South Florida's condo market has never been so hot. At least not from the perspective of private equity funds and investors who want to buy distressed projects at 40 percent to 50 percent discounts. Private equity funds are rushing to buy failed conversion projects and hundreds of unsold units in new developments in bulk. Some funds have been able to strike deals with desperate developers grappling with mounting debts and who want a way out of a project to avoid foreclosures. But many fund managers and developers say there still is a gap between the aggressive discounts the funds are seeking and the offers developers can afford or are willing to accept.
Matt Martinez is the point-person for a Connecticut-based private equity group with a $200 million bankroll to acquire distressed condo projects in Florida. Half of the fund will be invested in South Florida projects, the rest in other areas of the state. With a debt leverage of 50 percent, the fund targets $400 million worth of properties. We been waiting for this downturn in the condo market to happen for seven years," Martinez said.
Martinez, principal of the Miami-based private investment company Pangea Select, declined to disclose the private equity group but described it as a $2 billion firm in business for 11 years that invests in office, retail, industrial and multifamily projects. Like other private equity investors, Martinez is looking for aggressive discounts so the properties can make economic sense as rental operations. "For instance, we are looking at a 250-unit property in Miami in which a condo converter paid $200,000 per unit and the principal balance on the loan is $160,000 per unit," he said. "If we could buy them at $130,000, which is what it's worth on a rental basis, we would close on the deal." He said he is negotiating with owners of 32 failed conversion projects or new developments in South Florida, including a 200-unit complex in West Palm Beach that is the only deal under contract so far.
More than a third of Martinez's prospective properties are in Palm Beach County, which has the highest apartment vacancy rate of the three South Florida counties — 10 percent, compared to 5 percent in Miami-Dade and 7 percent in Broward County, he said. The increase in the market's rental units could boost those numbers by 1 percent to 3 percent, next year, he said. Martinez said he has also submitted two letters of intent to buy properties totaling 300 units in Broward and Miami-Dade counties. Martinez said he can't disclose the owners or properties because it would jeopardize the deals. Martinez and his client aren't the only ones shopping for bargains. He said several times he has approached developers who say they have already been contacted by other equity investors.
Northland Investments, a Boston-based private fund manager, recently cut a profitable deal with troubled condo converter Tarragon Corp. Northland paid $21.7 million, or an average of about $86,500 per unit, for 251 unsold units at Via Lugano, a 364-unit Boynton Beach conversion project. The property was built as rentals in 1999 and converted to condos a couple years ago. Tarragon paid $74 million, or about $203,000 per unit, for the property in October 2005. Recent unit closings varied in price from $150,000 to about $300,000.
The Via Lugano sale was part of a six-property portfolio that sold for $156 million. Tarragon owed $157.1 million on the properties. The deal closed Dec. 28, according to Steve Rosenthal, Northland's chief executive officer. "The dislocation and dysfunctionality of the real estate market has provided us with a lot of significant opportunities," Rosenthal said.
Source: Daily Business Review