Financing to build condos withers
PALM BEACH, Fla. -- Feb. 20, 2006 -- There goes the fast money.
Major commercial lenders are withdrawing from financing South Florida condo construction and conversion deals, another sign the overheated market may be too hot to handle.
UBS AG is out of the Miami market, confirmed spokesman Peter Casey. So is GE Commercial Finance. Philadelphia-based private real estate investment firm AMC Delancey is still interested in Florida. Just not, for the time being, South Florida.
"We are seeing lenders overall pulling the plug," said Dan Kodsi, president of Royal Palm Communities, a developer in Boca Raton.
It's not only lenders on the construction end who are newly nervous about risk. The federal government hopes to damp the sale of exotic home mortgages, which enable even credit-poor prospective homeowners to buy. So, even if condo developers get financing, condo buyers may not.
The likely upshot: "There are many thousands of condo units announced as future projects or in the planning stages that will never get going," predicts Bradley Hunter, director of Metrostudy's South Florida Division in West Palm Beach. "They won't even get to the starting line."
That's downright starry-eyed compared to the dark prediction served up by Fitch Ratings Service, the New York credit ratings company. Fitch projects that one out of every 10 condo conversion deals nationally inked last year will fall flat.
Jack McCabe hasn't stuck a figure on it, but the Deerfield Beach-based real estate prognosticator and president of McCabe Research and Consulting is talking of creating a vulture fund poised to swoop in on distressed properties and pick them up for a song.
AMC Delancey CEO Kenneth Balin said of the tightened lending, "It doesn't mean the fundamentals aren't strong."
"It means people are playing a game of musical chairs and when the music stops, someone is not going to have a chair."
You don't have to be a real estate whiz to spot the early warning signs that condo financing is being hamstrung by everything from the high price of construction to skittishness over rising interest rates.
"See how many are dark at night," said McCabe of condos newly on the market. "There might be one light on for every 20 units. People are not living there. It is the height of the season, but they are sitting dark."
Rebel Cook, a local broker, said, "People call me every day asking me to sell their properties."
Real estate agent Darlene Delano said when she recently took a client to view a North Flagler condo, it was empty.
"This is a four-story building and we did not see one person while we were parking, or on any floor," Delano said. "In fact, we didn't see anyone from the time we walked in, to the time we left."
Even "pre-sold" buildings are struggling. That's because would-be owners who put down deposits thinking they would secure a 2.5 percent interest rate mortgage are now facing rates of 5.5 percent and higher -- just as the condo is ready for occupancy, and they have to sign mortgage papers.
"Within the last three weeks, I have seen several reservation holders who walked away from earnest money deposits," McCabe said. "There was a fellow who had put over $100,000 down who walked away."
Builders blindsided by rising materials costs can lose a lot more than that.
"There are some horror stories where developers opened their presales department and signed contracts and then went to build only to find out (construction) prices have gone up -- and now they find out they have sold everything too cheap," Balin said. "They priced it wrong."
That appeared to be the case at Promenade Condominiums in Boynton Beach, where reservation money was returned to buyers last month after the developer cited "meteoric rises in construction costs." One of those buyers has since sued, in part because the condos were put back on the market for sale - in his case, for an extra $70,000.
At Opera Place, BAP of Miami's high-profile high-rise in downtown West Palm Beach, the rising cost of materials prices forced the developer to assess a "construction surcharge" to those converting reservations to contracts.
Miami developer BBB Group didn't even get that far. Citing a lack of financing -- and construction costs that made generous financing necessary -- BBB called it quits last week, walking away from its planned 49-story, 364-unit Brickell Bay condo.
To be sure, most major finance firms and banks can withstand taking a hit if sales at their projects slump. Speculative investors hoping to make a quick buck reselling are another story. The going figure is that half of all South Florida condo purchases within the past one to two years have been made by investors. McCabe is among those who think the number of such investors is closer to 70 percent.
What no one disputes is that many of those investors are real estate novices.
"The taxi driver, the shoeshine guy are taking on a whole different level of risk," said Balin. "Might as well go to the Seminole casino."
Down cycles inevitable
The more optimistic believe that empty condos will ease the shortage of affordable apartments, as investors who can't sell opt for leasing their empty units. Delano said she represents several people "who have bought units and now are unable to sell them, so they are contemplating renting."
But, she said, most condo deeds restrict rentals.
Further, "People are not going to be able to rent these out at anywhere near the amount needed to cover" their costs, McCabe said. That's because many of the new units were designed to appeal to the luxury market, and a lease big enough to cover seven-figure mortgages is out of reach for many renters.
Balin agreed. "The numbers don't work as a rental," he said.
As a result, speculators who can't quickly resell are likely to wind up renting their units at a loss.
Down market cycles are nothing new to South Florida, of course.
"I would counsel people not to think that the sky is falling," said Metrostudy's Hunter.
Some will even benefit. Kodsi, for one, said developers are now approaching him to partner on already announced deals, using his established company's 30-year track record to nail down financing. Shakeouts, he added, "are good for the industry."
And, of course, building has not ground to a complete halt. About 600 showed up at The Related Group of Florida's recent party to unveil its tony ICON Palm Beach, a 21-story residential tower on Flagler Drive. According to a spokeswoman, two people signed contracts on the spot.
Staff Writer Alexandra Clough contributed to this story.
Spending and lending
*Promenade
Location: Boynton Beach
Status: Deposits returned to buyers after owner/developer reported skyrocketing construction prices. Units are back on market at new, higher prices.
* Clarkes Hotel
Location: West Palm Beach
Status: Hurricane-related construction costs prompt developer to revise building plans, raise cost of added units.
* Opera Place
Location: West Palm Beach
Status: Delays in groundbreaking resulted in higher construction costs; buyers converting reservations will be charged a construction fee.
* Barcelona Square
Location: West Palm Beach
Status: After spending five years working on condo/mixed-use development, owner sells land.
* Eden Condominium
Location: Boynton Beach
Status: Rising construction prices force owner/developer to refinance construction loan.
* 1390 Brickell Bay
Location: Miami
Status: Owner cancels plans for 49-story condo, returns deposits, citing an inability to get financing.
* 401 N.E. Third Street
Location: Fort Lauderdale
Status: Developer puts condo site up for sale.
* Ice Condominium
Location: Miami
Status: Owner drops plans for Biscayne Boulevard condo tower.
© 2006 The Palm Beach Post, via ProQuest Information and Learning Company; All Rights Reserved. Pat Beall, Palm Beach Post Staff Writer.
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Financing to build condos withers