The Real Deal Miami

Financing of last resort

As financing becomes tougher to find, developers are turning to condo inventory loans

October 05, 2016
By Mike Seemuth

Property Markets Group received a condo inventory loan secured by unsold units at Echo Aventura.

Property Markets Group received a condo inventory loan secured by unsold units at Echo Aventura.

Facing an uncertain sellout period, some condominium developers will borrow against their inventory of unsold units. Condo inventory loans are typically high-interest-rate debt from nonbank creditors and may have unappealing terms, such as giving lenders the recourse to pursue the borrower if the inventory doesn’t fully cover the debt.

Anthony Graziano, senior managing director at the Miami office of Integra Realty Resources, said that condo inventory loans aren’t popular with developers, at least not yet. He said these loans typically have interest rates ranging as high as 9 percent to 15 percent. “It is a no-questions-asked, quick-closing type of mechanism, so it tends to be more expensive.”

Nevertheless, real estate experts predict that these loans may become more popular in the coming years, as a large number of units are slated to hit the South Florida market just as demand from abroad appears to be cooling. Many currencies have weakened against the U.S. dollar, and some Latin American economies are in turmoil, making Florida condos more expensive for foreign buyers.

Analyst Jack McCabe said that some hard-pressed foreign buyers may even be willing to walk away from nonrefundable deposits of as much as 30 to 50 percent rather than close. “I’m looking at putting together a group to buy these unsold units in the next year or two,” McCabe said. “I think we’re going to see a volume of walkaways, despite the larger down payments.”

Howard Taft, a senior managing director of Aztec Group, a real estate finance firm in Coral Gables, concurs. “I would predict that by 2017, you’ll see more developers taking inventory loans,” he said, adding that most of the profit from condo development was in the last 10 percent to 20 percent of the units sold.

Property Markets Group received a condo inventory loan in July. The developer secured the $24.2 million loan with 20 unsold units at its 190-unit Echo Aventura project, a two-building complex that opened last year in Aventura. The New York-based Emerald Creek Capital was the lender.

PMG principal Ryan Shear declined to give the exact interest rate on the loan, saying, “It’s not 5 percent money, but it’s not 10 percent money. It’s in that range.”

It is the second time PMG has borrowed against unsold units at Echo Aventura. In 2015, it obtained a $34 million condo inventory loan on unsold units, which at that time totaled 25, from Benefit Street Partners. The developer paid off this initial loan when it refinanced the unsold units with the new condo inventory loan.

The developer’s unsold inventory at Echo Aventura was down to 14 units at the end of August. “We sell about one a month,” Shear said. The owners of roughly 30 Echo Aventura condos have put their units on the market, he said, “but we really haven’t had a tough time competing.”

Mark Bahiri, managing partner and co-founder of Emerald Creek Capital, said the firm’s loan to PMG will give the developer more time to sell the remaining units.

Bahiri said that when making a condo inventory loan, Emerald Creek focuses on the quality of the borrower and the size of the loan as a percentage of the inventory value. “We’re looking to lend only to best-in-class developers,” he said.