Florida Real Estate Journal
November 16-30, 2009
Vol. 17, No. 15
By Jennifer LeClaire
Special to Florida Real Estate Journal
MIAMI – In 2003, speculators started building what would become 23,000 condo units in a 60-
block stretch of Downtown Miami. The last of those projects comes online early next year. The question is, how long will they sit empty? At the end of the second quarter of 2009, developers were still holding about 9,400 units that either hadn’t closed or were still under construction, according to Condo Vultures. While stimulus packages for first-time homebuyers have driven sales up in recent months, thousands of units remain empty even as new projects are coming out of the dirt for 2011 delivery.
As Jack Studnicky sees it, deep discounts and stimulus funds will only drive so many sales. If Downtown Miami is going to see the revitalization its local officials have been prophesying, developers and lenders need to work together to find strategies to fill half-empty buildings with residents that will support a 24/7 community. Studnicky, an Aventura-based luxury real estate broker that handles several Trump properties, has seen this phenomenon before. He helped rescue a sagging condominium market that put a number of developers out of business in Ocean City, Md., in 1975. Studnicky worked with developers to sell out ailing buildings at a time when interest rates were high, prices were high, and the economy was down. In some ways,
the scenario was worse than it is today.
The Florida Real Estate Journal caught up with Studnicky, vice president of International Sales Group, to discuss the state of Downtown Miami’s condo market and strategies for turning challenges into opportunities that let everyone win.
FREJ: What do you see as the big challenges for Downtown Miami condo developers with half empty buildings?
Studnicky: There are many. The first rule is to protect the asset, but that’s difficult to do because the developer and the lenders are usually at odds ones with each other. Meanwhile,
the building can suffer sabotage by unpaid contractors who were mid-way through the job because funding for the project stopped. If the building is already completed, owners may struggle to pay for normal maintenance, especially if condo unit owners aren’t paying their monthly fees, and relationships with tenants can go sour. Well-meaning condo commandos
often try to take control, but that may only create more unrest among unit owners. Developers begin slashing prices to try to sell empty units, management begins to fear losing their job,
morale suffers as rumors spread. It’s a mess.
What about the banks that loaned them the money to build?
What’s at risk here?
In today’s market, banks know they will end up bailing out the property. The sooner the bank gets involved the better. Going to war with the developer is a mistake because when the
lender threatens foreclosure it has a ripple effect: everyone puts a hold on funding, cooperation ceases and the real challenges we just discussed begin. The big risk here is the bank will
end up with a tarnished asset that may never regain its original stature if the building is allowed to languish. Lenders need to take quick action to create a positive environment for all parties,
including the developer, the contract holders who have closed, the renters who have little to lose from moving out of a distressed building, and pending contract holders that are so easily
spooked.
Unfortunately, the bank has to take an unanticipated financial loss. The sooner they come to that reality the sooner they can start protecting the asset they will soon be inheriting. It
takes good legal leadership to navigate this difficult terrain. The bank and the developer will be the losers and the losses will increase the longer it takes the bank to get control of the asset.
Are traditional real estate brokers up to this challenge?
Well, there are many good brokers selling condos in Downtown Miami. But the situation we have on our hands means more than holding a fire sale on condos. Most of the real
estate on the market today is being picked over by bottom fishers or opportunists who are only interested in the cheapest price per square foot. Selling distressed property is a science
and one not often practiced. The last time we were confronted with this problem was in the mid-’70s. There aren’t many around who have been through this kind of cycle before. The
market today demands workout specialists that can orchestrate a successful sellout of the asset. I have actually sold REOs for more than the original developer proforma but I don’t see that happening in this market.
What types of issues can a workout specialist navigate?
Competitive issues are a big one. You have to do the research on the market. It’s foolish to sell property for less if you can get more. Vultures are only interested in cheap, and you can
easily destroy the integrity of a building by accepting their offers. How would you like to be the owner of a unit who paid $550,000 only to discover the same unit is now being offered at $350,000? That causes people to walk away from their investments. First they stop paying their maintenance, and shortly thereafter they stop paying their mortgage. The building just seems to run down from there.
How do you decide the proper pricing, then, to maximize the sell-out? Do you look at ROI?
Forget about ROI. The buying public will be the only winners if we are all successful in a workout. We are looking for the maximum revenue possible by selling a good product at the best price possible in this market, not a fire sale. The fire sale attitude scares off real buyers because they are looking for the long-term value of the property.
How do you deal with current occupant relations? Any advice?
Sure. Get the people who have already closed on your side. Their “good will” can make a sale or kill it. I have seen sales destroyed in an elevator ride with a prospect that was ready to
buy when a disgruntled owner gets on the elevator. During a three-floor lift, the owner effectively kills the deal. The same is true by disgruntled owners walking through the lobby or any place a viable prospect may overhear bad news about a potentially good building. Things get really tough to deal with when people who have closed organize and picket the building.
What about selling in distressed buildings?
As far as building staff, keep them up to date on the workout plan. Keep the lines of communication open and keep the environment positive. Keep the sales center appropriately staffed based on target market profiles and run the sales office like a business. Get rid of the fire sale attitudes because they can cause a cancer. Decorate a model apartment or two targeted to your specific buyer types. Just putting furniture in a unit can be a turn off if it doesn’t match the tastes of your target market. And put your model where you have the best views. People may buy a smaller unit with no view, but at least you’ll have the best sales environment to sell in and creating that environment takes savvy marketing.
How can the bank decide if they should sell to vultures or hire a workout specialist to handle the property and maximize their investment?
Banks have many constraints these days and many reasons why what looks like the most obvious solution is not a solution at all. There is a lot of sophisticated legal maneuvering required. If a bank sells an asset to a vulture fund, the bank is leaving 65% to 75% on the table
– that’s millions of dollars. The money left on the table goes to the vulture. Vultures funds are generally more entrepreneurial and aggressive than the banks. Any bank considering how to deal with the above problem will find many so-called experts beating on their doors. The problem is anybody can call themselves an expert and by the time you know how effective they are it may be too late. The key to the search can be summed up in one word: experience.
this is an old facet to real estate that has reemerged. The last time we experienced these problems was in the mid-1970s.
“Banks have many
constraints these days
and many reasons
why what looks like
the most obvious
solution is not a solution
at all.”
– Jack Studnicky,
International Sales
Group
Jennifer LeClaire (www.jenniferleclaire.
com) is a South Florida-based
freelance writer, editor and project
manager.
