As Pandemic Drags Into 2021, Lenders And Investors Seek Safety, Yield In Florida

When the coronavirus pandemic hit the U.S., investors were expecting a wave of distressed assets.

“In 2020, everyone was like, ‘We're waiting, we're waiting for the shoe.' And the shoe never dropped,” said Dan Kodsi, CEO of Miami-based Royal Palm Cos., a developer of luxury residential projects.

Capital has been sitting on the sidelines, but in this environment, Kodsi said, “No one's going to lend in New York City. No one's going to lend in Chicago. Even LA right now, it's not a place to lend. And so, really, the darlings of the market are Florida and Texas. And that's where a lot of the capital is going to go. And so we are really the beneficiaries.”

Kodsi, speaking on a Bisnow webinar about the South Florida CRE forecast for 2021, said that while hospitality default rates were 20% to 50% around the country, South Florida’s have been around 8%.

Vagabond Group CEO Avra Jain, a Miami developer with particular expertise in adaptive reuse projects, said that her phone has been ringing.

“A lot of the New York restaurants are coming down," she said. "… I'm getting a lot of phone calls for, actually for office — for entrepreneur offices, small offices.”

Mexican and Israeli investors, especially family offices, are hunting for real estate assets, she said.

“I got three phone calls this week for opportunity zones. We're on our fourth opportunity zone-specific project," Jain said. "Opportunity zone is better than 1031, right? Because you can actually pull out your equity, and then at the end of a transaction, when you sell, you’re tax-exempt. The problem with 1031 is you never get out, right? It's just ongoing. So I think opportunity zone is going to get a bump when people really understand that it's actually a better investment than a 1031.”

Jain said alternative lenders have helped to creatively finance projects during this uncertain time.

“These nonbanks have come in and filled in this hole that has allowed for more creative development," she said. "And I think that's part of what was helping with the absorption when we come into these situations where there's stress on the market.”

“We try to make it very easy for a sponsor to execute their business plan to get to a stabilized cash flow," said Ready Capital Managing Director David A. Cohen, who has partnered with Jain on projects. "We execute a lot of bridge too.”

The company has issued fixed- or floating-rate loans to cover everything from hotel-to-multifamily conversions to vacant leases where developers have taken buildings down to the studs, to construction takeouts where a sponsor might have been giving high concessions and needs to get out of an existing loan. He will lend to projects that don’t yet have cash flow, he said.

“We will set you up with the full capitalization,” he said. “We're giving you all the tools to work within what you need to do. And that's how we work on all of our deals. And then just go do what you normally do and we'll see when it's stable.”

The key to succeeding in his business sector is to know the borrower and do thorough upfront due diligence, he said. He looks at pro formas and debt yields for particular asset types in particular markets. His mantra since COVID, he said, has been “sponsor, sponsor, sponsor" when it used to be "location, location, location.”

Kodsi said that foreign buyers, who had comprised 60% of sales of his Paramount Miami Worldcenter condo building in downtown Miami, have largely been absent the past couple of years. That was partly due to pandemic travel restrictions, but there was more at play.

“[Former President Donald] Trump created the psychological effect like, ‘You're not welcome to the United States,’" he said. "I think the Biden administration is going to open that door.”

Kodsi also pointed out that Gov. Ron DeSantis largely kept Florida open for business while other states enacted stiffer restrictions. That, plus tax advantages in Florida compared to New York and California, would keep driving people south, he predicted.

“So I think we're going to see something pretty incredible here and starting, I would say, second quarter, third quarter, we're going see another big influx of people coming in,” he said.