HIGH-RISE 101
Developers Face New World, High Building, Insurance Costs
By MATHEW PADILLA
On one recent autumn day, Bosa Development Corp. poured 14,000 cubic yards of concrete at the site of The Grande, a set of two 39-story condominium towers going up in downtown San Diego.
“It was a massive undertaking,” Eric Martin, Vancouver, British Columbia-based Bosa’s vice president of development, said of the concrete work.
And that’s just for starters. Next come the cranes, steel and more concrete.
Up the road, Bosa is gearing up to build twin 18-story high-rises in Irvine,the county’s first on the scale of those going up in San Diego or like those found in Los Angeles and Long Beach.
Bosa’s Marquee at Park Place has ignited talks and plans by other developers here now plotting their own condo towers, betting Orange County is ripe for high-rise living.
But high-rise development is a new ballgame for local developers, which don’t have track records in the construction and marketing of these giant, complicated and costly buildings.
OC’s real estate players know all about building cheaper wood-frame homes and condos. And they can put up steel-framed office high-rises where walls can nimbly bend to fit tenants’ needs.
Condo towers are different. They’re typically more expensive, inflexible concrete-and-steel hybrids. Once set, walls and bathrooms aren’t going anywhere. Concrete reinforced with steel is typically used because it’s the most cost-effective. It also buffers sound, according to sources.
For builders new to high-rise condos, tapping a partner could be critical. The local arm of Miami-based Lennar Corp. has teamed with Vancouver’s Intergulf Development Group on a project in San Diego’s Little Italy dubbed La Vita.
La Vita is set to include three-story town homes, eight-story towers and a 24-story tower. Construction is set to finish by the end of next year.
Lennar’s foray into high-rise condos in San Diego could be a warm-up for the company here. The company’s Mission Viejo-based California arm is in talks to buy a chunk of land across from Bosa’s Irvine project that could become home to an 18-story condominium tower, according to sources.
Emile Haddad, who heads Lennar’s land development arm in Mission Viejo, said Lennar is doing more infill projects of medium to high density because developable space for housing tracts is becoming scarce.
Lennar and other OC developers are well schooled in putting up homes that cost about $50 per square foot to build or low-rise condos that cost from $60 to $90 per square foot, according to sources. While some upscale builders are using steel frames, homes and condos here nearly always are framed with wood.
Compare that to a high-rise, which costs $150 to $200 per square foot to build, according to Pat Stark, vice president of operations for general construction at San Diego-based Roel Construction Co., which has an office in Irvine.
Stark oversaw the building of San Diego-based Lambert Development Co.’s Renaissance, a set of two 24-story towers in San Diego.
Others put the maximum high-rise building cost at closer to $250 per square foot.
It can take three years to build a condo high-rise, Stark said. The units all are done at the same time, unlike new homes, which usually are built and sold in small phases.
Design planning is critical to a developer because all the materials for the high-rise are bought early on, Stark said.
“Do you want to let a buyer who is not under final contract choose pink granite in a unit that he may or may not occupy?” Stark said.
In San Diego, Stark said Roel does its own structural concrete work. In OC, the company likely would contract out for concrete work if hired for a high-rise job, he said. Otherwise 70 to 80 construction workers would have to drive up from San Diego, he said.
Developers active in San Diego said when they first considered doing high-rises there about five years ago it was a challenge.
“It was very, very difficult to find people with recent high-rise experience,” Bosa’s Martin said.
But Martin said the market has changed.
Now there are plenty of contractors with know-how who are mobile, he said. There are contractors and subcontractors active in San Diego, Los Angeles and Las Vegas who could come to OC, he said.
The biggest challenge to a developer may be before construction starts, according to Stephen Duffy, a partner in the Irvine office of Ernst & Young LLP who has worked on high-rise projects in New York.
“It’s absolutely critical that the developer’s sales and marketing process achieve the highest possible level of presales as early as possible in the process,” Duffy said.
The high-rise developer has to prove to a lender “the hypothesis that this location will be in high demand and will be economically successful,” Duffy said.
Natale “Nat” Bosa, who runs Bosa Development, said he has to sell more than half of the planned 232 luxury condos in Irvine before he can get a construction loan.
One benefit for high-rise developers: a lower likelihood that they will be sued compared to those building wood-frame condos, sources said.
That’s because concrete reinforced with steel doesn’t warp over time and causes less secondary problems.
But whether defects are real or imagined, any condo builder can be sued.
In Vancouver, a group representing condo owners has included some Bosa projects in British Columbia on a list of buildings that it believes has water leaks, mold and other problems.
The problem is such that subcontractors have come to expect the developer to provide them insurance coverage in case they are sued, said David Alvarado, senior vice president with the construction division of ABD Insurance and Financial Services, part of Palo Alto-based Greater Bay Bancorp.
“If you don’t have insurance, there is not a subcontractor on the planet that will do it,” Alvarado said.
Umbrella insurance for all subcontractors has become costly and can price smaller condo projects out of the market, favoring larger ones such as high-rises, he said.
A developer typically wants at least $2 million worth of coverage. For that, the developer has to shell out $250,000 to $500,000, according to Alvarado. On a 10-unit project, the cost per unit is from $25,000 to $50,000 per condo.
As a developer adds units, the insurance cost per unit generally decreases, Alvarado said. At a certain point, a developer will want more than $2 million worth of coverage, but the cost factor still favors bigger projects, he said.
The situation hasn’t changed much since the passage of Senate Bill 800, which took effect this year. The new California law requires several steps between a builder and homeowner before litigation over alleged construction defects can occur.
“The impact has been minimal at best,” Alvarado said.
