Buying distressed real estate debt remains growth area

 

Local real estate companies are taking advantage of opportunities for buying distressed commercial real estate debt. But it’s a niche market for players with lots of cash and resources.

DISTRESSED DEBT BY PROPERTY TYPE

	Outstanding	Change	Worked	RR*
	Distress ($M)	vs 2010	Out (%)	(%)
Office	$41,857	8%	50%	68%
Apartment	35,295	-10%	52%	67%
Retail	28,798	6%	53%	66%
Industrial	11,541	1%	36%	73%
Hotel	24,241	-13%	52%	63%
Land	25,863	-9%	33%	54%
Other	4,748	13%	37%	69%
All Props	172,343	-3%	49%	67%

*Recovery Rate before costs and fees

BY ELAINE WALKER

EWALKER@MIAMIHERALD.COM

If there was an award for the most profitable single distressed commercial real estate debt purchase this year in South Florida, the Omni Center would win hands down.

Local real estate investors Jorge Perez, Jimmy Tate and Sergio Rok, looked at the struggling Omni Center and saw a great redevelopment opportunity in the midst of a revival along Miami’s Biscayne Boulevard. When they purchased the $161 million note in May that represented the bulk of the $206 million mortgage, their vision called for first gaining control of the property through foreclosure and eventually embarking on a mixed-use redevelopment plan. Selling wasn’t in the cards.

GENTING FACTOR

What they never expected was the Genting Group coming along four months later and buying them out at the full value of the note, with plans to incorporate the Omni as part of Resorts World Miami. The Perez-led group walked away with a $61 million profit in four months.

“We didn’t openly go out shopping that deal to sell it,” said Matt Allen, chief operating officer for Perez’s Related Group. “First and foremost we’re developers. The Omni site is one that we would have loved to develop. But it’s not a bad amount of money we made in four months.”

But before you think this is the new way to get rich quick, the Omni story is by far the exception rather than the norm. While purchasing distressed commercial real estate debt and distressed properties is gaining in popularity, those involved say it’s not a game for the inexperienced investor.

“Buying distressed debt is a very risky business,” said Ezra Katz, chief executive of Aztec Group, a Miami investment bank group that has also been purchasing debt. “A lot of people don’t understand the details. They smell a bargain and they take a risk. Unless you really know what you’re doing, stay out. If you want to gamble, you might as well go to Las Vegas.”

While most investors are purchasing debt as a way to gain control of a piece of real estate, it is no guarantee. The debt buyer could remain the lender. Gaining control of an asset requires foreclosure, which can be a costly and lengthy process, especially in South Florida.

Perez’s Related Group, as well as Tate and Rok, are among some of the bigger South Florida players in the distressed debt market. Other major players include Lennar’s Rialto Investments, LNR Property and RAM Realty Services of Palm Beach Gardens. Most are typically buying a mix of distressed debt, as well as distressed assets. Investments span all the asset classes from retail to multi-family apartments, office and hospitality.

The key is identifying quality assets that are underwater because they were overleveraged during the boom, rather than underlying flaws in the real estate.

Buying distressed debt and assets has been a key part of the Related Group’s strategy over the last few years. The company has purchased about 30 assets for close to $500 million, including undeveloped land in Hallandale Beach, Plantation and Fort Lauderdale, plus apartments in Myrtle Beach, S.C. Related has also teamed with Tate and Rok on retail properties in various markets from Arizona to Alabama.

EXPERTISE ESSENTIAL

“That’s how we’ve repositioned ourselves,” Allen said. “We have the expertise in all these aspects from development to asset management, that a lot of groups don’t have.”

Tate and Rok have purchased a total of nine deals valued at about $500 million, including properties in Coral Springs, New Orleans and Nashville.

“This is clearly a niche market,” Tate said. “The more transactions we close, the more experience we gain. We do not mind heavy lifting. The more heavy lifting that is involved, the more value we can create.”

While there are many institutional buyers, most of the bigger players in South Florida are larger real estate organizations with the ability and manpower to quickly evaluate the potential deals. Buyers must also have the cash to fund a deal. While it’s possible to refinance some of the debt later, closings tend to require quick turnarounds. Properties often need an additional capital infusion.

“To be competitive in this business, you’ve got to have ready capital available,” said Jim Stine, chief investment officer of Ram Realty Services. “Most of these properties need some work. The borrowers have probably been in default for a year or more. They’re not investing in the property and they’re not caring for them.”

Most recently, Ram closed last week on a $27 million note for a Plantation shopping center anchored by Publix and Steinmart. Over the past two and a half years, Ram has acquired 58 distressed real estate notes with a total debt value of approximately $275 million. For each property, the company paid between 20 percent and 80 percent of face value. Ram has recently formed its third investment fund that will target about $500 million of additional distressed note acquisitions, as well as other investments.

Stine and others in the industry see no signs of the deal flow slowing anytime soon.

At the end of the third quarter of 2010, approximately $3.2 trillion of outstanding debt was associated with commercial real estate, according to the Federal Reserve.

BOOM YEARS

Since most of the debt was financed during the boom years, the cycle could take as much as five to six more years to completely play out. There is an estimated $361 billion in commercial real estate debt expiring in 2012, and $1.4 trillion expiring between 2012 and 2015, based on a report from Deloitte, Foresight Analytics.

Real Capital Analytics estimates the outstanding commercial real estate distress currently at $172.4 billion, including $42.6 billion of properties already taken back by lenders. Real Capital estimates that puts workouts “nudging” the halfway mark.

“The market has really exploded since 2009,” said attorney Jon Chassen, chair of Bilzin Sumberg’s distressed property group. “It’s created its own industry.”

Miami Beach’s LNR Property is on the front lines of the deal flow, as the country’s largest special servicer of troubled commercial mortgages. Earlier this year LNR started a program with www.auction.com as a way to sell both distressed debt and properties.

“It’s a very efficient way for us to realize a market and value for properties,” said David Levin, vice chairman – investor relations for LNR, which is also purchasing debt. “An auction format shines a bright light on the process and the property. Anyone can bid. We’re getting more and better responses, everyone from Johnq@hotmail.com to Goldman Sachs. It’s very diverse.”

Transactions have increased as banks are more willing to mark their assets to market value, instead of continuing what the industry had dubbed the game of “extend and pretend.” That refers to what has been the tendency in recent years by lenders to extend the term of a loan to avoid writing down the value of the asset, which could have seen dramatic declines post recession.

Camilo Miguel Jr., chief executive of Mast Capital, a Miami Beach private equity firm that has partnered with the Related Group, said the number of debt purchases his company has made this year is more than double the last two years put together.

“We had been a little apprehensive about making acquisitions in the past as fundamentals were not supportive of the inflated pricing, but have started to dip our toe in,” Miguel said. “At this point in the cycle it’s starting to make more sense. Banks are selling some of the more desirable assets. We think that momentum is going to continue through the end of the year and next.”

Note buyers often pay 40 percent to 60 percent of the face value of the note, as banks are anxious to move the property and not deal with a potential foreclosure.

BRING VALUE BACK

“We prefer buying discounted notes because we fully understand this arena and how to bring value back to the collateral,” said Sergio Rok. “The banks take that loss and move on.”

But with all the available capital sitting on the sidelines, prices on certain assets are reaching levels that have left some buyers reticent to play the game of a bidding war.

The Adler Group has bid on about five different distressed debt purchases of office buildings and lost out. Instead, the company is focusing on buying undervalued distressed assets.

“We’re not just losing, we’re losing big,” said Matthew Adler, chief investment officer of Adler Group. “Because of the amount of equity that has been raised for this purpose it’s bidding up values that aren’t really supported by fundamentals. People are getting caught up in this frenzy.”

Global Fund Investments was formed in 2007 to buy distressed retail assets in the market, but it hasn’t worked out the way Doron Valero anticipated. He’s purchased four notes on retail shopping centers since that time, but he bid on at least 40.

“We thought it was going to be much easier to buy them,” Valero said. “I think everybody was caught by surprise that there weren’t more notes. You need to be focused on what you’re willing to pay and you need to walk when you need to walk.”

While Parmenter Realty Partners has always focused on distressed asset purchases of office buildings, Chairman Darryl Parmenter has never bought debt because he believes it’s “way over priced.”

One thing most players agree on is that the best deals haven’t been as plentiful or attractive in South Florida, as elsewhere. Many of the local investors have been spending the bulk of their capital elsewhere, making purchases around the state and throughout the Southern United States. Yet, Deutsche Bank has bought more debt in South Florida, than anywhere except New York.

“The problem with South Florida is that it’s a market that too many people want to be in,” Tate said. “It’s a good market with a lot of sizzle.”

Green card loophole boon to NY developers

February 02, 2011 02:00PM

More New York City developers are taking advantage of a program that offers green cards to foreign investors of development projects, according to the Wall Street Journal, as stateside financing remains constricted in the rocky economic climate. The federal program, known as EB-5, grants two-year green cards in exchange for a $500,000 or more investment in a real estate development. The strategy has gained traction among developers like Forest City Ratner, which has received $249 million from 498 investors taking advantage of the program at his Atlantic Yards development. Experts like Evan Zeppos, a spokesperson for developer Jackson Street Management, said that EB-5 is increasingly useful in the down market. "It's an attractive alternative," Zeppos said. "Any developer knows now that for financing, the faucet is still very tight." [WSJ]

Miami's downtown sees development boom

October 28, 2011 11:15AM

Swire's Brickell CitiCentre

Brickell and Downtown Miami could experience an even greater influx of investment and development in years to come, experts say. "We're seeing a wave of investment the quality and size of which we've never seen before in this area," said Neisen Kasdin, a real estate lawyer at Akerman Senterfitt. A wave of development is already underway, from Genting's $3 billion Resorts World Miami to additional retail in the Design District. The Brickell and downtown area has seen nearly 24,000 condominium units built in the last decade alone, according to the Downtown Development Authority's Cesar Garcia-Pons. [Miami Today]

Pending sales in Miami-Dade, Broward show mixed results

October 28, 2011 04:30PM

Miami-Dade County followed the national trend in September, as pending home sales increased 11 percent from over a year ago to 11,296 but fell 5 percent from August, according to reports released today by the National Association of Realtors and the Miami Association of Realtors.

Nationally, the pending sales index increased 6.4 percent year-over-year, but fell 4.6 percent from a year ago.

Meanwhile, pending sales in Broward County reached 7,693 in September, 0.3 percent below September 2010 levels and 3 percent below August's number.

However, both Miami-Dade and Broward counties showed a marked increase in pended sales in September, which measures contracts signed during the month and reflects the rising pace of sales in the region. Pended single-family home and condominium sales ballooned 26 percent year-over-year to 3,609 and rose 8 percent from August in Miami-Dade. In Broward, sales the number of sales that pended gained 13 percent from a year earlier to 3,135 -- 0.7 percent above August's level. -- Adam Fusfeld

Modest improvements for Fannie, Freddie as bailout tab decreases

October 28, 2011 12:45PM

Fannie Mae has received $104 billion in bailouts

A federal regulator has downgraded the bailout tab for government-sponsored Fannie Mae and Freddie Mac to $124 billion from $154 billion through 2014. The taxpayers have already paid Fannie and Freddie a combined $141 billion, but the latest numbers show that the cost is shrinking as the mortgage giants begin to repay the money. According to the Wall Street Journal, the numbers show modest progress -- the companies are stabilizing, but they aren't yet returning to profitability in the foreseeable future. All profits go towards paying the government 10 percent dividends on the bailout payments. Under a more severe economic scenario, the bailout bill could amount to $193 billion -- down from last year's estimate of $259 billion. Fannie and Freddie own or guarantee about half of the US' $10.4 trillion in mortgages.

Foreclosure stats for the week

October 28, 2011 01:30PM

Source: Condo Vultures

As of today, the number of foreclosures in South Florida year-to-date is 26,943, down from 52,633 at the same time last year, based on the most recent data available from Broward, Miami-Dade and Palm Beach counties. In the week ending today there were 947 foreclosures in South Florida, compared to 933 in the same week last year. The graph above shows foreclosure activity in South Florida's three counties. -- Adam Fusfeld

Mondrian near $100M in sales

October 27, 2011 11:15AM

Mondrian South Beach

The Mondrian South Beach condominium-hotel is close to $100 million in sales after three third-quarter transactions, according to a report from Condo Vultures. Total developer sales at the project are now at more than $97 million, following the purchase of 5,200 square feet between July and September. The 335-unit project, which is located on the Biscayne Bay side of West Avenue in South Beach, has now sold more than 45 percent of its units, with an average price of $900 per square foot. The South Beach neighborhood has now sold 79 percent of those condo units built after 2003. --Alexander Britell

W South Beach sells 23 units in three months

October 27, 2011 01:30PM

Interior and exterior of W Hotel

Between July and September, 23 condominium-hotel units at the W South Beach have sold for a total of $26 million, and an average price of more than $1,700 per square-foot, according to Condo Vultures. The 408-unit building condo-hotel at 2201 Collins Avenue is now 40 percent sold. Overall sales at the building have surpassed $240 million and average more than $1,800 per square-foot since it opened two years ago, although the average price per square foot has fallen by more than $400 over that period. The $500 million, 20-story complex was developed by Tristar Capital.

Miami's high profile condos are back from the dead

October 27, 2011 02:15PM

From left: Trump Royale, Trump Towers and Icon Brickell

Miami condominiums are selling at a record pace, according to recent market reports, and the New York Post singled out some of the area's highest profile projects to see whether they were experiencing a corresponding uptick. The answer was a resounding yes. 

Even in buildings that were previously thought to be destined for failure. 

Dezer Development said that it sold more than $100 million in Trump units during the summer months, for an average of about $525 per square-foot, at the 384-unit Trump Royale and the three-building, 813-unit Trump Towers. All told, just 75 units remain in those buildings. Just two years ago buyers were walking away from units en masse in the building. 

The Related Group's 1,800-unit Icon Brickell has just 30 remaining units, when factoring in contracted apartments, despite two of its towers being deeded back to lenders in 2010. Even CEO Jorge Perez admitted to being surprised by the sales pace. His next project, MyBrickell, already has 60 reservations before being complete. 

As previously reported, the W South Beach also experienced strong sales this summer. 

In addition to the plethora of Latin American buyers, the Post attributes the sales spike to the many luxury amenities that have begun to sprout in the new buildings and the high-end retail proliferating in Miami's Design District. [Post]

U.S. mortgage applications rebound, show modest gains

October 26, 2011 11:15AM

U.S. mortgage applications increased 4.9 percent for the week ending Oct. 21, according to weekly data from the Mortgage Bankers Association released today, on a seasonally adjusted basis. The unadjusted increase was 4.8 percent. Though the week did include the Columbus Day holiday, it followed a week where applications dropped precipitously.

Refinancings, which are not seasonally adjusted, increased to 4.4 percent, also rebounding from a double-digit decline.

The refinance share of mortgage decreased to 77.3 percent of total applications from 77.6 percent the prior week, while the adjustable-rate mortgage share of activity gained one-hundredth of a percentage point to 5.9 percent.

Mortgage rates remained relatively unchanged from the previous week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances (less than $417,500 under a new law) held steady at 4.33 percent, while jumbo loans increased to 4.68 percent from 4.64 percent. For FHA-backed 30-year fixed-rate mortgages the average rate fell by one basis point to 4.11 percent.

Meanwhile, the average contract interest rate for 15-year fixed-rate mortgages increased by that same amount to 3.62 percent. ??Finally, in September, the investor share of mortgage applications reached 6 percent, just above August's level of 5.7 percent, while the share of mortgage activity for second homes fell to 5.8 percent from 6 percent a month before. -- Adam Fusfeld

Record Miami condo activity fuels Florida's strengthening home sales market

October 20, 2011 12:00PM

Florida sales activity jumped 10 percent in September for both condominiums and single-family homes compared to the same month a year ago, according to a National Association of Realtors report released today, thanks largely to huge increases in South Florida sales volume. 

The condo market in the Miami area showed the greatest strength of any market in the state, as prices are on the rise and activity is at a record pace. The median price of a condo in Miami spiked 17 percent since last September, while activity rose 58 percent, bringing the 2011 sales pace to 29,000 transactions. According to the Miami Association of Realtors that would surpass the record set in 2005 (although condo sales prices still remain far below those witnessed during the peak). Miami single-family homes also performed well, as sales volume increased 46 percent year-over-year, although the median price dropped some 6 percent to $131,000. 

Sixty-three percent of Miami buyers in September paid in all cash, well above the national average of about 30 percent. 

"There is great demand from international and domestic buyers and investors for South Florida REOs," said 2011 Miami Association of Realtors Residential President Ralph De Martino. "Based on the current robust level of sales activity, it is expected that regardless of any shadow inventory -- distressed properties pending foreclosure or short sales or REOs yet to be listed for sale -- that may come on the market, there is insufficient supply to satisfy demand." 

Elsewhere in South Florida, sales volume increased by about one-third in the West Palm Beach-Boca Raton area for both single-family homes and condos. But price dropped significantly. The median single-family home went for $180,300, 20 percent less than last year's price, while the median condo experienced an 11 percent sales price drop to $76,700. 

In the greater Fort Lauderdale area, sales activity increases hovered slightly below the statewide level, at 8 percent, thanks mostly to the 11 percent increase in the number of single-family homes that traded. However, the median price for those homes fell 7 percent to $188,800. On the other hand, condo prices rose 3 percent to $71,900, but activity increased just 6 percent from last year's level. 

Across the state, condominium prices increased 7 percent to $87,200, but single-family homes experienced a 1 percent decline to $133,900. -- Adam Fusfeld

Experts foresee rising Miami-Dade housing prices
By Patricia Hoyos 
   Residential real estate experts foresee a boost in property values due to international buyers growing increasingly interested in South Florida. 
   Still, with a lack of inventory, financing hurdles and more foreclosures on the horizon, the real estate industry is far from its 2005 market peak. 
   The state of the residential market was discussed at the fourth annual Residential Real Estate Outlook Luncheon on Friday at the Westin Colonnade in Coral Gables. 
   The luncheon and panel discussion were hosted by the Coral Gables Chamber of Commerce in partnership with the Miami Association of Realtors and Miami Today. Michael Lewis, Miami Today's publisher, served as moderator. 
   "You can see that our monthly closings and sales are inching up," said Patrick O'Connell, senior vice president of new business development for EWM and a panelist. "All the numbers are going in the right direction now, and that's what we want to see."
   According to a market report by the Miami Association of Realtors, as of August, condominium sales are up 53% from one year ago and single-family home sales are up 49%. Also showing a favorable number is the residential inventory, which is down to 15,405 from last year's 25,679 units on sale. The industry generally considers a six-month supply of residences on the market to be optimal; larger numbers tend to drive down prices. 
   In Florida, 31% of sales are to international buyers. In South Florida, 60% of buyers are foreign nationals, said Jack Levine, chairman of the board of the Miami Association of Realtors and a panelist. Nearly one in three international transactions in the US is in Florida, and nearly one in three international transactions in Florida is in the Miami and Fort Lauderdale area.
   "The buyers are coming in here and they want to buy, and the pricing is great," Mr. Levine said "The main problems I see are in the financing side of it."
   However, financing doesn't seem to be a big problem for many international buyers, who tend to pay mostly with cash. Mr. Levine said foreign buyers also tend to buy residences at the higher end of the market.
   Panelists agreed that the number of buyers from Brazil is increasing significantly. On average, Brazilian buyers pay about 85% in cash and only need financing for the remaining 15%, with a median purchase of $215,000, according to the market report.
   Many of these international buyers are purchasing foreclosed properties as investments to rent them to others, Mr. Levine said. 
   "The rental market is on fire," he said.
   Around 53% of international buyers are from South American countries, including Venezuela, Brazil, Argentina and Colombia. Residents of Canada, France and Italy also represent a large number of international buyers.
   Lorenzo Perez Jr., chief executive officer of Premier International Properties Inc., emphasized the need for realtors to reach international buyers through social media. With the majority of social media users not being from the US, he said, the web can be an effective way of reaching potential buyers. 
   Because of these international buyers, panelists predict that next year property values will rise. 
   "We do foresee an increase in values in properties," said Mayelin Carbajales, vice president of Mercantil Commercebank's residential lending sales department. "It all depends on the market. Currently, in Dade and Broward and Palm Beach, we are seeing an increase in value because of the foreign national buyers that are buying there." 
   A major problem currently facing the residential real estate market is having limited inventory.
   Mr. Perez said there is a demand for properties, but there hasn't been much inventory placed out there. High numbers of bank-owned real estate properties continues to be a problem that could continue to hurt South Florida's real estate in the upcoming year. 
   "From a banking perspective, we are going to see an increase in foreclosures," Ms. Carbajales said. "We are also seeing distressed borrowers."
   According to Mr. O'Connell, the universal message from his contacts in the banking industry is that a lot of bank real estate owned properties are in the pipeline. He said real estate owned inventory in the market is currently down 50% to 60% from the peak.
   In the luxury homes market, he cited a 30% decrease in inventory. 
   Mr. Levine said he expects the real estate owned inventory to be "gobbled up as soon as it comes back up in the market." The question remains when these properties will be listed again on the market.
   Also hurting the real estate industry are banks being more hesitant to lend than in the past.
   In coming months, banks are going to require higher down payments and increase credit score requirements, Ms. Carbajales said. Overall, she predicted, standards across the country for borrowers will be raised. 
   With the number of foreclosures still high, banks are continuing to be concerned about the risks associated with lending, she added.
   The panelists said they don't expect foreclosures to slow down in 2012. But on the bright side, they anticipate that interest from international buyers will remain strong, increasing the value of properties. 
   "We aren't able to predict with crystal balls," Mr. Levine said. "We try to pick up trends, but it's really, really hard, especially because there are so many moving variables."

Construction set to begin on Miami's first new high-rise condo since bust

October 18, 2011 12:45PM

Construction will begin on a $170 million, 46-story, 374-unit condominium in Miami come next spring, the Miami Herald reported, marking the first new high-rise condo since the housing bust. 

Developed by Newgard Development Group at 1300 Brickell Bay Drive, the tower, called Brickell House, is slated to include a rooftop sky deck, a pool on the 46th floor and an automated parking garage. Newgard said it's a good time to begin construction as much of the firm's inventory has been absorbed over the last 18 months. 

Newgard will depend on prospective buyers to finance construction. Purchasers will need to pay 70 percent of the asking price before construction is completed. It's a model that is typical of Latin American construction, which is appropriate for the development that Newgard plans to market to foreign buers. 

"Let's be realistic. The majority of buyers in Miami come from outside of the country," said Newgard Chairman Harvey Hernandez. "Our buyers here, nobody has 70 percent. Nobody can afford that." [Miami Herald]

South Florida residential inventory

October 18, 2011 03:45PM

Compiled by Condo Vultures Realty using the South Florida Shared Multiple Listing Service. Active listings are properties where no current sale contract exists; pending sales are properties in which a contract for sale has been executed, but not yet closed. Listing brokers control the status of a property listing. -- Adam Fusfeld