Property Dynasties Team Up to Fund Miami Project

Developers are digging deep into their own pockets to pull off megaprojects in South Florida.

In the latest example, two prominent families, the LeFraks of New York and the Soffers of South Florida, are teaming up on a $4 billion, 183-acre development on a former landfill and Superfund site in North Miami.

Over the next two decades, the builders plan to create 4,390 apartments, more than 1 million square feet of commercial space and two swimmable 10-acre lagoons as part of the project they have named SoLeMia. They started work on infrastructure in April, and are planning to break ground on the first two rental towers and 500,000 square feet of retail space in about 15 months.

What separates this deal from earlier megaprojects in Florida and around the U.S. is the financing. Rather than plowing ahead with mostly borrowed money, as builders did in Miami and elsewhere before the property-market bust in 2008, the developers are financing the early infrastructure construction costs with equity. Even with interest rates near historical lows, almost all of the first $150 million for roads, sewers and the lagoon is coming out of their pockets.

The funding strategy underscores the shortage of debt financing for development in the wake of the downturn. While real-estate values have rebounded and financing is increasingly plentiful to buy properties, lenders remain picky when it comes to backing land acquisition and improvement, the riskiest part of development.

At the end of 2014, banks and thrifts insured by the Federal Deposit Insurance Corp. had $238.6 billion worth of construction and land-development loans on their books, up from $210.1 billion at the end of 2013 but still far below the $591 billion at the end of 2008.

The LeFraks and Soffers teamed up after a series of missteps by previous owners at the site, which the city of North Miami has been hoping to develop since before 2002. The site of a former municipal dump, the land has been sought by developers for its size, location and proximity to the ocean. It was cleaned up and declared safe for development more than a decade ago, according to the developers.

The parcel gained notoriety in the financial world after the 2008 downturn. A former owner, Boca Developers, used it as collateral for $163.5 million loan from Credit Suisse Group. The bank sold the debt as commercial mortgage-backed securities to investors who ended up losing all their money. It was one of the biggest losses resulting from a single securitized commercial property loan.

The current developers contend they will suffer no such problems, partly because they have the deep pockets to wait out market downturns. The LeFraks, who are worth $6 billion, according to Forbes magazine, have done this with other large projects, including LeFrak City in Queens, N.Y., and Newport, a 400-acre project on the New Jersey waterfront opposite Manhattan.

Richard LeFrak, chief executive and chairman of his family’s company, said the development will likely ride out a few cycles.

“If we have 2008 again, do you know what we’ll do? We’ll wait until business conditions improve again,” said Harrison LeFrak, vice chairman and Richard’s son. “We’re not going to have a $200 million write off.”

Other companies moving forward with big developments also are relying heavily on their own, rather than borrowed, money. In Miami’s financial district, Hong Kong-based Swire Properties Ltd. is using all equity to finance the first phase of a $1.05 billion mixed-use project named Brickell City Centre. The development, which broke ground in 2012, will include two condominium towers, two office towers, retail space and the first U.S. hotel run by Hong Kong-based Swire Hotels, according to Stephen Owens, president of Swire’s U.S. division.

Mr. Owens said Swire, a family-run business now in its seventh generation, generally doesn’t take on much debt. “Leverage is very harmful when the market turns the other way,” he said.

For now, the local economy is gaining steam, driven by hiring in sectors including retail, construction and leisure and hospitality. That has boosted the fortunes of Brickell City Centre. About 80% of the units in the first condo tower have sold, and Akerman LLP, a Miami law firm, has leased 80% of one of the office buildings.

The SoLeMia builders have no certainty that the economy will remain strong when their first apartments and stores start hitting the market. But like the LeFraks, the Soffers say their pockets are deep enough to ride out a downturn.

While the Soffers don’t have the same high profile as the LeFraks on the national scene, they are major players in the Miami region. The family owns more than $5 billion in property all told, including Miami Beach’s fabled Fontainebleau hotel and the Aventura Mall. Jeffrey Soffer, son of founder Donald Soffer and co-chairman and co-chief executive of the family company, is a local celebrity who used to race cars and boats and is married to supermodel and entrepreneur Elle Macpherson.

Plans for the project now known as SoLeMia began after the city of North Miami took the land back from Boca Developers and put it up for bid again. A venture of the LeFraks and others including Florida developer Michael Swerdlow won that bid, partly because of the LeFraks’ track record, according to Mr. Swerdlow.

But Mr. Swerdlow said he and Richard LeFrak didn’t agree how to move forward. Mr. Swerdlow said he wanted to prepare the land and then sell sites over a few years to other developers who would take on the risk of building apartments, stores and other projects.

The LeFraks wanted to hold the land over the long term. They ultimately bought out their partners and sold a 50% stake to the Soffers, who also will take primary responsibility for managing the development.

The families might finance some of the SoLeMia buildings with debt once all the site work is completed, Richard LeFrak said.

“What happens is that the land value rises to the point that you can finance buildings out of the equity you created in the land,” said Mr. LeFrak. “That’s how this game works: What you didn’t build on gets more valuable.”

Corrections & Amplifications:
Jeffrey Soffer is co-chairman and co-chief executive of his family’s real-estate company. An earlier version of this article incorrectly said that his title was chairman and chief executive. (May 20)

http://www.wsj.com/articles/property-dynasties-team-up-to-fund-miami-project-1432114201

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