Ezra Katz (AM Holt)
Large private equity bets on the South Florida housing market are filling a need for hundreds of millions of dollars in construction financing that’s otherwise not being provided by banks, several real estate lending experts told the Daily Business Review.
A rush of money from New York financiers is good news for developers of South Florida megaprojects as even lesser-experienced players are finding a lending environment.
“Lending institutions across the board have a larger appetite to do deals with a higher risk profile than even six months ago,” said Charles Foschini, vice chairman in the Miami office of national lender CBRE, “However, South Florida still has a strong memory for many of the condo and land debacles of the last cycle, and while those units were absorbed perhaps 10 years faster than many people’s predictions, the underlying lenders and equity holders did not do so well.”
Foschini said the searing memory of the housing crash has kept banks away from making the high-dollar commitments needed for many of the mixed-use, luxury megaprojects currently on the drawing boards. Private equity firms with more than enough funds to plug the money gap love the demand for luxury product by foreign investors and aren’t fazed by the high cost of South Florida land.
“In these megaprojects, it’s very hard even at a lower loan-to-value ratio to put together a consortium of bank lenders,” Foschini said. “That creates an opportunity for a lender like Blackstone or NRF, which is another one that’s come into the market in a big way, to make condo loan at a higher leverage and a higher rate.”
Over the past several weeks, Blackstone has provided South Florida developers with construction loans totaling $410 million and options that could potentially double that amount. A July 10 deal provided real estate investment group Fort Capital Management with $290 million to develop the 8.7-acre Surf Club at 9011 Collins Ave. in Surfside. An Aug. 8 loan saw Blackstone drop $120 million to fund the 51-story Biscayne Beach bayfront condominium in Miami’s Edgewater neighborhood.
Some banks have been open to providing large construction loans over the past year.
HSBC gave the developer of the Faena District megaproject in Miami Beach a $300 million loan this year and funded a $98 million infusion of cash for the first phase of the Marina Palms Yacht Club & Residences project at 17201 Biscayne Blvd. in North Miami Beach last November.
Wells Fargo closed on a $214 million construction for the Porsche Design Tower ultra-luxury project at 18555 Collins Ave. in Sunny Isles Beach last September.
But attorney James Shindell at Bilzin Sumberg Baena Price & Axelrod in Miami said banks have generally been loathe to lend to any but the lowest-risk projects: those being built by experienced developers in prime locations.
“What we’re seeing is that it’s very important that the sponsor group be strong and experienced, and it’s important that the project be well-located,” said Shindell, chair of Bilzin Sumberg’s real estate practice. “We’re not seeing so much of this money flow into the B and C locations as we did before the crash.”
Harold Lewis, head of the real estate and banking practices at Pathman Lewis in Miami, agreed with that assessment and said it’s part of a wider risk-averse position that has become the default position for big banks.
“It used to be the banks that took the risk from the developer side, but now it’s the buyers who, by putting up large deposits, take the risk from the developer side,” he said. “The risk appetite right now still favors experienced developers,” Lewis added, which means all but a handful of players might not get the most attractive terms by approaching banks for financing.
Costlier Than Banks
Ezra Katz, chief executive and founder of Miami-based finance broker Aztec Group, put it succinctly: “Not every developer can be a Related. There’s only one Related, there’s only one Ugo Colombo and so forth, and then there’s everyone else.”
“Everyone else,” according to Katz, might at least partly be falling into deals with private equity firm for lack of other options.
“Remember, these types of lenders, be they Blackstone or Canyon or someone similar, are more expensive than banks,” he said. “Yet certain borrowers might prefer or might have to go with these kind of lenders.”
Indeed, a key thing market watchers are watching is the kind of project sponsors receiving construction financing. In recent months, billionaires and some not so well endowed with little or no development experience have been scooping up development parcels in key Miami neighborhoods at high prices.
With little possibility of “flipping” the land, experts believe the city will soon have a number of unproven developers—perhaps partnering with more experienced companies—marketing luxury projects. It’s to be seen if financing will be available for would-be builders with thin resumes.
“You’re going to have to see how that develops,” Lewis said. “I think the lenders haven’t had to make those choices just yet.”
CBRE’s Foschini said the money needs of developers with less than gilded reputations was part of the dynamic fueling private equity’s South Florida run. While banks will generally ask for personal guaranties and off-site collateral to secure a deal, private equity is normally more open to so-called nonrecourse construction loans, where the collateral is mainly the land and future improvements.
“I would suggest that even for the top-tier developers, an expensive construction loan that’s nonrecourse may be far more appealing than an equity partner who will take significant upside on the deal or a construction lender who might be recourse,” Foschini said. “I’d rather pay a 9 to 11 percent rate on a construction loan than split half the upside with an equity partner.”