive news is tempered somewhat by the reality that increased demand for construction materials, equipment and skilled labor has pushed up prices and increased building costs in Maine and across the U.S.  Added to this price dynamic is the U.S. government’s recent threatened and actual tariffs which have further disrupted markets resulting in increased prices for lumber, steel, aluminum and other key construction materials.

In response to these price fluctuations, private developers, owners, public procurement officials, design professionals, contractors and construction managers (CMs) are having frank conversations about how to handle the risks of price increases.  All project participants agree that limiting and allocating exposure to price escalation is paramount.  One of the common steps that the parties opt for is to accelerate delivery of the entire project or procurement of those items that might be subject to price escalation due to tariffs or other factors, particularly structural steel.  Efforts to fast track purchases of steel or other items earlier than anticipated may make sense, but creates potential for risks down the road that may flow from expedited design, hasty review of submittals, changes in the owner’s program or handling and storage costs.  Often these considerations are not given a second thought in the contract process.  That is probably a mistake.

Project owners, designers and contractors should pay closer attention to how price escalation and risks of fast track procurement are handled in their contracts.  In addition to the risks of accelerated procurement, owners often assume that once the contractor commits to a lump sum price or a guaranteed maximum price (GMP), there is no further need to worry about price increases regardless of what happens in the marketplace. That is not always the case and will depend on the nature of the price escalation and the specific contract terms. Like it or not, contracts may allow for the possibility of price adjustment relief in the face of cost escalation under certain circumstances.   In addition, in the current marketplace contractors faced with price instability will likely hedge against the risk of price escalation by increasing lump sum and GMP quotes to the owner’s detriment.

Here are some of the contract provisions that may allow for price adjustments:

Unit Prices:  Some contracts, including those that incorporate state or federal procurement provisions may allow for unit price adjustments due to cost escalation outside of certain pre-defined parameters (say, beyond 10%).

Force Majeure:  More common place are contracts containing force majeure provisions which allow for relief from contract obligations for a range of events that are generally considered to be outside the contractor’s control.  Are tariffs and supply chain disruptions covered by that clause?

Taxes/Fees:  Some contracts provide that the owner is responsible for taxes or government fees that take effect after the contract is signed.  Do tariffs fall within the scope of that type of clause?

Allowances:  Still more common in GMP and lump sum contracts are allowance provisions that cap contractor costs to budgeted line items.  Costs beyond the budgeted allowances flow to the owner.

Contingency:  Depending on who controls the contract contingency, what, if any, latitude does the contract provide to use the contingency for price increases?

Regardless of the type of contract, owners and contractors should review even the most familiar contract forms to evaluate price escalation risks.  Most of the time there are ways to deal with the risk of price escalation in a transparent fashion in which the true cost of the risk is identified, quantified and allocated up front.  This provides some predictability for the contractor that it will not suffer losses outside its control due to commodity price changes.  In addition, the owner will have the benefit of knowing that the bid prices are not being irrationally adjusted to hedge against the risk of price escalation that may not actually occur.  As always, open communication and a fair allocation of risk produces a preferred result.  The alternative is to just sign the contract and hope for the best.

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MEREDA’s “Morning Menu” Breakfast Event Opportunity Zones: What you Need to Know to Take Advantage of this Opportunity in Real Estate and Beyond

The 2017 Tax Cuts and Jobs Act created a bi-partisan tax incentive program based on economically distressed Opportunity Zones.  Investors in Qualified Opportunity Zone businesses now have the ability to defer, and to some extent eliminate, recent capital gain income, by properly investing their gain proceeds.  Gov. LePage has designated 32 Opportunity Zones in Maine ranging from Saco to Madawaska, including parts of Downtown Portland, which opens the door for real estate developers pursuing projects in these designated areas to tap into a whole new group of tax savvy investors.

Join the Maine Real Estate & Development Association for breakfast on December 6 from 7:30 AM – 9 AM at the Portland Regency Hotel to learn more about these complicated new rules.  Panelists Andy Smith and Nelson Toner will offer insights about how the legislation will impact the real estate industry and the tax advantages available to investors in Opportunity Zone projects.

About the Event:

December 6, 2018 – 7:30AM to 9:00AM

Portland Regency Hotel
20 Milk Street
Portland, ME 04101

Breakfast: 7:30 AM Program: 8:00 – 9:00 AM

About the Panel:

For more than 30 years, Nelson Toner has practiced law at Bernstein Shur providing tax planning, estate planning and business succession planning to individual and business clients.  Prior to working at Bernstein Shur, Nelson worked in the tax department at the Boston office of Grant Thornton, an international accounting firm during the halcyon days of pre-1986 real estate syndications.  Nelson gives many local and state seminars, including a regular presentation at the Maine Tax Forum each autumn, and for many years taught Estate and Gift Tax at the Maine Law School.  He also writes the S Corporation column for the Journal of Passthrough Entities, a national tax publication.

Nelson earned a bachelor’s degree in mathematics from Trinity College (Hartford), a JD  degree from Case Western Reserve University, and an LLC in taxation from Boston University.

Andrew Smith is a principal at Baker Newman Noyes, specializing in assisting his clients with practical advice and creative solutions to their most challenging business issues, including tax efficient structures for business transactions; fixed asset analysis; succession planning; and tax deferral and reduction strategies. He also works with real estate clients of all sizes on cost segregation studies, like-kind exchanges, and historic rehabilitation credits. In addition to serving clients, Andy is also actively  involved in the firm’s college recruiting initiatives, having begun his career at the firm in 1997 as an intern and leads the tax department’s Multi-Generational Business group.

He earned a bachelor’s degree in business administration, with concentrations in accounting and finance, from the University of Maine, Orono.

Registering for this Event:

MEREDA Member: $45 each  | Non – Member: $55 each

Register After November 29:  Member: $55 each  |  Non-Member $65 each

Your RSVP is requested by November 29, 2018. Payment is expected at the time of registration. No refunds will be granted to anyone who registers, but fails to attend or who cancels after November 29, 2018.

This MEREDA Morning Menu Breakfast Event is Sponsored by Norway Savings Bank,  Baker Newman Noyes, Bernstein Shur and the City of Augusta

Visit www.mereda.org  for more information and to register.

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