By Bob Ivry
Sept. 4 (Bloomberg) — Sales of distressed Miami properties have begun, signaling a bottom for south Florida’s real estate market and the end of waiting for vulture funds armed with about $30 billion to spend.
The sale of 120 condominiums last month to a Philadelphia private equity firm and Related Group of Florida, a development company led by Jorge Perez, “broke the logjam” for investors targeting the oversupply of condos in downtown Miami, said Peter Zalewski, owner of the Condo Vultures LLC consulting firm in Bal Harbour, Florida.
Regional and community lenders are starting to market properties in Miami, where the median condo price in July fell 19 percent from a year earlier, according to the Florida Association of Realtors in Orlando. Banks that were reluctant to take real estate-related writedowns may be forced by regulators to sell homes that sit empty and mortgage notes that aren’t being paid, said Jack McCabe, founder of McCabe Research & Consulting LLC in Deerfield Beach, Florida.
“There’s a purging going on,” McCabe said. “It’s my belief that the vulture buyers would form the bottom of the real estate market, and we’re almost there. That bottom may last for three years as foreclosure sales go on.”
McCabe estimates that at least $30 billion has been earmarked by funds to buy distressed Florida real estate. Some investors have been waiting almost three years to buy, he said.
Non-Performing Loans
Wachovia Corp., based in Charlotte, North Carolina, and Birmingham, Alabama-based Regions Financial Corp. have sold real estate loans that were non-performing, or stopped paying, McCabe said.
At BankUnited Financial Corp., Florida’s largest bank, non- performing real estate loans jumped to 8.3 percent in the second quarter from 1.5 percent in the third quarter of 2007, according to a filing with the U.S. Securities and Exchange Commission.
Regulators told the Coral Gables, Florida-based bank it may lose its “well-capitalized” designation unless it attracts at least $400 million, the company said last week.
“Banks may be reluctant to make a deal because they want to preserve cash,” said Kenneth Thomas, an independent bank consultant and economist in Miami. “If they don’t make the deal they don’t have to write down their capital.”
BankUnited spokeswoman Melissa Gracey declined to comment.
Fifteen percent of the real estate loans written by closely held, Miami-based Ocean Bank weren’t being paid in the second quarter of 2008, compared with 2.4 percent a year earlier, according to the bank’s filings with the Federal Deposit Insurance Corp.
Selling Bad Loans
Ocean Bank started selling bad loans and foreclosed properties in the last three months of 2007, according to spokesman Ray Casas.
“We took a very hard look at our portfolio and, as appropriate, sold notes and foreclosed properties,” Casas said. “The bank has been very aggressive in doing that.”
Bad real estate loans increased five-fold at BankAtlantic Bancorp Inc., based in Fort Lauderdale, Florida, according to the bank’s FDIC filings. In the second quarter, 1.5 percent of the loans weren’t paying, compared with 0.3 percent in the second quarter of 2007.
Calls seeking comment from BankAtlantic were not returned.
“Banks are at the point where they have to take a hit,” said Michael Klinger, managing member of Saber Real Estate Advisors LLC in Aventura, Florida, a developer and opportunity fund. “A lot of them were avoiding the problem because they don’t know what to do with the real estate and they don’t want to admit and deal with their problems. They figured time would make things better.”
Banks have begun circulating lists of real estate loans for sale, Klinger said.
Inventory
With 11,551 condo units in the 1,040-acre downtown Miami area expected to be completed this year, it would take five years to sell them off at the current sales pace, according to Brad Hunter, regional director at the MetroStudy real estate research firm in West Palm Beach.
In July, one in every 186 homeowners in Florida either had their home repossessed by a lender bank, received a notice of default or were issued a warning that their house was going on the auction block for failure to make monthly mortgage payments, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. That foreclosure rate, a 139 percent increase from July 2007, ranked the state third in the country behind Nevada and California.
Lewis Goodkin, president of Miami-based Goodkin Consulting Corp., who has been advising investors on South Florida real estate for 30 years, said a gulf still exists between the banks’ offering prices and what the vulture funds want to pay.
`Dam Will Break’
“The investors are not going to buy unless they get a bargain of 40 to 50 cents on the dollar,” Goodkin said. “In some cases, if you bought land for nothing it still might not work. The market is not going back to what it was in 2005.”
Even so, Goodkin said “the dam will break” and distressed sales will pick up in the first quarter of 2009 when loan delinquencies pile up.
“There’s no way for a bank to avoid these problems,” he said.
Perez made the bulk purchase, the largest in condo-glutted downtown Miami, in the 50 Biscayne Blvd. tower with Lubert-Adler Partners LP, a private equity firm headed by Dean Adler. The two firms raised $1 billion to buy condos, mortgages and land in Florida, according to a Feb. 13 news release. The price was $30.3 million, about half the cost of individually sold units.
Bulk Purchase
Perez’s partnership bought the condos from his own development company and a partner, Atlanta-based Cousins Properties Inc., which built the 54-story tower.
In an earlier bulk purchase at 50 Biscayne, Perez and Cousins sold 26 units in May to 50 Biscayne Suites LLC for $6.1 million. Perez and Cousins paid off their construction loan with LaSalle Bank with the proceeds, according to Zalewski of Condo Vultures.
Paying off the loan allowed Perez to do the recent 120-unit bulk transaction at below-market prices, said Bruce B. Baldwin, a partner with the Miami-based Mase & Lara PA law firm who was not involved in the deal.
Construction lenders require developers to sell condos at a minimum price, he said. Once the developer’s debt to the bank is paid, the developer can discount the units, he said.
Perez may follow a similar strategy at the Plaza on Brickell development, two downtown towers with a total of 1,000 units, and other developers may too, Zalewski said.
Cost to Build
Perez and Lupert-Adler paid about $235 a square foot for the 120 units in 50 Biscayne, Zalewski said. That’s about half the $454 a square foot paid when three individual units in the building were sold in the fourth quarter of 2007, said MetroStudy’s Hunter.
It’s also comparable to the $175 to $240 a square foot it costs to build a new condo in downtown Miami, according to Ashley Bosch, president of Miami-based Block Urban Development LLC and president-elect of the Builders Association of South Florida.
Leah Witherspoon, a spokeswoman for Related Group in Miami, said Perez was traveling and couldn’t be reached for comment. Calls to Stuart Margulies, director of asset management for Lubert-Adler, were not returned.
Zalewski said he expects two bulk sales of new condos in the next few weeks, one of them for $190 a square foot and the other for $250 to $300 a square foot.
Buying condos in bulk could present legal problems, said Baldwin, the Miami attorney.
Florida law treats anyone who sells more than seven condos of a project with more than 70 units as the developer, making them responsible for construction defects or any lawsuits against the builder, Baldwin said.
“Bulk purchasers need to be wary,” Baldwin said. “They can really get spanked.”
To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.
