In Miami, Using the South American Playbook

By ALEXEI BARRIONUEVO
Published: December 6, 2012

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OUTSIDE the United States, many real estate developers have less of an appetite for risk than their counterparts here.

In South America, for instance, developers typically ask buyers to pony up a big chunk of the total price of an apartment in a new development long before it’s finished.

So South Americans pay huge installments — often 50 percent or more of the cost of the unit by the time the building is completed. It’s a system that most Americans, accustomed to financing at least 80 percent of a property with a bank loan, would consider unworkable.

I remember being shocked to learn from the owner of the apartment I rented in São Paulo, Brazil, where I lived as a foreign correspondent, about the schedule of huge payments — totaling 57 percent — he had had to deliver to the developer as the condo building went up. It was all nonrefundable, he told me.

But what if something went wrong, I asked him, like the developer going bankrupt? Or if the economy suddenly exploded into crisis, which is certainly not unheard of in South America?

He just shrugged. That’s simply how things are done down south, where interest rates are much higher, and where historically high inflation made financing riskier and more expensive than in the United States. The practice is especially common in Brazil and Argentina, but also in smaller countries like Uruguay, where Donald Trump has a licensing agreement for a new residential tower in the beach resort of Punta del Este that will require down payments of 40 percent from buyers before construction begins.

That perspective offers a different lens on the risks that developers are taking in Miami’s recent condo boomlet.

The Miami of today is not the Miami of 2004, when property prices were still rising in large part on a wave of speculation, with buyers putting down, at most, 20 percent and then flipping properties before construction was done.

This is post-bubble Miami, where banks are still skittish about backing new condo projects.

So Miami developers have taken a page from the South American playbook — a handy strategy, given how many willing buyers are flocking to Miami from that continent. Developers of several condos downtown and at the beach are requiring initial deposits of 40 percent or more, and more as they get closer to completion. By the time the building is finished, buyers are forking over as much as 80 percent of the total price of their apartments.

“Essentially, the buyers are helping developers build their buildings,” said Ann Nortmann, senior project director for Palau at Sunset Harbor, a 50-unit development planned for South Beach that requires a total deposit of only 40 percent because the developer, SMG Management, expects more American buyers.

Jorge M. Pérez, chairman of the Related Group of Florida and a chief architect of the new strategy, defends it as necessary to get developments off the ground, and to prevent speculators from flocking back to Miami, hoping to flip apartments as they did in the old days.

“Financing died during the recession,” Mr. Pérez said. “We all were awakened by the things that happened. We said, ‘If we don’t have the buyers that will pay for the majority of the price in the building upfront, then we don’t want to take the chance of building these buildings.’ ”

Related has employed the financing strategy in three buildings now under construction in South Florida (Apogee Beach, MyBrickell and Millecento) and in three others where sales, but not construction, have started (Beachwalk, Icon Bay and One Ocean). A 3,200-square-foot penthouse at One Ocean is listed for $8.5 million.

For all six towers, Related is requiring buyers to pay 40 percent by the time construction begins, and even more during construction. By the time they move in, buyers will have paid 50 percent to 80 percent of the total apartment price.

The strategy isn’t exactly keeping buyers away. MyBrickell and Millecento, both in downtown Miami, have all their units under contract, while Apogee Beach has only two apartments out of 49 still available, according to a Related spokeswoman.

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