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Condo Workouts Breed Innovation

In overbuilt residential markets from Las Vegas to Miami, investors with unsold condominiums — and their creditors — are desperately seeking ways to cover debt service or unload their assets altogether. “It's like somebody turned off the tap,” says Miami real estate attorney Marty Schwartz. “One day the market was hot and the next day it didn't exist anymore.”

Demand for condos in South Florida has virtually evaporated, according to Schwartz, a partner at Bilzin Sumberg Baena Price & Axelrod LLP. He estimates the number of unsold condos in Miami at about 15,000.

Debt service is overwhelming some developers. Fully 10.1% of condo construction loans were delinquent by 30 days or more in the fourth quarter of 2007, compared with a 7.5% delinquency rate for single-family residences, according to Oakland, Calif.-based researcher Foresight Analytics. While losses for developers with loans coming due may be unavoidable, experts say those project owners have options to recover at least some of their investment.

One solution is to convert an entire development to apartments. A Florida statute allows the developer to revert to apartments if a vote by at least 80% of the unit owners supports the change, Schwartz says. Unfortunately, rent seldom covers all of the debt service on the original construction loan. What's more, before the property can be converted to apartments the developer must buy back any previously sold units, typically at a lower price than the homeowner paid. That makes conversion to apartments a tough sell depending on how many units belong to individual buyers.

SRS Partners, a third-party workout firm based in Tampa, addresses the issue of unsold units mixed in with purchased condos in three ways: auctions, sales of individual units, or converting a portion of the complex into apartments.

Auctions can be the quickest solution and are favored by banks seeking to unload an asset as soon as possible, according to Bryan Crino, a principal at SRS. “That strategy often fails because the banks will put a minimum price in and quite often people just don't show up to meet the minimum price,” Crino says.

As time permits, SRS prefers to identify a market price at which it can sell three to five individual units per month. “Sometimes it's a 10% discount, sometimes 40% from the current asking price, but good research can determine what that fair asking price will be,” Crino says. Lenders with a large number of unsold units are often unwilling to take that much time, however.

SRS's third strategy is the most challenging and involves the creation of an apartment operation alongside sold condo units. The partners are attempting this new tactic at a 375-unit condominium project in which 95 units have sold.

In order to lease the rest of the project, the partners and property owner must work out how service fees will be paid. They must also add a leasing office in addition to the property's sales office, and prepare individual condo owners for the prospect of renters moving in next door.

“The theory is you can sell that block of units just like an apartment building, at a cap rate,” Crino explains. “It gives the buyer a really nice opportunity to get their cap rate [or] cash flow and they also have the opportunity when the market returns to sell the units.”

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