GLOUCESTER, MASS. - Bob Gillis has learned the hard way about the risks of building and selling highend condominiums. “It’s a tough business, and you have to have the nerves for it,” he said.

Over the last year, Gillis’ development company has cut prices on its condominiums, defaulted on its construction loan, and been sued by its general contractor and subcontractors for nonpayment.

All to build affordable housing.

Gillis is the treasurer and director of Cape Ann Housing Opportunity (CAHO), a nonprofit created in 2002 to redevelop the vacant LePage Glue factory here into affordable rental housing and moderately priced workforce condominiums.

Pond View Village, the new name of the development, also includes 26 highend condominiums to be sold at market prices. The sales were supposed to help cover the cost of infrastructure and land for the whole community, in addition to providing CAHO with seed money for future developments. That didn’t happen.

Housing experts across the country promoted market-rate housing at mixedincome developments as a way for affordable housing developers to earn enough income to help pay for high land prices and out-of-control construction costs. A graduate student at the University of Pennsylvania even dedicated a quarter of her master’s thesis on mixed-income housing and historic preservation to a glowing description of Pond View Village.

Pond View was meant to include three phases. The 43 affordable rental apartments in the first phase are now fully occupied. A second phase includes 15 permanently affordable condominiums and another 26 condos that can be sold at any price homebuyers are willing to pay. CAHO also planned to build another 40 condominiums in a third phase.

Missing the market

By August 2006, realtors were showing the finished condominiums to potential buyers. At the same time, newspapers from the Boston Globe to USA Today were warning of falling condo prices.

“It was about the perfectly wrong time to go to market,” Gillis remembered.

Over the following two months, 400 potential buyers visited the market-rate condominiums, said Ruth Pino, a branch executive of Carlson GMAC Real Estate in Gloucester, which continued to show the condominiums until they were taken off the market in late spring to be repriced.

Not a single market-rate unit sold. Only eight of the 15 affordable condominiums sold. As the condominium market softened, “even the affordable units became unaffordable to some people,” Gillis said.

It also didn’t help that Pond View Village was the first mixed-income project in the area. Some locals worried that low-income households would make bad neighbors.

“They are not as apt to maintain or take care of their living space or be as considerate of their neighbors as an owner,” said one commenter on Cape Ann Online’s community message board.

Taking the hit

It cost $12.1 million to develop the second phase of for-sale housing at Pond View. The developer raised some of that capital through soft financing and a Community Development Block Grant from the city of Gloucester. The remaining $9.7 million came from a construction loan provided by a consortium of banks and arranged by the Massachusetts Housing Investment Corp. (MHIC), a major investor in both phases of Pond View.

The loan was to be paid off with money from the sale of condominiums. By late spring, it was in default. CAHO’s contractors had also sued the developer for nearly $200,000 to pay for cost overruns.

Over the summer of 2007, state officials turned down a request for $1.5 million in additional resources, or $46,410 per unit, to make all of the condominiums affordable to buyers earning up to 110 percent of the area median income. The new prices would have ranged from $175,000 to $225,00, reduced from the original asking prices of $265,000 to $359,000. Even if this plan had worked, MHIC would have had to write off nearly $1 million.

New prices

In September, CAHO and its investors dug deeper, writing off more than $2 million to make the condos marketable without the benefit of new subsidy. The condominiums came back on the market at prices starting at $165,000 for a one-bedroom condominium and $259,000 for a three-bedroom unit.

Even with the newspapers full of stories about foreclosures and collapsing prices in for-sale housing, the realtors at Carlson GMAC showed the condos to 200 to 300 potential buyers over the following 10 weeks. On Nov. 16, the first market-rate condo sale since the repricing closed for $205,000, only slightly less than the lowered asking price of $210,000.

By the end of November, two more condos were under contract, and Pino expects a steady trickle of sales to continue through the winter.

Still, Pond View’s investors may have more losses depending on how long the condos take to sell—and that’s not including the $2.4 million CAHO has already spent preparing the site for Pond View’s third phase, which may never be built.

“Our future is up in the air,” Gillis said.