hen Miami condo developer Jorge Perez built Icon Brickell during the housing boom, he planned to make a $350 million profit on a $5 million cash investment. After all, he had pre-sold nearly 90 percent of the 1,796 condos, and closings were set to start in late 2008 and early 2009.
Lenders fell over themselves to lend money to one of the most successful developers in the country.
Today, Perez’s reality couldn’t be more different as most of the contracts fell apart and nervous lenders are pressing for resolution of defaulted loans. In his book, “The Billionaire Blueprint for Real Estate Success: Powerhouse Principles,” Perez wrote that with Icon, he wanted to build the “largest endeavor in Florida history.” But instead he may have created the largest real estate debacle and a symbol for a meltdown that fueled one of the worst declines since the Great Depression.
The future of the mostly vacant condominium at the mouth of the Miami River is uncertain as Perez and his construction lenders work to figure out what to do with the distressed project. Perez told the Wall Street Journal on Wednesday that he was close to reaching a friendly agreement with his lenders, a syndicate of banks led by HSBC and Bank of America.
On Thursday, Perez confirmed to the DBR the bank negotiations, but fell short from saying whether he would surrender the project to the lender. He owes nearly $700 million in construction loans.
“We are presently in what we hope, are the final stages of negotiating an arrangement with the lending group,” he wrote in a statement. “We are, at this point, not at liberty to disclose the terms that are being negotiated with the lenders but expect a resolution in the very near future; hopefully, within the next 30 days.”
Perez said he hoped the agreement would not interfere with the condo sales. So far, nearly 120 units have closed.
“[We] expect to close hundreds more in the next few months, as a result of the increase in demand due to price decreases and financing made available by the lending group.”
As a result of the negotiations, Perez, chairman of the Related Group of Florida, could give up the 2 billion-square-foot Icon to the lenders.
It happened before.
In July, he handed over 370 unsold units at CityPlace South Tower in West Palm Beach to a group of lenders led by Toronto-based Bank of Nova Scotia. Related owed nearly $119 million in delinquent construction loans. Perez agreed to a friendly foreclosure, and Bank of Nova Scotia put his company in charge of the condo sales and leasing for a fee. Nova Scotia took title to the CityPlace condos in Aug. 31 through a foreclosure auction.
Perez didn’t return a phone call seeking comment by deadline.
A failed strategy
Whether HSBC and Bank of America will keep Perez on board is unknown.
Some real estate experts aren’t sure Perez is applying the right strategy to sell Icon units.
Walter Defortuna, chairman of Miami-based Fortune International Realty, said Perez is more concerned with closing existing contracts than attracting new buyers. Defortuna said the buyers who signed contracts at the height of the market won’t close until they can figure out what the current value of Icon units.
“But to do that, you need new buyers, people coming from outside,” he said. “Even if you give the original buyer a discount, they won’t close because they don’t know what the market value is.”
Perez recently began offering a 30 percent discount to the original buyers, hoping to entice them to the closing table. But Defortuna said the discount won’t be enough for someone who signed a contract for $800 a square foot three years. The unit will still be overpriced in today’s market.
Real estate consultant and former builder Tony DiTocco said the discount will help some buyers since they will need to bring less cash to the closing.
Still, focusing mainly on the original buyers may not be the right thing to do, DiTocco said. Many of them are making less money than they used to and can no longer afford the purchase, DiTocco said.
Related projects also attracted a large volume of investors who planned to flip the condos and that is not longer a viable business plan.
Defortuna said he met with Perez a month ago and proposed taking over the sales of one of the three towers and bringing new buyers.
“But he said he wasn’t ready,” Defortuna said. “He thinks he has a unique project that could never be duplicated” so sale prices shouldn’t be cut significantly.
Defortuna said prices need to be reduced to a point where units will sell.
“Most buyers out there are opportunity buyers,” he said. “You don’t need to give the units away. You just need to establish the market value for units to move.”
But developers do not always have the flexibility to reduce sale prices without the consent of the construction lender. Lenders often predetermine the minimum sale price for each unit and need to approve any sale below that figure.
DiTocco, president of DiTocco Consulting in Fort Lauderdale, said lenders are increasingly becoming more flexible in reducing sale prices.
“It depends on each individual negotiation, but [to banks] it is better to get what you can get than it is to hold your guns and not sell anything at all,” he said.
Condos at Icon used to be marketed at around $650 per square foot but prices have come down to $360 per square foot, said Defortuna, who recently brokered several sales at Icon at the lower price.
Defortuna said he would like to be put in charge of sales at Icon. He would start by marketing the project in phases to create a demand. If buyers see that they have nearly 1,800 condos to choose from, they may delay their decision to buy.
“They will say ‘if I don’t buy today, I can buy tomorrow or the day after,’ ” DeFortuna said. “That’s the worst thing that could happen to a developer.”
Defortuna, who earlier this year helped sell out 1060 Brickell in less than three months, said Icon’s worst problem when it comes to attracting buyers is its density. Currently, 80 percent of condo buyers in Miami come from Latin America. Yet, high-end projects in Latin America have no more than 50 units.
“No one in Latin America perceives a project with 1,800 units as high end,” he said. “In Latin America only government projects have large density.”
So many of those buyers don’t want to pay high prices for a unit at Icon, he said.
Icon’s interior design is also a problem in a battered housing market because many buyers consider it gaudy. Its oversized statues, mirrors and pool furniture cause some buyers to “hate” the project, Defortuna said.
But Icon resident Jaret Turkell likes the building very much. He is renting a unit from the Related Group and pays almost $1.95 per square foot monthly, when he used to pay $2.25 per square foot in South Beach for a less luxurious condo.
“They are slowly releasing units into the [rental] market, and as soon as they are released, people are snapping them up very quickly,” said Turkell, a commercial real estate broker with Holliday Fenoglio Fowler in Coral Gables.
His company is currently working with Perez in the negotiations with the bank, said Turkell, who is not involved in that deal.
HFF early this year unsuccessfully tried to find a buyer for Viceroy, a luxury boutique hotel within Icon’s three-tower project.
“Icon is going through growing pains right now,” Turkell said. “But in three to five years, Icon will be the signature building in Miami’s skyline.”
Paola Iuspa-Abbott can be reached at (305) 347-6657.