Pavilion from the Ocean

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Real Estate/Ahead of the Deal: Is this the end of a golden era for South Florida condo development?

As local history is written, the first month of 2016 could well mark the peak of a golden-era period for high-rise condo development in the tricounty South Florida region of Miami-Dade, Broward and Palm Beach.

Since the 1980s, developers have practically every decade initiated a series of condo building booms to capitalize on the strong demand from out-of-town buyers for South Florida units.

Foreign and domestic investors alike have proved over the years to have a strong interest in owning residential properties in this sunny, international business center with no state income tax that markets itself as the gateway to Latin America.

Inevitably, the high-rise condo market booms have been subsequently followed by predictable busts.
The downturns have consistently created buying opportunities for new generations of discount-oriented investors who typically gobble up unsold units that can be rented out in the short term before ultimately being resold at handsome profits in later years.

Despite the well-documented history of booms and busts in South Florida, all of the key players — developers, investors and lenders — have continued to participate in these cycles time and again, given the potential rewards achieved by those who take on the risk.

After all, South Florida residential real estate — much like technology stocks — has always seemed to bounce back to new highs after periods of hard economic times.

Consider that even though South Florida’s residential real estate markets crashed spectacularly during the last decade, developers now have more than 400 new condo buildings with nearly 49,600 units in the pipeline for sites east of Interstate 95 in the tricounty region, according to the preconstruction condo projects website

(For disclosure, my firm operates the website.)

Out-of-town investors from Latin America, North America and Europe played an influential role in buying up the excessive supply of units from the previous cycle as well as actively paying record prices in the current South Florida boom.

Given this region’s high-rise history, a pair of political moves initiated earlier this month in Washington, D.C., has the potential to dramatically change the makeup of South Florida’s condo market going forward.

On Jan. 12, President Barack Obama called for ending the more than 50-year-long U.S. embargo on Cuba at a time when South Florida residential real estate is increasingly competing for buyers against other areas in the Americas, including the booming condo market in Panama.

It is unclear if the U.S. embargo against Cuba will be lifted during the remaining term of his presidency but Obama’s efforts to normalize relations with the communist country to the south is generating tremendous curiosity amongst U.S. residents who want to at the very least to have a legal means for visiting the Caribbean island.

It goes without saying, South Florida and much of the Caribbean are sure to feel the impact of U.S. tourists focusing their tourism and investment dollars on Cuba.

It is not to say that investors will bypass possible residential real estate deals in South Florida in hopes of being able to someday buy in Cuba. Still, the possibility is something many investors will probably want to evaluate before making a final decision.

A day after Obama’s call to “lift the embargo” on Cuba, the U.S. Treasury Department’s Financial Crimes Enforcement Network bureau issued a temporary directive on Jan. 13 targeting all-cash buyers involved in luxury residential real estate transactions of at least $1 million each in Miami-Dade County and the New York City Borough of Manhattan.

The move by the Feds calls for title insurance companies to report “the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing,” according to a FinCEN statement.

The Feds want to know more about the “natural persons” who are ultimately behind the wave of third-party entities — or “shell companies” — that have been purchasing South Florida luxury condos with cash to ensure that illicit funds are not being used to complete these transactions.
“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said in a statement announcing the six-month directive that is scheduled to begin in March.

It is unclear if the FinCEN order will become permanent or be expanded to include Broward and Palm Beach that along with Miami-Dade make up the tricounty South Florida region.
The South Florida condo market — reinforced by the banking, legal and transportation infrastructure of the United States — has long been viewed as a safe harbor by international investors who want to protect their capital, maintain their personal security and possibly even make a profit.
Wealth preservation and individual security rather than pricing are said to be crucial factors influencing many of the South Florida condo investors who are from foreign countries where economic and social issues are much less predictable than in the United States.

Based on the volume of all-cash deals for residential real estate in South Florida in recent years, it is reasonable for the Feds to examine whether illicit funds may have been invested in the tricounty region.

The unanswered question going forward is what the Feds will discover and ultimately do to maintain the integrity of current anti-money laundering laws while balancing the importance of international investors to South Florida’s luxury residential real estate market.

Peter Zalewski is a principal with the Miami real estate consultancy Condo Vultures. Zalewski, a licensed Florida real estate professional since 1995 and founder of CVR Realty and Condo Vultures Realty LLC, advises developers, lenders and institutional investors. Zalewski also runs the preconstruction condo project website in conjunction with the Miami Association Of Realtors.

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