Article Courtesy of The Miami Herald
By Rene Rodriguez
Published March 8, 2018
When Jesus Urdaneta paid $500,000 for a three-bedroom,
two-bath unit in a modest condo building in Brickell, he thought he had
found the perfect place for him and his wife to raise their three kids: A
quiet cul-de-sac with little traffic, close proximity to Interstate 95 and
Coconut Grove, and beautiful views of Biscayne Bay and the Rickenbacker
Causeway.
But six months later, just as the family had settled into
their new digs at 175 SE 25th Rd., Urdaneta got an offer he
couldn’t refuse: The Russian developer and businessman
Vladislav Doronin, chairman and CEO of the real estate firm
OKO Group, wanted to buy Urdaneta’s 1,800-square-foot condo
— for a whopping $1.1. million.
“My first reaction was ‘Oh my God, we won the lotto!’”
Urdaneta said about the offer. “We called it the Russian
lottery. It was impossible to say no. We couldn’t believe
it.”
With vacant waterfront property in short supply throughout
Miami-Dade County, real estate developers are increasingly
targeting older, existing condo buildings and buying out the
owners at premium prices. Then the old building comes down,
replaced by a bigger, state-of-the-art luxury tower.
The process, known as condo termination, is complicated and
has many moving parts. But when it works, it can lead to the
birth of a formidable new property — and leave the owners of
aging condos with an unexpected windfall.
OKO Group, in partnership with the investment company Cain
International, will turn the 25th Road site into the home of
Una, a swooping 47-story luxury tower, with exteriors and
interiors designed by the international architectural firm
Adrian Smith + Gordon Gill Architecture.
The tower will hold 135 residences, each with a private
elevator entry, ranging in size from 1,100 to 4,786 square
feet. Prices will go from $900,000 to more than $5 million.
Potential buyers can see what the final units will look like
— lots of wood, stone and leather, warm tones and
floor-to-ceiling windows — by visiting a new sales center
now open at the site. Construction is targeted to be
completed by 2021.
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Architectural rendering of the new 47-story luxury
condo tower Una, to be located at 175 SE 25th Rd. in Brickell.
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Risky business?
Launching a new luxury condo tower at a time when the market is glutted with
unsold inventory might seem like risky business.
According to the most recent home sales report by the Miami Association of
Realtors, sales of luxury condos in January surged 58.1 percent year over
year. Cash buyers — critical for projects such as Una, which has no
traditional bank financing in place — comprised 42.4 percent of all sales
transactions in January. That is nearly double the national average of 22
percent.
The year-to-year bump in sales has made a dent in the overstocked luxury
condo market, but supply still far exceeds demand. According to the 2018 EWM
Realty International Annual Market report due to be released this week, the
current inventory of available luxury condos ($1 million and above) in
Miami-Dade in January was at 40.8 months. That’s down from 61.7 months over
the same period last year, but still way above the three-to-six-month sweet
spot that reflects a healthy real estate market.
The higher the price, the larger the inventory, too: In the $3 million-plus
price range, the current inventory of luxury condos is at 73.7 months,
according to EWM. The report uses data from the Southeast Florida Regional
Multiple Listing Service.
But the developers of Una argue that their tower is so unique, it can’t be
lumped in with the existing luxury condo towers struggling to close sales.
By using private equity instead of relying on traditional bank financing and
presales, these developers can launch their new project while other
developers are taking a wait-and-see attitude.
“If you have confidence in a market — and we have a lot of confidence in
Miami — you have to back it with your own equity,” said Jonathan Goldstein,
CEO of Cain International, a London-based funding and investment firm.
“You’re going against the grain a little bit. You’ve got to have the
confidence of your convictions. It’s during the times when other
[developers] can’t access the marketplace when you can hopefully do the
best. But we would not be averse to third-party financing if it becomes
available at the right time.”
Vladislav Doronin and Jonathan Goldstein are the principal partners on the
new luxury condo tower Una, to be built on the location of an existing older
building at 175 SE 25th Rd. in Brickell.
Doronin and Goldstein believe the Una’s unique location combined with timing
— no other luxury tower is currently slated to break ground south of
Brickell — will allow the project to stand out from the pack and buck market
forces.
“This is a very established neighborhood, very private and quiet,” Doronin
said. “There has been no new construction here for the last 10 years. We
were lucky to manage to purchase this site. And for the near-future, no one
else is going to build here. We won’t have any competitors in South Brickell.”
Doronin also points out that international buyers pay special attention to
high-profile projects, such as OKO’s $350 million Missoni Baia tower in
Edgewater and the Aston Martin Residences project from the Argentine
supermarket magnate German Coto under construction at the mouth of the Miami
River.
While Latin Americans still make up the overwhelming majority of foreign
real estate buyers in Miami, Mansion Global reports that interest from
territories such as Israel, Russia and Europe continues to grow. Miami is
already ranked as one of the top six international home-buying markets for
the super-wealthy (defined as having assets of $30 million or more), coming
in third after London and New York and ahead of Monaco, Los Angeles and San
Francisco.
The recent federal tax reform bill, which caps deductions for property and
sales taxes, could also help lure more high-worth U.S. buyers to Florida,
where there is no state tax.
“The first 60 days of this year has been one of the most active sales
periods we’d seen in a while,” said Ken Krasnow, executive managing director
for Colliers International South Florida, a commercial real estate brokerage
that helps companies relocate. “The interest in Miami has always been
global. But the impact the new tax laws are having on New York and other
high-tax states are only going to make that interest stronger.”
How they did it
The process of identifying an older building and buying out its tenants for
redevelopment is lengthy and involved. Gerard Yetming, a former broker at
CBRE South Florida now working with Colliers, said the first step is to look
at existing properties in desirable locations and figure out what the value
of the land would be if it was vacant.
Developers of the upcoming luxury condo Una built a sales gallery on the
11th floor of the existing building at 175 SE 25th Road they purchased for
$48 million. They acquired the building by buying each of the existing
condos from their owners.
You also need to make sure the zoning codes at the location allow enough
development to make the investment profitable. The building at 175 SE 25th
Rd. was built in 1971 at a height of 11 stories. But according to the Miami
21 Zoning Code, the land is entitled for construction of a building with a
height of up to 48 stories.
Once the potential worth of the land is calculated, the brokers figure out
the price of improvements needed to bring the older structure to present-day
building codes (stronger windows, new roofs, refurbished elevators).
If the difference between cost of repairs and the value of the land is large
enough, the property becomes lucrative to a developer, as long as a majority
(90 percent) of the condo owners in the building are willing to sell.
Yetming said he met with the condo association and its members in April 2015
to see if they were amenable to a deal. They made specific offers to each of
the 61 owners based on the size and location of their individual condos
(units with bay views or higher floors, for example, got more).
“You have to put yourself in the owners’ shoes,” said Yetming, who is now an
executive vice president at Colliers International. “The way they sell their
condo should remind them of the way they bought it. You take everything into
consideration from corner units to bay views in your offer, so the owners
feel they are an active participant in the sale.”
Four months after the initial presentation, Yetming said 100 percent of the
owners in the building had agreed to sell, for a total price of $48 million.
“There’s more supply than demand in the market at the moment, so if you live
in an older building and you’re trying to sell, it’s going to be harder to
compete with newer units,” Yetming said. “If you can sell your condo for
more than it’s worth, that’s a great deal for anyone.”
Hurricane Irma’s close call in September was a reality check for many
waterfront property owners, who were braced for a worst-case disaster
scenario and worried their buildings might not even be left standing after
the monster storm.
“When Irma came through, a number of waterfront communities suffered damage
and are still dealing with repairs and deciding how they’re going to
proceed,” said Steven Wernick, a land use attorney and partner at Akerman
LLP and past chair of the city of Miami’s Waterfront Advisory Board. “Some
of these older properties, especially buildings from the 1970s, often don’t
conform to recent building codes and are not well prepared for sea level
rise. They’re in flood zones.
“Irma has spurred some condo associations and owners to assess whether they
want to spend the time and money to make upgrades to aging structures. In
some situations, it might be in the best interest of current owners to just
sell the property.”
Una is the latest luxury tower to be built on the former location of an
outdated building, but it’s far from the first. Edgardo Defortuna, president
and CEO of Fortune International Group, said his company is currently
developing a new project on the former site of the Playa de Varadero condo
at 18801 Collins Ave., which was built in 1965.
Other examples include the Residences by Casa/Armani in Sunny Isles Beach
and the upcoming 17-story luxury condo at 5775 Collins Ave., which will be
built on the site of the Marlborough House condo by Brazilian billionaire
José Isaac Peres.
While Defortuna won’t go as far as to call it a trend, he said you can
expect to see more of this kind of strategy used in the industry as Miami’s
next real estate cycle gears up in the coming years.
“This kind of development is a thing of the future: It’s actually here now,”
Defortuna said. “Real estate in Miami is almost a new game now, because it’s
very very difficult to find a site that is readily available. Developers
have to be creative and figure out a way to solve that issue. And this way
of developing is a win-win, because the old condo owners are making a nice
profit on their property.”
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