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Will Bulk Sales Stabilize Miami's Luxury Condo Market?
(This is Part Two of a two-part exclusive Real Estate Channel overview of the luxury condominium market in metro Miami. Part One was posted Friday, Aug. 28, "SPECIAL REPORT: Miami Luxury Condo Market Sales Rise as Prices Drop.")
(MIAMI, FL) -- No market in the United States has more unsold luxury condominium homes than Miami.
Developers are reportedly holding at least 10,000 units for sale. Another 23,000 have been built in and around Downtown Miami or in some stage of completion.
What does all that mean to the market? Great buys for the individual buyers and maybe the same for the bulk sales purchaser.
Bulk sales are happening because some lenders would rather sell in bulk and receive a pay check now than have to take the property back later in a lengthy and costly foreclosure exercise.
Jay A. Steinman
"Banks sell condominium units in bulk to avoid the potential successor developer liability, carrying costs and the other general liabilities associated with the maintenance of a condominium project and the operation of a condominium association.
"Bulk sales of condominium units result in a "re-leveraging" of the product allowing the buyer to positively reposition the asset.
"The buyer of the project (or the mortgage encumbering the project) is able to reduce the debt per unit and possibly allow for a positive cash flow for the project when the units are leased (and the upside of the appreciated value of the units when they are sold after the market conditions improve).
"The good news is that the banks are able to immediately rid themselves of the 'headache' project. The bad news is that the market for the sale of these projects (or loans) requires a great discount and causes a short-term drop in the price of the units.
"Alternatively, some banks have realized that they may achieve a greater return by selling units to individual purchasers versus bulk sales. Such banks are taking advantage of governmental programs like Fannie Mae and FHA.
"These banks will sell the units (sometimes through receiverships) and will finance the purchase of the unit. They will underwrite the loans to the applicable governmental standards. The loans will initially be held by the banks in their own loan portfolio, but will then sell the loans once the applicable guidelines are satisfied."
"Per unit sales will realize a higher return, but yet will take a lot more time and involve higher costs and liabilities. The banks need to evaluate the various costs and benefits of bulk sales versus per unit sale in order to make an informed decision with regard to maximizing the return on their defaulted loans secured by luxury condominium units."
But even lenders are balking at the $100-per-square-foot price some bulk buyers, like institutions and hedge funds, are now demanding.
Some lenders are offering around $200 per square-foot. Even that number is about $100 less than the average $300 per square foot most developers and lenders need just to cover their original land and construction costs.
Consider for a moment: Some of these luxury condos were built at $400 to $500 per square foot four or five years ago. And now they are fetching only $200 per square foot?
What kind of mathematics is that?
But even bulk sales are not being done in any great volume.
Only 11 bulk sales have been recorded in all of South Florida since July 2008, according to Condo Vultures Inc., a real estate commercial real estate brokerage and research organization based near Miami Beach city limits in Bal Harbour, FL.
Nine of the 11 bulk sales to date were closed in Miami-Dade County. Two closed in Palm Beach County.
All 613 units totaling 650,000 square feet were purchased for $129.4 million, at an average $199 per unit, or $211,070 per unit. Compare those figures to pre-construction prices between 2004 and 2006 that ran $400 to $600 per square foot.
The buyers are reported to be investor groups from the United Kingdom, Canada, Latin America, Germany and Spain.
Bulk buyers want the price to come down below $100 per square foot.
Peter Zalewski
The lowest per-square-foot bulk sale recorded in 2009 to date involved New York City investor Rodrigo Nino's Prodigy Capital Investments LLC paying $1.9 million or $156 per square foot for 10 units at the 49-story, 327-unit, sold-out Brickell on the River South Tower. The developer had slashed prices previously to about $215 per square foot.
The price at the loft-style building equates to a 43 percent discount, according to the Condo Vultures Official Condo Buyers Guide to Miami.
Rodrigo Nino.
One of the most successful sales projects this year has been the sellout of the 570 unit, twin-tower 1060 Brickell Condos. An investor recently purchased 31 units at $203 per square foot. The units originally were priced from $335,000 to $1.2 million, and then were repriced to $180,000 to $1.5 million.
As the bulk sales momentum appears to be strengthening, not all new luxury condo projects have been attracting buyers. Real Estate Channel reported Aug. 20 on the financial woes of the one-year-old, $300 million Everglades on the Bay community. ("First New Miami Condo Tower Files for Chapter 11")
Saddled with estimated debt that could reach $500 million to 200 creditors, Cabi Downtown LLC, the Mexican owners of the one-year-old, $300 million Everglades on the Bay community have filed for Chapter 11 protection under the U.S. Bankruptcy Code.
The twin-tower, 49-story project has closed only 9 percent of its 849 units for an estimated total sales of $31 million, according to Bal Harbour, FL-based Condo Vultures® Bulk Deals Database.
A hearing is set for Sept. 2 to clarify the total debt and assets involved, as well as drafting a more complete list of creditors, according to court records.
The owners stated in their Aug.18 bankruptcy filing they owed between $100 million and $500 million.
A $256 million first mortgage was due in February of this year. The condo is located on the former site of the Everglades Hotel at 250 Biscayne Blvd.
"This is the first new condo tower in Greater Downtown Miami to seek bankruptcy protection," says Zalewski. "The action must have become necessary as the number of closings at this Class A project slowed to a trickle in recent months. The primary reason is the current pricing at Everglades on the Bay is more reflective of the boom years rather than today's tumultuous market."
"There is every reason to think this project will sell out rapidly to individuals and/or bulk buyers once the pricing is brought in line with current market conditions," adds Zalewski.
The average purchase price on the 75 units that have closed at the Everglades on the Bay project between November 2008 and June 30, 2009, is more than $425 per square foot, according to the Condo Vultures® Official Condo Buyers Guide To Miami™.
By comparison, many of the Greater Downtown Miami condo projects today are priced between $200 and $300 per square foot.
In a separate event, more bad news for a lender came in an intriguing deal orchestrated by Miami-based Royal Explorer Development.
Banco Popular North America filed a foreclosure suit July 2 against Royal Explorer, the owners of Brickell Station Villas, a 12-story, 63-unit condo community at 100 SW 10th St.
The suit alleged Miami-based Royal Explorer Development had defaulted on a $17.77 million mortgage note. But on Aug. 17, Royal Explorer sold the property to Hollywood, FL-based Brickell Station Lofts LLC for $10.24 million in an all-cash deal, according to Miami-Dade County real estate records.
The next day, Aug. 18, the bank voluntarily dismissed its foreclosure lawsuit and recorded the mortgage as paid. Based on the $10.24 million short sale, Banco Popular North America took a 42.4 percent loss on the loan.
That purchase price equates to $162,540 a unit.
Peter Zalewski, managing principal of Condo Vultures Realty, says the buyer paid $126 a square foot.
"At that rate, Brickell Station would be an affordable rental property for many working-class people in the Brickell area," Zalewski says.
Zalewski calls the still-unfinished Brickell Station Villas a Class B project in a Class C location.
He notes, "If I did advise this buyer, and I didn't, I would say rent it for three years and, as the market starts to return, sell it starting at $200 per square foot up to $250 per square foot.
"If the owner plays his cards right, he could make a $100 per-square-foot premium on what he purchased it for."
Royal Explorer is managed by Patricio Cervantes, who is president and owner of Miami-based Gamma Construction.
Robert S. Lechter, Brett Houston, Claudio Dolman and Marcel Apeloig manage the company that now owns Brickell Station Villas, according to state records.
Jorge M. Perez, chairman, The Related Group, Miami has been Florida's most prolific luxury condo developer. But, like many of his colleagues, Perez has been hit hard by the Recession and slow sales.
CityPlace West Palm Beach
And his 1,646-unit Icon showplace condo on Brickell Avenue has sold only 31 units, according to industry sources who tabulate daily condo sales.
His latest venture is promoting sales at Trump Hollywood, (Real Estate Channel, Aug. 22, "Perez and Trump Jr. Pitch Sales for $355M Trump Hollywood Condos.")
The condos at the 41-story, 200-unit, $355 million project are priced from $1.3 million to $7 million and average $700 per square foot.
Michael Cannon
"He (Perez) had a lot of product in the right place at the right time, but like others, he over-extended himself," notes Michael Y. Cannon, executive director, Integra Realty Resources-Miami.
In a new twist to the Perez-Related Group saga, The Wall Street Journal is reporting the Related Cos. of New York City (associated with The Related Group of Miami) and Lubert-Adler Partners have teamed up to bid on the assets of condo lender Corus Bank of Chicago.
They are joined by a rival offer from Los Angeles private-equity fund Colony Capital LLC and iStar Financial Inc., a New York-based commercial-mortgage real-estate investment trust.
WSJ real estate reporter Nick Timiraos reports "several real-estate professionals see the Related-Lubert team as having the inside track to the bank's assets in a sale brokered by the Federal Deposit Insurance Corp., though other private-equity firms remain in the mix, including Starwood Capital Group.
"A sale still could be weeks away, according to people familiar with the matter, and Corus, a unit of Corus Bankshares Inc., said last month that it was unlikely it would raise capital without the help of regulators, including the FDIC."
If successful, Lubert-Adler and Related would provide funding for any purchase and would bring in the Related Group of Florida, a separate firm with ties to Related of New York, to provide boots on the ground in completing Corus's condo projects, according to the WSJ report.
"Lubert-Adler and Florida's Related, headed by 'condo king' Jorge Perez, last year formed a $1 billion vulture fund to scoop up distressed multifamily assets in Florida," reports Timiraos.
"But Mr. Perez faces his own set of challenges as he asks for lenders to rework loans on a number of luxury condo projects that have come to market amid the downturn,"
Meanwhile, iStar has suffered from rising defaults from billions of dollars of condo loans it made during the boom, including some for the same projects that were backed by Corus, according to the WSJ report.
Commenting on the Corus-Perez-Related Group item, Lisa Rab in the New Times Broward-Palm Beach blog, writes:
"You have to hand it to the Related Group. No matter how bad the economy gets or how many ghost towers dot the skyline, the Miami real estate giant keeps looking for ways to make a buck.
"Here's the current philosophy: We can't pay our own bills. But hey, let's buy more stuff and hope for the best!
"Corus Bank lent money to at least 16 projects in South Florida, including the nearly empty Tao Sawgrass in Sunrise and Trump International Hotel & Tower in Fort Lauderdale. Now that Corus is on the brink of failure, vultures such as Related are hovering.
"If the deal goes through, the Related Group (which has strong ties to Related Companies) will finish building Corus' condo projects in South Florida.
"This would be quite a feat, considering that Related is already struggling to fill its own Florida condo buildings -- Icon Brickell in Miami is mostly empty, and CityPlace South Tower in West Palm Beach is in foreclosure.
"Indeed, Related's building frenzy played a big role in creating the glut on the condo market that led to the current crisis.
"How can it possibly tackle the albatrosses left behind by Corus? Isn't that a little like Philip Morris selling nicotine patches?"
Rab adds, "Calls to the Related Group were not immediately returned. But it's safe to assume the bigwigs are out celebrating their impending windfall."
Perez also didn't respond to a Real Estate Channel e-mail which had requested phone interview.
While most unbiased observers of the Miami luxury condo market remain bullish on its future growth, the market also has its naysayers.
Mike Morgan, a blogger at The Wall Street Examiner based in West Palm Beach, FL and not associated with The Wall Street Journal, writes:
"We're starting to see isolated headlines about some high end condo sales in Miami, but you must still read between the lines. And even more important, you need to read what is not even being talked about.
"NBA Star Buys $5.5M Condo - That was a headline two weeks ago. Amar Stoudemire of the Phoenix Suns bought a penthouse in the W South Beach. What you are not hearing about, are the athletes and celebrities that are selling their units at losses. This market is by no means bouncing back.
"The hype is there, and now we have our very own Reality TV show about Miami and the spoiled, obnoxious, arrogant rich kids that make this their play ground
"But that is not enough to fill the tens of thousands of empty condo units throughout South Florida.
"Even the Stoudemire purchase needs some tea leaf reading. The W South Beach is not in the kind of trouble that hundreds of other South Florida condo projects are in. For many condo projects, you cannot even obtain financing, because so many of the units are empty, in default and/or delinquent in paying dues and fees."
Zalewski sincerely believes the housing market in Downtown Miami may be the first to emerge out of the recession.
"Most people are saying its spin. It's the realtors trying to blow smoke and trying to get people back into the marketplace. That's not the case.
"Walk yourself into a sales center that's priced at $200 a square foot. Take a number. Kick back and try to get a soda. You won't even be able to get a soda out of the refrigerator-- they are running out of the stuff (condo units at $200 per square foot) so quickly."
He adds, "Looking at sales, it appears most are not being made (right now) to 'bulk' buyers...Most (sales) are being made to foreign nationals, investors looking to flip once again in Miami real estate, and that could be a good thing or a bad thing.
"On the one hand, investors may be bailing out Downtown Miami, renting out their units and bringing life to the area. On the other they could be making another bad gamble which could lead to another wave of downtown foreclosures."
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