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Increased Competition For Buyers Forcing Changes In Deposit Structures

February 18, 2014

Faced with increased competition for preconstruction buyers, South Florida condo developers have started to roll back a key safeguard put in place in the aftermath of the devastating real estate crash of 2007.

With nearly 190 new towers proposed east of I-95 in the region, at least two developers of waterfront projects in Broward and Palm Beach counties have recently unveiled presale buyer deposit structures that are significantly lower than the current industry norm of 50 percent.

During the last South Florida condo boom-and-bust cycle, developers typically collected preconstruction buyer deposits of 20 percent or less, which some industry watchers contend was too low and led to the widespread speculation that resulted in overbuilding.

The new preconstruction buyer deposit norm of 50 percent is starting to change.

The developer of Paramount Fort Lauderdale Beach envisions collecting 30 percent presale deposits from buyers at the 18-story, 95-unit project being built on a site fronting State Road A1A south of Sunrise Boulevard, according to the Sun-Sentinel.

In West Palm Beach, a developer has launched a presale campaign asking buyers for 25 percent deposits for condos in the proposed Water Club North Palm Beach project. Plans for Water Club include a pair of 22-story condo towers totaling 166 units, according to marketing information.

It is unclear how many other condo developers have also reduced their presale deposit requirements at this point in the latest South Florida real estate boom., a preconstruction condo projects website operated by Peter Zalewski of CondoVultures, which runs in conjunction with the Miami Association of Realtors, is scheduled to release the results of their latest survey of preconstruction condo deposit requirements and prices next month in March.

The reported reduction of preconstruction buyer deposits comes nearly three years after the Melo Group introduced the 50 percent presale buyer deposit structure for its 96-unit 23 Biscayne Bay project as a technique to build the first new condo tower in Greater Downtown Miami since the crash.

Nearly every condo developer since 2011 has adopted the 50 percent deposit structure with only a few exceptions, most notably the recently completed 24-story Bellini Williams Island tower in Aventura. Bellini’s developer, Martin Margulies, reportedly used art work in order to obtain a loan.

Despite the 50 percent deposit commitment, condo developers have completed five new towers and launched construction on at least 45 additional buildings in coastal South Florida.

The 50 percent deposits have even caught on with some out-of-town lenders that are now financing new construction in South Florida.

A year ago, Birmingham, Ala.-based Regions Financial provided a $160 million construction loan for the 46-story, 79-unit Mansions At Acqualina project in Sunny Isles Beach. In September 2013, Wells Fargo Bank provided a $214 million construction loan for the 56-story, 132-unit Porsche Design Tower in Sunny Isles.

According to estimates, lenders have provided less than $3 billion in financing for preconstruction condo projects in coastal South Florida during the current cycle.

During the last boom, lenders provided more than $10 billion in condo construction financing for projects located east of I-95, according to the Daily Business Review.

While the amount of condo construction financing to date is small, signs suggest banks are looking more closely at financing new developments.

Going forward, the unanswered question is whether an increase in construction financing coupled with a decrease in preconstruction buyer deposits will once again create an environment that is ideal for speculators to flourish.

Source: The Real Deal

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