The Unreal South Florida Real Estate Market

Seldom does a week go by without someone (from many different parts of the world) asking me about buying (or investing in) real property in South Florida. Since I have always shied away from giving any form of “financial advise”, I simply try to be nice while I avoid going beyond the usual pleasantries about life in our partly/sunny state (except in the fortnight after each national election).

But at the behest and due to the insistence of a media outlet specialized in the real estate “industry”, I wrote the following piece which I hereby share with you all.

The ominous among us are already fretting that the glamorous, euphoric and sophisticated real estate market in South Florida is beginning to look ripe for yet another of it’s frequent somersaults.

From the other side –the perennially optimist one- we are hearing, for the umpteenth time, the frantic promises that we are finally and definitely out of the boom and bust days of yore. But anyone with the faintest of memories could tell you that such promises usually play the role of a tsunami warning horn, even if, as usual, few are paying any heed to it today. Too busy “making” money, in some cases head over heels.

In a society where short-termism has become a national mantra of sorts –with regard to the changing climate and its impact on our planet, with regard to burdening our children (and grand children) with debts, when it comes to erasing all kind of regulations so as to “free” the hands of those eager to play our national (and irrational) game of “free-for-all”- the real estate scene in Miami is the equivalent of the Cirque du Soleil: illusionists and saltimbancos galore. But the sad clown of past experiences is still around to worry us all.

According to an article published in The Miami Herald -“There’s a surplus of luxury condos in Miami, but three more developers are building anyway”, by Renee Rodriguez. / October 22, 2018- there is a glut in South Florida’s luxury condo inventory (58 months of inventory, four times what convention says a healthy market can carry).

Only two major luxury condos broke ground in South Florida in 2018, with unit prices ranging from US$ 2.7 million to US$ 35 million. But developers (including foreign based developers) are still betting on Miami’s enduring appeal to the rich and famous (and to the rich and famous wannabes), or to those who still see the United States as the safest place to park their capital. Now that the United States is run by, arguably, the most “famous” real estate developer in the world –one who has elevated short-termism to an art form-, will that perception change? The answer to that question should tell us a lot about how well real estate developers know themselves and their trade.

As we all know, EVERY real estate developer will claim he or she is selling irreplaceable assets that tend to appreciate over time, that nothing in the market can compare with what they are selling, and that there will always be demand for their product.

In any event, I will not bore you with a report on the “state of the Florida Real Estate market” or any projections of where it is headed, since if you are reading this piece you are likely to be well versed on the nature of the industry and the limits of “expertise” in it when it comes to making such assessments and predictions. The fact is nobody really knows, including me.

There is, however, abundant data showing that the housing market is slowing nationwide. The sales of newly built single-family homes slipped 13.2 % in September (from a year earlier), and many blame a provision in the half-baked “Tax Cuts and Jobs Act” passed in late 2017, which restricts deductions for state and local taxes to $10,000, a provision that hits homeowners with high housing prices and high property tax rates (namely the “liberal” Northeast of the country) hard in their tax bills. This does not affect alien “homeowners” (or “not-really-home” owners) who manage to stay away from becoming US residents for tax purposes, though.

But still, I’d rather forego using my crystal ball, knowing as I do that these are, by far, the most unpredictable times I have faced in almost forty years of residence (for all purposes) in the USA.

I do want to point out a few of the issues hovering over the present (and the future of) South Florida Real Estate.

One of those issues is the incidence of foreign money (developers, buyers, investors) in the South Florida real estate market. About a quarter of the total sales of real estate to foreigners in the United States take place in Florida, and three quarters of condo buyers in Miami forego mortgages and pay in cash (the national average for cash sales for all properties in the rest of the country is slightly over thirty percent).

The flow of foreign money into South Florida’s real estate market is nothing new, of course. Nor are the many questions as to the origins and of that money.

In most cash purchases of real estate in Florida the foreign buyer acts through off shore shell companies –the vehicle of choice for those who seek anonymity, whether they are tax evaders, corrupt politicians, or simply people who fear the consequences of showing the extent of their wealth.

Since 2016, the U.S. Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Treasury Department, has turned South Florida real estate lawyers (“dirt lawyers”) like me into an arm of the law, requiring them, in all high end cash purchases of residential real estate -for US$1 million or more- to find out and disclose to the federal government the identity of any “beneficial owner” or owners of the purchasing entity, and all legal entities related to the purchasing entity (frequently owned by yet another shell company). The definition of “cash” was only recently expanded to include wire transfers (besides currency, certified checks, cashier’s checks and money orders), which is an indication of how concerned the feds (as well as our local authorities and real estate “industry” players) “really” are about dirty money’s impact in our beautiful landscape.

Failure to report within thirty days of a real estate closing could add meaning to the term “dirt lawyer” because of how we would feel if hit with a US$500,000 fine or 10 years in prison, the sanctions contemplated for non-compliance.

Another interesting aspect of the South Florida real estate market is the selling of green cards to real estate investors.

Around 2009, in the aftermath of the last recession, when obtaining real estate financing from traditional lenders became almost impossible, our real estate mavens began using a then twenty-year-old visa program, the EB-5, to gather the money they could not get from the banks.
Under the EB-5 visa, virtually any foreigner who invests from US$ 500,000 to $US 1 million in a real estate project that would create at least 10 jobs can obtain legal residency in the United States (it takes roughly two years to get a green card under the EB-5, a much shorter wait than under other visa programs).

Originally, the EB-5 visa was meant to generate new businesses and jobs (blue collar jobs) in the most downtrodden areas of the country, not as an alternate source of financing for building luxury condominiums. Back then some Immigration lawyers regarded it as scandalous that real estate developers could even think of misusing the EB-5 visa program in a way that so blatantly betrayed its goals. How many jobs are created when you build a luxury condominium? the doorman, the maintenance guys, the valet parking staff, and what else? And each US$500,000 investment was supposed to create 10 jobs. But our political system being what it is (totally subservient to monetary interests and the lobbyists who represent those interests) the EB-5 program has been re-interpreted, allowing developers to count their construction costs, as well as their soft costs –the architect’s fees, for example- to determine the number of jobs to be created.

If you are considering applying for one these visas, maybe you should visit this website first: eb5projects.com/litigation

A very large percentage of our EB-5 visa applicants come from China, and the initial success of the US$1 billion Brickell City Center, built by a Hong Kong based developer (without resorting to EB-5 funds) is likely to spike the interest of Chinese moneymen.

Latin American demand for EB-5 visas is growing too.

But the most crucial issue hovering over South Florida’s unreal real estate market is the impact the constant funneling of foreign wealth and the consequent surreal prices is having on our social fabric.

In 2014, Miami-Dade County was declared poor enough to qualify as a Regional Center under the EB-5 visa program, that is, an area in dire need of the foreign money those seeking to buy a green card would bring over. The local authorities celebrated this “achievement” as the dawn of a new age for one of the poorest areas of the state of Florida (more than 18% of the county’s population lives under the poverty line). The median yearly household income is about US$46,000, while the median property value is close to US$266,000; in no small measure due to the impact the luxury market has on all property values. Regular Miamians are leaving in droves, because they cannot afford to live in such a poor but expensive town.

Contrary to the expectations, the Miami-Dade Regional Center has left no footprint at all in South Florida. In four years, one single project has been sanctioned (in late 2017), Tibor Hollo’s (one of South Florida’s most iconic developers) Panorama Tower in Brickell Avenue, which was said to count with 99 EB-5 “investors” who would finance about half the project’s costs while creating about 2500 jobs. We’ll see what happens, as our eloquent Developer in Chief likes to say.

But early this year, the person designated to lead the Miami-Dade EB-5 Regional Center resigned (she was practically forced out), after showing the good sense of trying to steer the program away from the emphasis in commercial projects, looking for opportunities to finance public minded businesses like affordable housing and the renovation of city owned facilities, something a lot closer to the original intent of the EB-5 visa program. An incoming city administrator branded her as inefficient and her last words were: “We’re not just a cash register here, God Almighty”. Then again, maybe we are.

South Florida is a marvelous place to live, for those of us who can afford it. But I am beginning to wonder whether my kids will be able to, not to mention my grandkids.

The fact is all that glitters is not gold…