Florida Real Estate: Well Positioned For The Savvy Investor

Tuesday, March 27, 2012 - 11:52

The Editor interviews Stuart T. Kapp, Partner, Proskauer.

Editor: Please tell us about your background and experience.

Kapp: I’m a Florida native who ventured north for school, returned to start my career as a real estate attorney in Miami and, after a few years, moved to Proskauer’s Boca Raton office where I have practiced for the last 18-plus years. I have a master’s in Public Administration from the Fels School of Government at the University of Pennsylvania and attended Cornell Law School. My degrees add value to my practice as a real estate attorney, especially in terms of real estate experience and development; case resolution on the strategic analysis and planning sides; and, of course, the critical legal background and experience. Specifically, my degree in Public Administration enhances my ability to analyze and solve problems beyond the information provided in the legal documents, and it naturally ties in with work related to public institutions. More broadly, it provides insight into fundamental issues, such as the systemic or value-add propositions required to advance business deals; the so-called “politics” of the parties in deals; and the ability to understand what’s behind the paper.

Editor: What is the latest thinking on Florida real estate as a strategic investment?

Kapp: Florida has certainly experienced its fair share of the country’s real estate boom/bust pain in recent years, perhaps even more than a fair share.  Nevertheless, the long-term fundamentals of Florida’s real estate market remain solid. For example, on the multi-family side, a recent statistic shows a 91 percent absorption rate of boom-era residential condominiums that were built in well-located areas. In fact, today we see developers beginning to announce new condo projects.

Another of Florida’s positive fundamentals is its geography, a warm weather climate located, forever, between the Everglades to the west and the Atlantic Ocean to the east. When this factor is combined with the state’s continued long-term population growth – based on domestic and international demand – Florida’s long-term prospects remain solid.

The Miami area, and, as a result, the entire South Florida region, is maturing from a winter getaway to a business center and international hub, with a specific niche for serving companies doing business in and with South America. European and Asian business is also growing in importance. While the region comprises individual cities, each with unique characteristics, together the area adds up to a tri-county metropolis that continues its maturation into a major international business destination.

Editor: Are many foreign real estate investors gaining a foothold in your area?

Kapp: We see a lot of foreign investment in Florida, not only because of its improving business prospects, but also as a safe haven for foreign nationals.  In fact, there is a joke around town that the best condo salesperson in South Florida is Hugo Chavez. But such investment is not limited to residential transactions.

Notable commercial real estate transactions involving foreign investors include the proposed Resorts World development in Miami by Genting – a Malaysian company that is reported to have spent $500 million on land acquisition in downtown Miami – and the CitiCentre Project, also in Miami, by Swire Properties from Hong Kong, a $700 million mixed-use development. And these types of developments are inspiring other projects: one in particular is an exciting project that we have been working on located on Atlantic Avenue in Delray Beach.

Another positive long-term fundamental vis-à-vis foreign investment involves the current expansion of the Panama Canal, which will inevitably lead to increased cargo traffic to the three South Florida ports. In addition, Miami International Airport is one of the busiest cargo airports in the country. Over time, South Florida will continue its solidification as the primary interface between South America and North America, and the entire South Florida region will benefit. The region is expanding and improving its infrastructure to prepare for the future: we are deepening our ports, creating a tunnel into the Port of Miami, expanding our expressways and adding a new runway to Fort Lauderdale International Airport.

Editor: What are the critical considerations for clients looking to expand real estate holdings in Florida? Does Florida offer incentives to attract such investment?

Kapp: There are no unique legal requirements for direct investment in Florida assets; however, there is a complex regulatory scheme for approvals and zoning in development deals. The key factor in these deals is to have the right advisors who understand the local marketplace and all of the applicable sub-markets, such as South Beach and Boca Raton, to name just a few.

While there are no direct incentives for pure real estate investments, there can be substantial incentives for corporate relocations. A good example of a state-sponsored program, created under the Jeb Bush administration, is The Scripps Research Institute, which is establishing a major biomedical science and research center in Palm Beach County to research and perhaps develop medicines that will cure cancer or other diseases. It’s not far-fetched that such ideas would be developed in Palm Beach County; after all, IBM invented the PC (personal computer) right here in Boca Raton.

Editor: What is happening in the distressed market?

Kapp: As you can imagine, the distressed market is very active here and creates substantial activity for our own practice. I represent a number of entrepreneurial clients who have executed on many transactions involving distressed debt and foreclosure judgments. As well, we have handled workouts in which our clients provided new capital to challenged assets. We’ve handled distressed transactions involving golf courses, large condominium projects, commercial office properties and vacant land. Right now we see a lot of activity in the multi-family and retail areas.

Editor: What are the unique considerations for acquiring distressed Florida real estate?

Kapp: In its purest form, purchasing distressed real estate involves the crossover understanding between the business transactional and the litigation aspects of deals. We’ve managed distressed loan purchases through foreclosure, pending foreclosure cases and foreclosure judgments, all of which carry greater risk than the purchase of real estate by deed.

In these deals, it is critical to understand the interface between the real estate issues and the litigation, foreclosure and foreclosure auction processes if the ultimate goal is to buy distressed debt to yield property ownership. Whether the deal constitutes notes that were challenged, notes in default or those in pending foreclosures, these transactions involve an “as is where is” purchase – without the lender taking any real risk or making representations and warranties. Therefore, you have to do a great deal more homework and scrutiny to understand and confirm not only what you are buying in terms of the debt, but also the underlying integrity of the asset. Many times, the borrowers won’t allow access to the property, so the work has to be done from a distance, and so if a Phase II environmental site assessment is called for, it is probably out of the question. 

Editor: Do those considerations and the expertise required carry over to the ultimate creation of contracts and agreements?

Kapp: Yes, for sure. A sophisticated real estate attorney adds critical value to these types of transactions by understanding the nuances – risks that may not be apparent on the face of the deal. The blind spots in distressed debt deals are bigger and more frequent because lenders are not forthcoming with information other than handing over the loan documents. Getting the job done requires understanding the documents and enforcement provisions; conducting the proper due diligence on the debt and asset; and then generating an effective plan to realize upon the collateral. 

However, the art of the transaction is figuring out how to deal with the existing borrower. Will you “go to war” or take the approach that they were not bad deal-makers, but simply got caught in bad circumstances. The latter may involve finding ways to relieve them of their guarantees, to enlist their assistance with finishing the construction process and, possibly, to give them something for their interest and cooperation.

Editor: Are more venture capital players entering the real estate space?

Kapp: We are seeing a substantial amount of private capital entering the Florida market, which is understandable because we’re dealing with higher-risk, value-add, premium opportunities that are not well positioned for institutional players looking for steady returns.

We know and represent a number of funds and wealthy family offices that have the capacity to buy – for cash – and that are willing to step forward, analyze and understand risk and then efficiently execute. Today’s best deals are made quickly and without the need for financing. We often find ourselves seizing the deal and thinking about how we will finance it at a later date.

Editor: What is the landscape for financing options for Florida transactions?

Kapp: Interestingly, there is increased availability of financing for qualified clients and the right deals. We’re seeing everything from traditional bank financing with recourse to the slow return of securitized lending. We are now seeing banks making a number of loans to proven operators with good track records, albeit at lower loan-to-values than we have traditionally seen.

This kind of financing is particularly suited to properties that need some TLC before they can be repositioned because such properties are not ideal assets for securitized financing. On the other hand, we are also seeing deals whose valuations already reflect the new pricing realities, with securitized conduit loan products offered to accommodate re-priced but generally well-situated, cash-flowing assets.

Editor: What is your view on the current financing environment?

Kapp: The decline in tenant demand and lease rates has, no doubt, created challenges. However, resized valuations, a new paradigm for appropriate lease/rental rates, and greater lender conservatism all have combined to create the very early stages of a slowly improving market, though there does remain a long-term drag from legacy assets working through their problems. Progress is steady but, of course, a bit slower than desired, and it requires reorienting fundamentals to fit the current paradigm, i.e., applying new concepts to an analysis of challenged properties and existing indebtedness. Today, it’s all about buying at the right price and having the stamina and depth to go the distance. 

Editor: Do you see any developments on the horizon?

Kapp: In recent years, the market has concentrated on working through existing supply; however, we are now witnessing the early stages of a return to development for best-of-class assets and locations. For example, we are involved in a four-city-block development on Atlantic Avenue in Delray Beach, which I mentioned earlier and which we think is one of the best mixed-use opportunities in South Florida. 

For the first time in Palm Beach County, we have a hot area – another South Beach or Las Olas – Atlantic Avenue. We think this project will be transformational for the area. we think this project will be transformational for the area. The project is well positioned for success because there has been no substantial development of this type in the South Florida area for over five years, especially not in south Palm Beach County, and we are ready to proceed to the next phase, having obtained the necessary development approvals.

Overall, we anticipate that the South Florida market will continue to improve over time and will eventually return to a healthy equilibrium. Of course, we’re not there yet, but we are definitely moving in the right direction.

Please email the interviewee at skapp@proskauer.com with questions about this interview.