By Maura Webber Sadovi, via The Wall Street Journal
Some investors who made gutsy bets on failed condo projects during the depths of the financial downturn are getting handsomely rewarded now.
Consider the case of a Miami Beach project called Alton Pointe and Ram Realty Services Inc., the investor that turned it around. Ram just sold the 119-unit complex for $20.3 million, about $5.9 million more than it had invested.
But the story of Alton Pointe also shows why distressed real-estate investing isn’t for the timid. Before the big payoff, the deal took a number of unusual turns and required some tough decisions.
For starters, Ram had to decide to go after Alton Pointe in the first place by buying its debt in late 2008. At the time a controversy was swirling around its developer, Michael Stern, Mr. Stern had acted as an undercover informant in a bribery probe in exchange for immunity, according to Joseph Centorino, a former prosecutor in the Miami-Dade state attorney’s office. Three Miami Beach officials eventually were convicted.
As news of the corruption probe was breaking, Ram had an opportunity to buy about $13.1 million in debt on the stalled Alton Pointe project for about 50 cents on the dollar from now-defunct Colonial Bank. But the investigation gave Ram officials second thoughts.
Peter Cummings, chairman of Ram, says the firm decided to go ahead with the 2008 deal because, after conducting an extensive review of bank documents, the firm’s executives gained confidence that Mr. Stern had received the proceeds of the Colonial Bank loan. That helped assure Ram that they would be able to take control of the property, Mr. Cummings says.
“All the rest is noise,” Mr., Cummings says.
Mr. Stern and his attorney couldn’t be reached for comment. Mr. Stern was indicted last month in an unrelated case on federal wire-fraud charges tied to allegations that he swindled Indianapolis Colts football player Dwight Freeney. Mr. Stern pleaded not guilty earlier this month. Mr. Stern currently is being held at the Metropolitan Detention Center in Los Angeles awaiting trial.
The Alton Pointe rental complex, which consists of nine buildings, originally was built as apartments and a hotel from the 1930s to the 1950s in the “streamline Moderne” style. Mr. Stern had planned to convert the complex into condominiums but the project ran into financial problems as the housing Industry collapsed.
A foreclosure proceeding already was under way when Ram, of PaIm Beach Gardens, Fla., purchased the debt on the project from Colonial. But Mr. Stern sought to keep control by putting the project into a bankruptcy proceeding. Ram ended up taking control at a bankruptcy auction. By then about l0 units in the complex were converted to condos and sold. One building was boarded up and the remaining rental units were about 50% occupied, Mr. Cummings says.
Next came the fix-up. Ram renovated the units, added a pool and repositioned the property as a rental-apartmnent complex. The firm’s strategy was helped by a strengthening apartment market, which has rebounded nationwide as foreclosures and the lack of credit have turned many would-be homeowners into renters, the occupancy of the complex has risen to 96% from about 50% when Ram took control.
Those gains have come as the Miami apartment market’s vacancy rate fell to 4.4% in the first quarter from 5.6% in the year-earlier period, according to Reis Inc., a real-estate- research firm. Mr. Cummings says the sale vindicated the firm’s bet on Miami. Everyone was down on Miami,” Mr. Cummings says. “We believed that Miami was one of the great gateway cities.”
In Ram’s recent sale, the buyer was the New World Symphony, an orchestral academy that plays in a new Frank Gehry-designed concert hall less than a mile away, according to Real Capital Analytics, a real-estate research firm. The New World Symphony plans to fill the complex with its musicians as current leases expire.