South Florida’s surging preconstruction condo market is facing its first serious test of investor confidence.
It relies on buyers prepaying half of the purchase price for proposed units so that developers have the funds to build the towers as marketed. With nearly 175 new condo towers proposed, under construction or recently completed, buyers from around the world are anxiously awaiting news of a foreclosure lawsuit against Miami developer Harvey Hernandez of the BrickellHouse project, one for the first new condo towers to be constructed in South Florida since the real estate crash of 2007.
At risk for South Florida condo developers is the future viability of a creative construction funding strategy based on a Latin American method of collecting 50 percent deposits from buyers to overcome the financing challenges that exist in today’s U.S. banking environment.
Under the Latin American funding method being used in South Florida, presale buyers are putting down 50 percent deposits despite knowing that nearly all of their funds will be spent by the developer to build the proposed projects.
This method is said to work well enough if a proposed condo project is built as planned.
It is less certain what happens if a project experiences significant cost overruns or even fails to be constructed.
Given this possibly outcome, many of the domestic buyers who lost money putting down 20 percent deposits on preconstruction condos during the last South Florida boom-and-bust cycle are said to be avoiding the current condo boom due to the Latin American model.
As a result, foreign investors, especially those from Latin America, are said to represent the majority of the preconstruction condo buyers in South Florida.
It is against this backdrop that South Florida preconstruction condo market gasped as an entity controlled by Hernandez’s Newgard Development Group was been slapped with a $15.8 million foreclosure lawsuit against his planned 46-story BrickellHouse condo tower being built with 374 units between Brickell Avenue and Biscayne Bay in Greater Downtown Miami.
The Oct. 4 suit filed in Miami-Dade Circuit Court by private lender JBG Development LLC – which sold Hernandez’s BrickellHouse Holding LLC the land for the BrickellHouse condo tower by providing the said loan — wants “an accounting of the books and records of BrickellHouse ‘to determine if net sales proceeds have been properly allocated, whether BrickellHouse has paid money to parties in contravention of the note,’” according to the Miami Herald report.
Hernandez’s side contends the “frivolous” foreclosure lawsuit was prompted by the private lender having “regret” about selling the land to the BrickellHouse developer instead of building the project itself, according to the Miami Herald.
Regardless of the legitimacy of the lawsuit, news of the foreclosure could have noticeable repercussions for the BrickellHouse and the overall preconstruction condo market in South Florida, industry watchers said.
Hernandez’s attorney Robert P. Frankel agrees.
“I’m very concerned the filing of this lawsuit in bad faith by the plaintiff is going to have some chilling effect on the project,” Frankel told the Miami Herald.
It is worth noting, Newgard Development Group’s other current preconstruction condo project — the proposed 39-story Centro with 352 units — that is selling in Greater Downtown Miami has not been named in the BrickellHouse foreclosure lawsuit, according to Miami-Dade County records.
Even before the news of the BrickellHouse foreclosure lawsuit, the Centro was already offering above-average commissions of six percent to incentivize real estate brokers to promote the investor-oriented project, according to marketing literature.
Going forward, the confidence of the buyer pool for preconstruction condo units in South Florida is sure to be more critical of the potential risks when deciding upon which projects to invest their 50 percent deposits.
Peter Zalewski is real estate columnist for The Real Deal who founded Condo Vultures LLC, a consultancy and publishing company, as well as Condo Vultures Realty LLC and CVR Realty brokerages and the Condo Ratings Agency, an analytics firm. The Condo Ratings Agency operates CraneSpotters.com, a preconstruction condo projects website, in conjunction with the Miami Association of Realtors.