MIAMI -- 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."
OKO Group spent a year negotiating individual sales of all of the 61 units on the property, paying a total of $48 million to buy the 11-story building outright in 2016.
Soon, they will tear it down.
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.
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."
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.
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"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.
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 Jose 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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