An Essay: On the Fourth Day of Christmas ... by gimleteye

(Part 8) Budget deficits in municipalities wrecked by the housing boom are soaring. In Miami-Dade and Broward counties, taxable values continue their steep slide as the region continues to wrestle with the Great Recession. In 2010, Miami-Dade property values fell 13.4 percent compared to the previous year. The same was true of neighboring counties in South Florida. “The drops are the biggest since the once-roaring real estate market took a steep dive, both shrinking land values and shuttering work sites, Illustrating the impact of the building slowdown: Taxable property values in Miami-Dade County stemming from new construction for the past year reached $2.6 billion, down from $8.4 billion the year before.” (“Property values, cities take big hit”, Miami Herald, June 1, 2010) Hialeah Mayor Julio Robaina said the county's projection -- a 19 percent decline in his city's taxable property value -- was more than he expected, but not a shock. “It should be no surprise to any of us,” he said. 

The answer begs the question: “If growth was allowed to spin out of control, why wasn’t there a contingency plan? A Plan B?” The answer is self-explanatory: we will not plan for growth beyond using tax policy to provide whatever services are needed to accommodate population expansion which, in the nation’s fastest growing regions, is the only industry. 

The key feature of the model—that eventually encompassed the entire spectrum of development from Big Box retailers to condo canyons at the shoreline and platted subdivisions in Everglades wetlands—was feeding the beast. Ultimately the beast broke its chains. Wall Street, with the help of both Democrats and Republicans, busted down the Glass Steagall Act, providing among other features of precaution, the separation between the activities of commercial mortgage and investment banks. The Federal Reserve, which could have reinforced caution, did the opposite; lowering the benchmark lending rate from 2001 to 2004 to the lowest levels in US history while refusing simple measures to tighten bank lending requirements.

To grow the beast larger and more profitable meant a bigger supply: more houses, more retail strip malls, commercial space and related infrastructure. Wall Street couldn’t get enough. Blowing up supply meant breaking down barriers, and especially barriers to growth at the local level: zoning, master development plans, rules governing wetlands and water quality and natural habitats. Breaking down barriers also meant bullying, cajoling, and steamrolling local opponents. It came as naturally to the local bankers in Miami-Dade, lobbyists, and trade associations representing the builders as it did to the executives of Fannie Mae who intimidated anyone and anything its path, whether ratings agencies or members of Congress—detailed in the excellent 2011 book by NY Times Gretchen Morgensen, “Reckless Endangerment”.

Nothing was more important than ensuring jobs, profit and economic activity—expanding the tax base to provide for the services people demand. In this scheme—and scheme it was—there is no place or standing for the skeptic. Where numbers did not exist to support their arguments for more zoning, more condos, more demand: then they were invented or otherwise constructed to render meaning, meaningless. It is still going on today, with the attempt to rationalize the breaching of the Urban Development Boundary.

The 2004 Christmas edition of the now defunct Sunpost praised Miami’s developers to high heaven. A few examples and updates: 

Melanie Muss. “When Melanie Muss was appointed to head up development for the Fontainebleau Hilton Resort in 1999, she initiated a comprehensive renovation and expansion plan that positions Miami's most famous landmark hotel to continue prospering well into the 21st Century. The expansion focal point is on the Fontainebleau II and Fontainebleau III Ocean Club condominium-hotel projects being developed in partnership with Turnberry Associates at the south end of the resort's 18-acre property. The 36-story Fontainebleau II is sold out and will open early next year in conjunction with the resort's 50th anniversary. Sales began in May for the 18-story Fontainebleau III and groundbreaking is scheduled for early next year. "The Fontainebleau resort put Miami Beach on the map in the 1950s and 60s," Muss said. "These projects will enable us to continue playing a dominant role in South Florida and throughout the world."

Only five years later, the world-wide ambitions had blown to smithereens.

“Miami's Fontainebleau Grand Launch a Dim Memory as Hotel Cannot Pay $60 million in Contractor Bills, Seeks to Reduce $660 million Construction Loan: A year ago, developer Jeffrey Soffer presided over the most lavish hotel opening in South Florida history as supermodels, pop singers and movie stars celebrated his $650 million renovation of the Fontainebleau Miami Beach. Just weeks from his 41st birthday, the real-estate heir joined family friends James Caan and George Hamilton in the VIP section for a private concert by Mariah Carey. Victoria's Secret models sashayed in a televised lingerie show hosted by Heidi Klum. Exactly 12 months later, the $5 million weekend bash seems a mere financial footnote as Soffer confronts mounting challenges at South Florida's largest resort. Among them: Contractors claiming more than $60 million in unpaid bills. In court papers and interviews, contractors say they were ordered to work double- or triple-time to get the Fontainebleau ready for the Nov. 15, 2008, Victoria's Secret show, but that the resort stopped paying its bills at roughly the same time. For the first time, a senior Fontainebleau executive on Saturday said publicly that bankruptcy was an option under consideration as the resort tries to reduce its $660 million construction loan and settle the contractor claims. Last year, the investment arm of the Dubai government paid Soffer's ownership group $375 million for a 50 percent stake in the Fontainebleau. That deal gave the Dubai entity, part of Nakheel Leisure, the option to take over restructuring negotiations if there were problems with the resort's loans.” (Miami Herald, Nov 15, 2009)

Michael Bauman. “Invest in real estate. That is the message of BCOM, Inc., a Brickell-based firm that seeks to prove that land is a far safer investment than stocks and bonds,” gushed the Sunpost in its Christmas 2004 edition. “And what better way to prove such a business philosophy than by developing a project in your company's own city. Hence the 1800 Club, a luxury condominium built on the very spot of the popular bar/restaurant with the same name. 1800 Club won't serve beer and chicken wings, but 469 residences priced between $200,000 and $2 million. Spearheading the effort is Michael Bauman, chair and CEO of BCOM, a man with extensive experience in construction, finance, development and acquisitions who serves as general counsel for AUSA and Keyes Real Estate. Bauman is also famous for being the previous owner of the Miami Circle. Intending to build a residential building, Bauman paid $8 million for what would later become an archeological site. County and state sources paid Bauman $26 million to preserve the ancient Tequesta Indian ground.”

By 2009, land wasn’t a safer investment in stocks and bonds. “At the 1800 Club, Majestic Properties has taken over sales operations after BCOM agreed to make the units more affordable, said Majestic’s Ivan Chorney. There are 146 unsold condos at the 469-unit 1800 Club, according to Yvette Naranjo, a Majestic agent.Condos are being offered for an average of $240 a square foot, down from $354 a square foot. That’s a 32.2 percent reduction from before Majestic came on board. Chorney said BCOM, led by Aslan Palachi, is trying to sell its excess inventory to individual buyers rather than bulk investors at even bigger discounts. Palachi didn’t return phone calls. “Some of the new prices are below what we would consider foreclosure or short-sale prices but these are not foreclosures,” said Chorney, standing in an empty unit with broad views of Biscayne Bay. The 2,200-square-foot, three-bedroom corner unit is now selling for $580,000, or $263.63 a square foot, down from $847,500, or $385.22 a square foot. The new price represents a 32 percent cut. In 2004, the pre-construction price of that unit was $740,000, Chorney said. (“Condo Meltdown: some developers slash prices below pre-construction level”, March 23, 2009, South FL Daily Business Review)

“The owner of the Presidential Country Club, an 18-hole golf course in North Miami Beach, filed for Chapter 11 bankruptcy protection on Tuesday in Miami. The ownership company, Presidential Club LLLP, is majority held by BCOM Presidential, an affiliate of Miami Developers BCOM. The petition lists $10 million to $50 million in debt and $1 million to $10 million in assets.” (South FL Business Review, June 9, 2009)

Shear Construction was ubiquitous in South Miami during the building boom. The residential area, stretching from Coral Gables to the north and Pinecrest to the South, had been gradually converted to single-family residences and gated communities from its earlier incarnation as farm groves for fruit and avocado. By the early 2000’s, nearly every vacant parcel with a remnant grove tree had been knocked down. Shear Construction was especially active in the business of creating McMansions from the former farmland.

The Sunpost, 2004 Christmas edition, hailed Shear: “It is a world away from the residential window-washing business Gary Shear created when he was in college. Gary Shear and his wife and partner Dana are celebrating the 20-year anniversary of Shear Construction and Development. Started in 1984 by Gary Shear, the company has since gained a reputation as a builder of luxury homes all over South Florida, including in exclusive enclaves such as Cocoplum, Tahiti Beach, Gables Estates, Journey's End and Old Cutler Bay. "We pride ourselves on building the best, so we have to make sure that these homes are the talk of not just of the scene, but of the style icons and celebrities that recognize the hard work and dedication to exceed expectation," Gary Shear said…. "If you look at re-sales you'll find that homes we built consistently re-sell higher than any other homes in the area. Realtors tell us that buyers look for homes built by us because they've seen the degree of quality we build into every one of them."

Then things changed: “Miami-based Shear Construction and Development faces its fifth foreclosure lawsuit this year – an $11.8 million complaint targeting several single-family homes in Miami-Dade County. Wachovia Bank filed the foreclosure lawsuit on July 6 against Shear Construction; President Gary O. Shear; and the development affiliates that own the homes – 1115 Properties, 4920 Properties, 6645 Properties and 6175 Properties, according to Miami-Dade County Circuit Court records. They own five single-family homes that were completed in 2008 and two vacant parcels zoned for single-family homes. Most are at the southwest corner of Southwest 72nd Street and Southwest 47th Avenue in Miami. They have at least six bedrooms each. The complaint filed by Wachovia says that Shear Construction owes $11.8 million on these properties from a mortgage originally issued in 2003. Miami-based attorney Jose G. Sepulveda, who represents Wachovia in the lawsuit, did not immediately return a call seeking comment. Wachovia also is the plaintiff in the largest pending foreclosure case against Shear Construction: the $13.1 million complaint involving the Ponce de Leon Condominium in Coral Gables. In Broward County, Wachovia has a foreclosure lawsuit against Shear over a $2 million mortgage covering its Flamingo Ranch Estates residential development. In June, TD Bank sued Shear Construction in a $2.8 million foreclosure involving a 10,771-square-foot home in Pinecrest. A month earlier, Pacific National Bank filed a foreclosure against the developer over a $4.6 million mortgage covering a 2.6-acre Miami River shipyard. Gary Shear did not immediately return a call seeking comment.” (South FL Business Journal, July 16, 2009)

"Very few people foresaw the depth of the economic and lending crisis of the past few years," rued Fountainbleau owner Jeffrey Soffer (“A Double Flop for the Fountainbleau”, March 25, 2010, Businessweek). But that was only true if you were talking to bankers and other developers. Today, politicians sagely advise that the consequences should be of no surprise: ballooning municipal deficits, cutting services, personnel, and government services. It takes a village to raise a child, and many fathers and mothers to wreck the village.

For community activists, affordable housing advocates, and environmentalists, the building boom that consumed Florida was an unmitigated disaster forcing critics into the same cattle chute as consumers; lulled by promises of great deals and of reward, private/public partnerships and “win-win” scenarios like a rising tide lifts all ships.  (… to be continued)