As the South Florida condo market shows signs of
stabilizing, concern is growing that expected association maintenance
fee hikes — like the one announced this month at the new Paramount Bay
tower in Greater Downtown Miami — could stall the recovery.
For the last 18 months, end users, investors and
bulk buyers have been rushing into the coastal condo market in the
tricounty South Florida region with cash, purchasing new condos at deep
discounts with the notion that unit prices would likely appreciate as
the economy improves and financing once again becomes available.
Investors, especially foreign nationals with
strong currencies, have been willing to buy units today that generate
enough rent to offset monthly association fees and property taxes.
If the condo units can generate even a
single-digit percentage return on top of monthly expense, investors for
the most part have been willing to be patient given the alternative low
interest rates offered at banks.
Since January 2010, buyers have acquired nearly
5,200 new condos in South Florida’s seven largest coastal markets of
Greater Downtown Miami, South Beach, Sunny Isles Beach,
Hollywood/Hallandale Beach, Downtown Fort Lauderdale and the Beach, Boca
Raton/Deerfield Beach, and Downtown West Palm Beach and Palm Beach
Island. As of March 31, less than 6,800 units remained unsold out of a
pool of nearly 49,000 created during the South Florida real estate boom
dating back to 2003.
As the units sell, many projects are reaching the
designated threshold where control of the respective condo projects must
be turned over by the developers — or successor owners — to the
condo association boards of directors elected by unit owners. It’s at
this moment that the boards of directors and unit owners typically
discover that the services and amenities that they have grown accustomed
to while under the developers’ control can no longer be afforded at
the same monthly maintenance fees.
If the associations want to maintain the same
services and amenities that had been subsidized by the developers, the
monthly maintenance fees usually must go up.
Consider earlier this month when the ownership of
the new 346-residential-unit Paramount Bay condo tower in Greater
Downtown Miami filed a “guarantee of assessments” plan through the
year 2013 at the 47-story tower fronting Biscayne Bay, where the house
from the popular 1998 There’s Something About
Mary movie was filmed.
The Paramount Bay’s current ownership — which
is expected to launch sales in the second half of this year — amended
the condominium documents to disclose that the monthly maintenance fees
for residential unit owners will increase up to 16 percent annually for
the next two years, according to the filing recorded with the Miami-Dade
County Clerk of the Court.
In real dollars, this means the monthly
maintenance fee per square foot for residential units will rise from an
average of about $0.76 in 2011 to $0.88 in 2012 to $1.01 in 2013. For
the smallest residential units at 1,128 square feet, the monthly fees
are scheduled to go from $861 in 2011 to $990 in 2012 to $1,138 in 2013,
according to the Miami-Dade County filing.
If by the year 2014 the control of the project has
not been turned over to the association’s board of directors, the
developer “shall have the option…to extend the then-current
guarantee of assessment for additional periods of one month each,”
according to the Miami-Dade County filing.
Alternatively, the developer’s “guarantee of
assessments shall automatically terminate on the date of the meeting
of unit owners at which transfer of control of the association to unit
owners other than the developer occurs,” according to the Miami-Dade
County filing.
Price increases in monthly condo maintenance
fees in the years ahead do not necessarily mean buyers will ignore a
project but instead probably conduct more market due diligence before
transacting deals.
End users in search of amenities and services
are generally willing to pay increased monthly maintenance fees for
perceived value in a condo project. This helps to explain why some
Miami Beach condo associations are able to charge nearly $2 per square
foot per month in fees for residential unit owners.
Investors, however, tend to operate strictly off
spreadsheets with financial metrics that reward increased revenue, not
expense.
The issue may be moot for the moment as tenants
have rented nearly 1,400 new condos in Greater Downtown Miami at a
median price of $1.83 per square foot per month through June 15. This
year’s median rental rate is up more than eight percent from the
same period in 2010 when tenants leased nearly 1,300 units at a price
of $1.69 per square foot per month, according to Miami Association of
Realtors data.
Going
forward, will rental rates will be able keep this pace or even match
possible increases in condo association maintain fees? If rental rates
fail to move in unison, condo association boards of directors and
investors could have some challenging decisions to make in the next
few years.
Peter
Zalewski is a principal with the Bal Harbour-based real estate
consultancy Condo Vultures created in March 2006. Zalewski, who has
had a Florida real estate license since 1995, works as a consultant
for private equity groups and institutional investors from around the
world.