Miami Developers Utilizing Non Traditional Sources of Venture Capital

by Bilzin Sumberg

With all the current and planned building projects taking place in South Florida, it seems the recent real estate crash has largely been forgotten. However, the collapse still haunts traditional lending institutions, many of whom are unwilling or unable to finance Miami’s present building boom. Further, as Jeff Bartel, chairman of Benworth Capital Partners LLC points out, “Regulatory constraints remain an impediment for accessing debt financing that borrowers require to acquire or develop property under the traditional levered model.”

This doesn’t mean that banks aren’t lending at all; they are just more selective in the projects they fund. Eleazar David Melendez of the Daily Business Review writes, “Banks have generally been loathe to lend to any but the lowest-risk projects: those being built by experienced developers in prime locations.” CBRE vice chairman Charles Foschini adds, banks are generally staying away from the “high-dollar commitments needed for many of the mixed-use, luxury megaprojects currently on the drawing boards.” Examples of some of Miami’s current bank-funded projects are Miami Beach’s Loews hotel, landing a $175 million loan by the U.S. arm of Germany’s Deutsche Bank; the Downtown Doral project, at $65 million; the condo building at 5252 Paseo, $40.3 million; and an up-coming 80,000-square-foot retail building, $25 million, all funded by Wells Fargo.

So in the midst of elusive bank financing, how are projects being funded? Two answers are cash and buyer financing, both of which are led by foreign nationals. With high-end real estate as the new global currency, according to Miller Samuel CEO, Jonathan Miller, wealthy investors from places like China and South America are putting their cash into Miami real estate. Reuters Zachary Fagenson also writes, “Buyers are flocking from Latin America, Europe and Canada, paying cash for sprawling units with designer flair.” Developers are also receiving huge preconstruction deposits. The Miami Herald reports that “condo buyers are agreeing to put up as much as 80 percent in a series of down payments during construction. Ten percent of each deposit is kept safe in an account the developer doesn’t touch, as required by state law. The rest is available for construction.” And “there are at least nine Miami projects are already in the works using this financing model.”

Another avenue of funding is coming from private equity firms.  The Daily Business Review reports that “large private equity bets on the South Florida housing market are filling a need for hundreds of millions of dollars in construction financing that’s otherwise not being provided by banks.” Don Konipol of the CCIM Institute explains how they differ from banks:

In addition to being more expensive, “private mortgage loans are made by private lenders, are usually short-term (6 months to 3 years) hard money or asset-based loans, and the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower`s credit . . . They can assist real estate investors who need immediate financing without the financial documentation required by traditional institutional financiers.”

Projects of this type include the Surf Club at 9011 Collins Avenue ($290 million) and the Biscayne Beach Bayfront condominium ($120 million) both financed by investment group Blackstone.

And then there are the not-so-traditional sources of venture capital like crowdfunding and the U.S. government’s EB-5 program. The 2012 federal JOBS Act legalized crowdfunding and since then dozens of real-estate crowdfunding sites have emerged, raising more than $135 million in debt and equity for real-estate deals, according to the Miami Herald.

“Before crowdfunding platforms came along, only a small fraction of the nine million U.S. accredited investors – those with a net worth of at least $1 million or $200,000 in annual income – had participated in private-investment opportunities . . . Crowd-funded real estate development is a growing market that is only going to get bigger.”

The 13,353-square-foot mixed-use building in Miami’s Wynwood arts district is being developed this way.

The EB-5 program attracts wealthy foreign financiers who invest a minimum of $500,000 in return for permanent U.S. residency. The commercial enterprise must generate at least 10 U.S. jobs for two years, when subsequently the EB-5 Visa becomes permanent.  Riviera Point Development Group has two projects underway financed via this program. One is the Professional Center at Riviera Point Green in Broward (a two-building 70,000-square-foot business complex) and the other is a 40,000 square foot office building in Doral. “The University of Miami’s bioscience research park raised $20 million from 40 foreign investors under the program,” according to the Daily Business Review; and developer Jeff Berkowitz plans to “use EB-5 financing to raise a 1,000-foot SkyRise waterfront tower next to downtown Miami’s Bayside Marketplace.”  It adds, “most EB-5 investors in the programs, or about 80 percent of the approved visas, came from China.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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