Miami Life Apartments

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Miami Life Apartments Bridging People and Potential

When I was brainstorming with ideas for a thesis, I came up with a couple of interesting research topics that I began evaluating. But then I realized that if instead of a standard thesis, I were to work ‐while still a graduate student‐ on a formal business project for a multi‐family housing development, I could then have a head start for an interesting future business venture. In addition, I would be able to use the multitude of resources available to us here at Harvard University. Furthermore, professionals and experts in the field would not mind sharing their knowledge, techniques and vision with a graduate student. Once I am in the field as a potential competitor to them, it would be expected that they might not be so forthcoming and candid with their inputs.

I travel often to South Florida because several family members of mine live there. On one occasion, I visited a few poor suburbs in South and West Miami. It called my attention the agglomeration of ‘mostly’ new immigrants in these poor areas, the lack of affordable and decent housing in those areas, and the pitiful and desperate look that some of those neighborhoods had. As they are at present, you could say that those decrepit structures are “tourist eyesores”. I realized that with not much investment, dramatic improvements could be done to a few dilapidated plots of land. By doing so, not only we could do a positive metamorphosis of the business appeal of those centrally‐located blocks, but at the same time a much better quality of life could be offered to those families and individuals who are now living in conditions more typical of a developing country, rather than American suburbs. I could not get those images out of my mind, so putting my thoughts together, I decided to embark on this “urban development study”, choosing that option rather than a more academically oriented thesis.

On the first pages of this analysis and study, I present the difficulties encountered and solutions ‐whether technical, environmental or financial‐ to some of those hurdles. I am using a large number of graphs and calculations to support my business study and to give backbone to my development proposal. Finally, I conclude that this project is doable, but it requires a relatively moderate investment, part of which can be obtained via grants and subsidies from municipal departments, as well as from non‐governmental agencies.

From the beginning it has been an extraordinary educational experience, and now that I have finished this research, I am more committed than ever to move to an implementation phase to make this dream and hope a reality.

I thank from my heart all those peers and professors for their support and input, without them I would probably had to reduce the scope of the project. I also found great support from community activists, and received very candid and unselfish information from many professionals in several fields related to the housing development industry, for what I am really thankful. Ultimately, thanks to Harvard University’s Graduate School of Design for this great opportunity.


Executive Summary

Goals and Objectives

My goal is to understand the complexity of the development process. Implementation will be done using a current –for sale‐ vacant lot in Miami, creating set‐ups/pro‐formas for a 12 unit residential building with ground floor retail stores. I will also try to find a building that I could also modify for adaptive reuse. I will contrast feasibility studies against different scenarios such that the site with the least risk and highest appeal will be further analyzed in greater detail.

Comparison will be generated for several scenarios: 1) low‐income units vs. market rate, 2) adaptive reuse vs. new construction, 3) for rent vs. for sale. The evaluation will also include the amounts and distribution of types of units and retail spaces. If the chosen method of analysis and resulting proposal is accurate, feasible, and realistic; then that would be the most rewarding result of this project.

Developing this proposal while still in school provided me with an educational experience like no other. Investing some of my own financial resources on this project makes it also a personal venture, with every additional incentive to absorb information at the highest level possible. Applying the research into my Scholarly Paper Study requirement allowed me to take advantage of a broad range of resources that only a university as this one can provide.

For validation, it is my intention to select –next semester‐‐ a team of 5 to 8 individuals to closely review all the work and focus on a strategic approach for the presentation of the proposal in order to be submitted to lenders, investors, and the appropriate municipalities by June of 2008. Since this is my first project of such caliber, my main concern is to gain knowledge and earn credibility that would be needed for larger projects I foresee in the future of my career. I am not worried with financial compensation, as long as it covers my basic needs. One of the golden rules of builders is: Final value of property needs to exceed all construction costs. The rule of thumb being $1.20 value per $1 cost. (Marchant) I will be positive to share the developer’s fee (as well as any other profit in the form of percentage points) with those future team members who helped me make this vision a reality. Furthermore, I would be interested in analyzing the possibility of holding one of the twelve units for my personal usee, and as a result divide my share of the developer’s fee to increase the reward to the partners to continue in good terms with them for future endeavors. It is very important to try to stay with the same partners to reduce the amount of time and risk of working with unknown individuals every time I begin a new project.

Methods of Analysis

I will first determine the average cost of rent and sale per square foot for residential and retail space in the area. Then I will contact local brokers to help me determine a realistic cap rate. For the affordable housing set up I will contact HUD and other NGOs in the area to determine what subsidies the project could qualify for. Talking to developers, I will organize the hard and soft costs and other operation costs such as fees, insurance (which at present is really high in Miami) and will contact lenders to determine the details on types of loans available (with their interest, payments, and likely terms of the loan). When sufficient data has been collected, then a 10 year forecast will be generated showing IRR and NPV as to determine if this would be a good investment in the long run. Those critical parameters will help me determine the maximum value that can –profitably‐ be invested on that site. Hurdle rate and feasibility studies will be reviewed several times as we move ahead through the different constructions phases. Schematic designs of the setups that look most beneficial will be created, and they would be properly organized within the following research as to continuously document the feasibility and viability of the project.

Contacting people personally, helps maximize validity of data, such as from bias or favoritism towards suppliers, middlemen, contractors, etc. This being said, I should add that I apply four different methods to develop contacts. The first is extensive internet searches; looking up companies or municipal departments followed by browsing their websites, after locating their contacts tab, copy and paste of potentially good resources is done on a list on a separate document. The second method is “word of mouth”, that is, simply asking people for references, suggestions, or advice. Initially began with peers and faculty at Harvard, then I sent emails requesting such referral from people I was not that acquaintented with. One example is the Graduate School of Design’s entire school’s forwarding email system (called Student Announce). The third method, and I would say most valuable for contacting people within the realm of my study, was actually attending networking events and workshops many of which were held right here in the university although I also attended a few outside the campus. Of critical importance is networking, that is, knowing of enough individuals who have the knowledge, means, or charisma to bring together the different expertise that complement each other, with a purpose in materializing a vision. With these networking events I was able to make a small collection of business cards of persons who either where the direct contact or simply facilitated the creation of a relationship conducive to other third parties who were of more relevance to my study.

There was no need to call banks; instead I called on mortgage brokers. A good broker knows the market and has an early insight on when buildings are coming out before they do (Marchant). I used local real estate brokers to solicit to Investors keen on financially rewarding opportunities.

I found out that a good approach to locate investment is to hire politically‐involved consultants to audit my study, since they can help deliver it to the market through their connections. The analyst will measure if that is the best use and can also figure out the as‐is value. Ask lawyers about titles, and not about real estate. CDC’s help socio‐economically disadvantaged areas. Performing this first hand analysis, these insights mentioned are all examples of what I have learned as far as what the roles of these players should be.

The most reliable data could be obtained through the public sector because they are responsible for the zoning and building codes. Another thing I learned is to be aware that all data must be looked at with a critical, skeptic eye. Even when the people who volunteer info were brokers, developers, appraisers, and consultants; I noticed that sometimes they fabricate it. Therefore, it requires a strategy and methodology to detect the incongruence. I found out that persistence in questioning is the best antidote to protect myself from bogus information. A technique I found effective was to get familiar with some of their recent press releases. Based on those I would ask them about details, using accurate terminology, while trying to deliver my question of raw data with ease. Often I would call someone only to be referred somewhere else. Yet, I began to write down everyone’s names. Eventually I would tell them I had been specifically referred by a person whom they knew.

I found distressed properties through Banks and lenders; they maintain REO (real estate owned) lists that are usually made available upon request. REO listings are also held by institutions such as: FHA insurance, VA guarantee, and HUD affordable housing programs whom I also contacted. If the value of a property is close to the mortgage balance, the bank might also bid for it, in order to put on the REO list. I even searched other means available to the mass public like Craigslist, because many individual property owners advertise their sales privately to not have to foreclose and thus keep their reputation. Of course this is more common with small developments like 20 units or less. Auction properties would be nice, but when researching these properties I spent tedious time investigating the title record to find out that they were not clean and thus will take time and money to clear the title. Even if I were the winning bidder, the old borrower can reclaim it if they come up with all the debt they owe, as well as the new fees to the bank associated with the default.

In order to find the appropriate sites for acquisitions, I searched for the ones with the lowest yield expectations, an area with high cap‐rate. But it was very complicated because to determine a cap rate, so many factors need to be compared. Not just the quality, of construction, size, age, functionality, location, and operating efficiency, but also comparing the terms of the lease maturities, lease options, rent escalators, and any other major lease attributes such as easements, title restrictions, and so on. A simple solution I used was to find the amount of tenants being leased to and if they were in a long‐term or short term contract.

This was a basic and generic remedy, but in reality, it is said by many that it’s worth paying for the expertise where it counts, such as a Market Analysis. In conclusion, assigning the correct cap rate is difficult and an incorrect one could result in a serious pricing error.

Risk Factors

My research emphasizes the mitigation of risk since this would be my first project, to taint my reputation at this early stage of my career would derail my future endeavors. The following will focus on risk factors during every stage in my process, and the possibilities of how the risk could be remedied. Risks need to be closely evaluated to deconstruct them and determine the specific issues that pose the threat. The final challenge it to then find a solution to avoid or at least minimize the probability of that risk occurring. One rule of thumb for me is to always have a plan B, because even when appropriately planning for risks, there are always uncertainties that may not have been accounted for and must be prepared for by other means.

Due Dilligence

The most important factor for the reduction of risk is proper due diligence. The more accurate is the research, market, and feasibility study, the less risk the project will ultimately have. With more accurate numbers and calculations the initial market risk that would create a snowball effect of continuously increasing uncertainties will be diminished.


Partners are necessary when forgoing a large project, or any scale project for my case. In a joint venture, it is critical for me to have similar goals with similar level of risk take with my team. When possible, I shall record meetings or agreements with other parties to verify the correct communications. Repeat relationships are said to always be easier. When looking for a partner I need someone who has experience, political attachments, reputation and is reasonable. In emerging markets, it is said not to have an LLP with a local entrepreneur because if there was a problem, the court would probably favor the local individual instead of the ‘out‐of‐towner’. There are all sorts of models of joint ventures. It all comes down to how the profits are split. It 7 should be all done up‐front and very clearly defined. Put maximums on fees, negotiate the exit strategy, and a mechanism for when things don’t work out. One golden rule is whoever puts up the most cash, gets the preferred return ‐a threshold return before the other partner gets anything.

A possible problem is if the majority partner stops paying on the loans for any reason and I have 25% ownership and want to continue on the project. This is a form of embezzlement and it would result in long and expensive legal battles. The way to minimize the potential dangers in this matter is by partnering with professionals who have the credentials and reputations. A very detailed outline of how they conduct their business practice should be requested from them.

I am intrigued by the S Corporation method because equity funds are raised by selling limited partnership interest. This concept can be beneficial in that I would be consolidating all my partners into one entity thus reducing the possibility of conflicts associated with working with several people. Yet at the beginning of this venture, it would be imperative that I hire a tax expert or consultant to figure out all the details for, what I think, is a complicated form of partnership that requires professional expertise. In a Limited Liability Partnership all involved have rights in the management say and can bind the company by contract.

Another joint venture option which I am pursuing is to partner with the land owner as a Silent Partnership. If I can bring in the land owner as a partner, then that satisfies my down payment for the loan. I have identified four possible methods of accomplishing this. The first is to create a Limited Liability Partnership with the land owner such that they will receive a certain percentage of the profits. The second is a land option or easement, which would allow me to negotiate with the land owner possible terms and conditions to use the properties documents for application processing. If I can option the land, great, because it is worth the flexibility to improve the feasibility study and proceed with caution –yellow light, red light means stop, green light go. Reds are easy, greens are rare, and yellows are common. (Marchant)

A third way, and something I would like to attempt, is to try to do a sort of creative financing where the seller helps the buyer by paying his points or discount fees it is a common source of financing for land called a purchase money mortgage‐ a loan taken back by the seller of the land. As the buyer develops the land, new financing is obtained and the seller is paid off. Still lenders normally require title insurance in case of problems. The fourth would be for the land owner to get a second mortgage at a below‐market rate of interest which would reduce the borrower/buyers monthly payments and ultimately the cost of financing the property.

Land leasing is also an important way to gain income on the land. The closing date would be made for as long term as possible. Condos may not be allowed to be built on leased land but apartments certainly can. To induce the land owner I would just mention that if I lease the land for say, $50,000 a year, and the owner still sells for his asking price of $1million, say a year later, the relationship of his gain is 5%.

To mitigate some of these involved risk with the sites, I selected sites that are surrounded by other vacant lots or the same can be said with possible building acquisitions. In other words, if the subject property is sold by the time I conclude my project or if I encounter a red light, there will be ‘plan B’ sites that can work with the market research I have conducted.


From my research I learned that affordable housing is a great way of minimizing uncertainty risk. Government subsidies minimize the developer’s soft costs which has significant influence in the overall total development cost. The subsidies will cover such line‐items as impact fees, property taxes, and even marketing. As mentioned before, the problem is that I would need site control to apply for low‐income housing subsidies. This entails higher risk because I would be buying the property without knowing the probability of being awarded my assumed subsidies. If I am not awarded on the first round, I would need to wait to reapply which could be 12 months. The site acquisition carrying cost will continue to accumulate increasing the project’s cost substantially. Site control is not just necessary for affordable housing but also any other type of development so that property inspections can be done prior. While having the right to conduct test, I will not only check environmental issues like lead paint, asbestos, prior chemical storage, but also foundation, drainage, building quality and building code compliance, etc. For a simple site control, I need to negotiate with the land owner if I can pay the lands taxes or their financial burdens related to the site, in order to obtain the owner’s documents.


With the development of a building we see the construction risks in a wide array of forms, especially when comparing new construction to existing or defaulted construction properties. Either way, performance bonds or completion bonds from the contractor might be requested to reduce some of the risk. (R. Peiser) Performance bonds are required for public buildings for the public entity’s defense, but the same cannot be said for private based construction. On very large projects, the lender will require it, such as, 2% of the cost in order to buy the necessary insurance bond. If the contractor doesn’t finish, the bonding company will pay for another contractor to come in and finish the project, but will not recapture the time delays and other discrepancies involved with the transaction. Deep pockets can be helpful when the contractors call a change order. Since I don’t have deep pockets, I just have to fix it affordably or just ignore the inconvenience and try to adapt and incorporate it into my master plan. If I try to sue the contractor or architect, it can take months of timely and expensive trouble which I should always try to avoid. One way to delude the contractor problem is to not pay them upfront. Pay them as work is being completed such that I can dispense the contractor team if needed.


With new construction, the process for developing raw land requires grading the land where necessary, obtaining rezoning approval, installing utilities, sewers, streets and sidewalks. Also, some of the most common unforeseen complications come from the infrastructure risks. As mentioned earlier, to minimize this risk, it is imperative that when I soil test, I should not just evaluate to see if the soil is contaminated, but also determine the type of foundation that will be necessary. The prior due diligence should accordingly include what can and can’t be done on the site, such as store a septic tank or a well. It is crucial to know the zoning and special permits and variances for site plan reviews to avoid problematic inconveniences.

As the cost of built structures continues to drop with the economic downturn, the cost of labor and materials prices keep rising as shown in the following figure as the highest concerns for developers. This suggests to me that buying an existing building and minimally manipulating it might be the best answer to relieve this risk.

TO‐BE‐DEVELOPED‐ Properties that have defaulted during construction are up for sale at auctions, but because there is little collateral value compared 11 to its outstanding loan, lenders are doubtful and thus will have interest rates at one to four points above the prime. These ‘to‐be‐developed properties’ are complicated to foresee. Unless I buy after the completion of the project, I would be dealing with the risk of not knowing what I am paying for. Due diligence of the previous developer’s background is my priority so that I may rest assured that they do not walk away from the deal or go belly up from another project they might be involved with. When analyzing a for‐sale building prior to its completion, I can minimize the leasing risk by attempting to have the seller guarantee at least a 93% occupancy upon its completion. Lenders can give a “special warranty deed”‐ to warrant the title against liens and encumbrances that occurred while they held it. (Brueggeman, Fisher and Irwin) I shall be careful if the property defaults for little money, especially near the end of its loan period because by law the owner could easily recover it after they financially recuperate.


Rehabilitating buildings can have less construction uncertainty associated with it because, as mentioned earlier, a major risk involved with new construction is the creation of the foundation on unknown soil. The renovation of an existing building may have many unforeseen complication lying behind its walls, but when I purchase the asset, costly uncertainties will be more physically apparent then starting from nothing. Construction time is also less, thus reduce the amount of time that uncertainties could arise in the future.


Time efficiency is crucial and can also decrease the risk involved with financing. Generally, rates are chosen as measures of the perceived risk at that given point in time. To reduce reoccurring expenses along with the lender’s monthly yield, my development will be carried out with strategic coordination to reduce construction time.


Major corporations like GE borrow in the billions, and are the criteria for the “preferred borrower” because they are low risk. The larger a firm the more creditworthy they are to a lender. That entails that my proposal will be the exact opposite, thus lenders will view me as high‐risk. The prime rate is considered the average interest rate that banks give to their most credit worthy commercial borrowers. What is left goes to the smaller corporations until the available financing is filtered all the way to private builders and developers. As a result, almost anything available for my scale of project will be above prime. Mortgage companies lend, but they don’t have FDIC or CRA obligations, thus they are not regulated and can lead to predatory lending. Many of the predatory lenders are in the form of subprime lenders, sometimes there’s good ones, but most of the time they falsely interpret the interest to the borrower where it can never be paid off. Yet interest only loans are highly sought after for short term investments, and are the norm for construction loans.


Interest rates vary widely because of supply and demand, yet the Federal Reserve has policies in place to mitigate swift changes. When the economy is expanding rapidly, it increases the demand which raises the rates on large commercial loans for developers as well as expanding businesses.

To come up with an interest rate, lenders look at the particular type of property, its rental and operating projections, its physical condition, current and projected interest rates, and the involved investor’s expectations. Other types of lenders might base the interest rate on the possible returns in light of alternative investment opportunities. (Financial Analysis of Real Property Investments) The Interest can also be calculated to assume all the risks associated with it such as default risk, interest risk (anticipated and unanticipated inflation), prepayment risk, legislative risk, and liquidity risk. Such that i=r+p+f, where r=opportunity value, p=high premium incase of default, f=inflation (Brueggeman, Fisher and Irwin).


When I send preliminary plans to a contractor, they might give me a high quote because of any possible uncertainties in the blue prints. This is especially true with innovative designs, or any design that is new or difficult for them. Even with the new technology of Building Information Modeling, some contractors are still not used to reading the prints and will raise the price on any irregularity from their usual routine.


Manufactured housing may reduce the cost of construction as well as the construction risk due to weather set backs or faulty craftsmanship. Stacking modular sections on top of one another also helps reduce noise levels for the tenets because of the additional space between floor joists and marriage walls. The fast growing potential of prefab may even allow the use of contemporary and abstract design at a competitive price. Currently the realm of prefab is finding a niche business practice in the high‐speed construction of the world. By introducing mass production manufacturing with the latest technologies, they are making it easier and less expensive consequently bringing familiarity of their product types to the contractor and end users. Many manufacturers are introducing their product with at LEED certification quality. The companies will provide the structure to the site, but the façade, landscaping and interior will have to be all tied together by a general contractor. As soon as this product becomes more widely used, it will be essential for developers who want to reduce their costs.


The most risk capital is right at the beginning; personal equity and reputations are at stake. A recourse loan will even recapture assets not related to the venture. Some peers’ advice is to give everything to the spouse. Being that I don’t have any assets, I don’t see a dilemma, yet the lending institution might decline me because of that same reason. With uncertainties, the developer should place a high premium on the discount rate. FIRE‐ Financial Insurance for Real Estate can be purchased if I only put down 5% equity for a loan. Title insurance would work similarly for rehab properties and can even take out the need for an attorney in some cases.


In conclusion, clearly you can see that with proper due diligence and risk mitigation, the project holds more merit for being successful.

With less risk there is less reward, yet the amount of risk investors may want to take vary extensively on their economic status and personal preference. Because this is my first project, my condition is the least amount of risk with a marginally acceptable reward. As I will demonstrate in the body of this paper, a balance can be strategically calculated with formulas, probability, and logical reasoning.

Market Overview


A 2.3 million raise from 37.3 million in 2005 sets the record for number of households with housing cost burdens in excess of 30 percent of income.

20% of the population needs housing, 8% needs affordable housing, and 28% need low‐income. (Joint Center for Housing Studies of Harvard University) State and local governments make it difficult to build affordable housing by limiting the land available for it, imposing impact fees, and subdivision requirements all which raise production costs. Restrictive land use regulations and little increase in income for the people in the lower tier have made it complicated to heal affordability problems. Housing affordability is the nation’s largest housing challenge. (the US Census Bureau) Unless local governments ease regulatory constraints, developers can do little to supply additional affordable units.

The nation’s housing stock is divided up by 65% owners 35% renters. (Stockard) Despite record‐breaking national trends on mortgage foreclosures, the apartment market remains strong. These people who default on mortgages will ultimately need alternate means of housing, which the most fitting for their situation is rental. With rents steadily increasing, the net operating income of apartment properties finally rebounded. Primarily, the new multifamily rentals met replacement demand. Apartments are currently the 2nd best market while condos are the least successful of all sectors. (ULI and PCW)

For the for‐sale market to have a good recovery, the home starts would need to reduce to 1.55 million and manufactured home placement down to 100,000 annually. Current distressed for‐sale properties may be made to rental to become successful. Lenders like to match the maturities of their assets (loans) with their liabilities (deposits): commercial banks for construction loans and life insurance for long‐term loans. In general, the life companies are doing well in relation to other types of lending such as commercial banks. (Miles) Yet in Miami they are having a hard time supplying loans, and are offering 70% LTV.

As you can note above, pension funds maintain the potential to be a huge strength behind the real estate debt and equity markets. (Miles) Entertainment retail is a big trend worldwide and especially in Florida. From Disney World to high grossing dance clubs, the amusement business is doing well and should be further studied to incorporate similar attributes of smaller scale into my project.


The term bubble is used to describe when home buyers and speculators/investors take advantage of fast appreciation. So much so, that the rates are too high to work and the bubble bursts. A straightforward calculation of how that happens is the following: too easy to get a mortgage = appreciation = low interest =bubble pop.

Because of Florida’s oversupplied housing reinforced with its low employment growths it will take a long time to recover. With 30,190 foreclosures last year, the state lands in third for most foreclosures in the nation. (the US Census Bureau) Many are acting on this trend and are beginning to convert condos to apartments in mass numbers. The ability to adapt and take advantage of short‐term downturns and to be able to hold property long‐term has been said to be the key to success in real estate. (R. Peiser) Condo developers have had to stop mid‐way on construction because their funding seized due to lenders wariness of the over‐saturated market. In Miami, 40,000 new condominium units will go online by next year. If we divide that by the ability to absorb, the result shows six years of oversupply.

Converting a project to other uses would cost a lot of time and thus money for these developer who were already consumed by their existing project. As a result, fresh other investors are taking over the project to condo conversions, consequently others now fear the over saturation of the apartment market. The quality of condos are substantially better than those of typical apartments because they are meant to sell the appeal of the unit using such things as granite counter tops, instead of low cost materials for renters who are trying to save. In some cases, higher income renters that could buy homes prefer to rent because of lifestyles that have easy access to work and the amenities of cities. The combination of these two factors will result in large quantities of Class A apartments to be released into the Miami market in the months to come.

This significance of the oversupplied markets has allowed me to seize further research on the condominium sector as well as high class apartments. Even though, there is always demand for for‐sale affordable housing, the onslaught of foreclosure properties and the depreciation of homes will decrease enough to house some of those financially restrained.

The current slow trend for the condo market might pick up if interest rates decline and job growth picks up. The economy/GDP is directly related to unemployment rates. In laymen’s terms, if everyone has jobs, then the GDP is good.

In the state, the site costs have gone way up and soft cost keep increasing because the complexity of new and changing laws and codes. Yet the labor cost has not climbed in comparison, most likely due to the fast growth of immigration. Florida along with Arizona, and Georgia, are the fastest growing states in the country due to migration of foreign born. In Miami immigrants contributed to 40% of household formations between 2000 and 2005.

In Florida, 20% of recent homebuyers and 25% of renters are foreign born. Two out of three renters in Miami are minorities. During 1994 to 2004, the number of minority renters rose by 3 million households, offsetting a comparable decline in the number of Caucasian renters. The number of legal immigrants has reached almost 1 million annually. (the US Census Bureau) Additional demand for rental units and starter homes will come from the echo boomers as they move into the peak household formation years. (Miles) The following graphs are provided by Harvard University’s Joint Center for Housing Studies ‐The State of the Nation Housing report. They clearly depict the influence of minorities in the housing markets.

Days On Market –DOM‐ is a good indication of how a market’s doing. Single‐family homes went from 72 to 110 DOM while in the same time period condominiums went from 72 to 127. according to the Realtor Association of Greater Fort Myers and The Beach, the value per rental unit in Jacksonville was $125,436, cap rates for class A were 4.25 to 5.25, class B was 5‐6%, and class C 6‐7%. In Miami cap rates are show in the graph below.

Additionally, in Miami, East Kendall has the least amount of vacancy and Hialeah has the highest absorption. ((RealQuest))

Construction demand will be weighted toward luxury homes, major remodeling projects, senior housing, and secondary homes (CB Richard Ellis) thus mainly fulfilling the ‘dream’, not the need for housing. Major cities like Miami are introducing housing price contracts to sell to homeowners in order for their home value not to decrease. The way the contract works is that they are for a fixed amount and guarantee a price per contract, for example you can buy 200 contracts for $250 each guaranteeing a value of $50,000 on your home.


An area of more than 5,000 square miles, and a population surpassing 5.5 million full‐time residents, makes South Florida one of the largest consumer markets in the US. It is the seventh largest metropolitan area in the US with an average household income of over $72,000.

Many international companies enter the United States by establishing their first operations in South Florida. The cost of operating a business there is highly competitive compared to other major metropolitan areas. There is a low tax structure with no state or local income tax, and corporate income tax at 5.5%. Property taxes are currently among the lowest of major US metropolitan areas.

The notion of “hybrid” buildings is being introduced in the city, in which I found to be an intriguing concept. The idea of a big box store being wrapped in residential or smaller commercial establishments has great potential there. This is useful in places like Miami who have a strict “MiMo” (Miami Modern) design on all buildings and the sight of a Wal‐Mart or Costco would take away from that uniqueness.

With the median population being made up of young professional and retired elderly, the municipality is not concerned about families that have children which require schools and other expensive legal requirements with no economic gain in return. Units over two bedrooms in size, usually means kids, which communities like Miami might be trying to avoid. Yet, providing more rooms in apartments would allow for the target consumer young professionals to share them with roommates to reduce cost burdens or just create a leisurely office space. Location is defined by where the jobs, schools, transportation, and health service are. This is why property values are more expensive in the center core and as a result renters are more likely to live near the downtown than homeowners are. (Joint Center for Housing Studies)

Buying bulk land then selling parcels of it with new zoning is currently a popular trend in the county. Many are finding small scale building and rezoning profitable from small deteriorated homes with large lots. Then they build out the plot to the maximum units allowable to resale it. The city inspector told me to apply for rezoning I only need to meet one of the following criteria, 40,000 square foot minimum lot size, 200 feet of frontage area, or if the property is adjacent to sites with other zoning. If I don’t satisfy the conditions above, I can ask the neighbors to fill out a joint applicant to meet at least one of those requirements.

With the ongoing large scale condo conversions, I see the local economy being oversupplied with Class A apartments in the near future. This will leave the market demand open for less expensive apartments. The only imperfection to this may be that developers are building with such high density that repositioning lower class apartments may be made financially rewarding by compressed yield over time. I have learned that any class condo conversion that becomes available is highly sought after. CBRE states that you can get Class A and Class B at 10‐15% below the replacement cost. The latest market data from CBRE also claims, that new deliveries will come online in 2008 and 2009 with 25% differential in affective rental rates.

Currently there is an oversupply of distressed properties in the city ‐those for auction and rehab. These building foreclosures are occurring as borrowers are more commonly unable to make the mortgage payments, or when the market value is less than the remaining loan balance –which in the field they call it underwater or upside‐down properties. Construction lenders have tightened up on their loans due to this economical downturn and are mostly giving variable rates which are unfavorable in an unstable market like Miami. If rates are expected to go up, it is beneficial to have a slow moving index like the Treasury bill, yet they are commonly based on the easily fluctuating LIBOR.


Every project needs a story to help it get funding, and what better story than helping the unfortunate. To have a strategic approach, when I apply, I will explain what my competitive edge is, and how I am going to beat out the others. The demand for affordability is always there as the following image depicts, the problem is the complexities involved with the implementation.

Other subsidies that may be available when applying are described below. From the IRS Treasury there is income tax assistance, reduced real estate taxes, mortgage interest alleviation, and of course the largest subsidy of all, the Low Income Housing Tax Credit. The US department of Housing and Urban Development, more commonly referred to as HUD, provide resident based Section 8. The money is collected by public housing authorities and then distributed to applicants by lottery. The approved applicants only have to pay 30% of their income and the Section 8 subsidy pays the remainder of the rent. They don’t have to tell the landlord they are Section 8 until they sign the lease. It is illegal to refuse a Section 8 renter. Insurance will cover the damages that they will most likely make due to letting other families move in to save even more money. They can only have the eligibility paper 90 days before they have to return the eligibility to HUD. It’s available to about 25% of eligible applicants. Not available to full time students, but maybe part time. If income is less than 80% AMI, they can negotiate with the land lord to raise the rent and HUD pays the difference because they don’t pay more than 30% their income. Many people may keep from working more so they stay eligible, but no one can ever know if this is true because they are not going to say; yes I have been staying home some days because I don’t want to make more. The City of Miami Department of Community Development states that, “Once Section 8 families find a good place to live, they tend to stay, which translates to less turnover. As a result, landlords have fewer operating costs and are able to make more of a profit.” The tenant’s certificate will cover 80% of the fair market rent. I may want to tell my lender that I will have a guaranteed source of income from the units that are low income because for every certificate, HUD has 5 applicants. (Marchant)

Site‐based Section 8 is also provided by HUD. 15% of HUD’s Section 8 stock needs to be given to landlords for site base use. It is said that some HUD branches give more than allowed to developers because giving them out arbitrarily to people is not as effective. That HUD branch can later send a letter to their head quarters claiming they lost or misplaced the additional certificates. (Stockard)

They give more eligibility for developers who can guarantee 30 years affordability instead of the state’s minimum of 15 year. FHA or VA insurance is also available that subsidies interest rates.

With Section 8, the property has to meet the below declared rent limits to be considered for eligibility by the housing authority. Typically, 140% of the Fair Market Rent (FMR) is the cutoff for qualified properties.

The Mayor of the Miami‐Dade County, Carlos Alvarez, as well as the mayor of the City of Miami, Manuel Diaz were both born in Havana, Cuba. Mayor Diaz was recently reelected in 2006. While in office he has put housing as a high priority and fixed the housing department trouble that was being closely watched by HUD. In 2001 only 100 affordable units were developed with $14 million that the city was allocated unaccounted for. Their awful loan portfolio dated back several decades with unpaid loans, and un‐built homes that were promised. Due to improved underwriting standards, there is not one post‐2001 loan in default. According to a statement given by the mayor earlier this year, they will encourage joint ventures between for‐profit developers and non‐profit agencies, taking politicians out of the contract award process. They will also put a professional loan committee in place and bring in major private affordable housing developers, as well as, work closely with HUD to ensure program compliance.

The housing authority is appointed by the mayor, but it is funded and regulated by the federal government, so the federal government will have the ultimate say in what they do. When applying to government subsidies, one should be aware that senators have a longer term objective than congressmen do.

Last year, the mayor’s efforts resulted in the best allocation year on record with 10 projects, that represented 1,104 new units and over $277 million in additional affordable housing projects. The city has a goal to develop $1 billion in affordable housing by 2010, and since the beginning of the decade they have spent $557 million to show their commitment. The Economic Development Department created a Community Development Entity (CDE) for purposes of applying and allocating New Markets Tax Credits. The New Markets Tax Credit (NMTCs) program is recognized for steering low interest, private capital into distressed communities to acquire capital for commercial and residential projects that are hard to fund. Similarly, the HRV Hampton Roads Venture is a community development investment firm that has partnered with the City of Miami to help attract private sector investment capital to apply, specifically towards innovative real estate projects in lower income neighborhoods. They are expected to apply for a $75 million allocation exclusively for Miami.

Massachusetts has a very effective affordable housing vehicle called Chapter 40B. It is a state statute that enables local zoning boards to approve affordable housing developments under flexible rules. 40B is triggered by having a community with less than 10% of its housing stock affordable. As of now, the City of Miami requires a minimum of 15% of units to be affordable within a 10 mile radius. Unfortunately, Miami does not have a 40B requirement which ultimately speed up and facilitates the implementation. In 2000, Miami assigned an exclusive “in‐house permit expediter” for affordable housing. However the biggest subsidy with 40B is the density bonus, because you can reduce the development cost per unit, which the in‐house permit expediter does not provide. If there was something similar, a developer could seek a property with low density zoning to capitalize that benefit. Without the 40B as well as no ‘one‐stop application’ the permit expediter may not be sufficient. Miami has a Universal Application Cycle for many of their subsidies. For the other subsidies I will have to identify the exact deadlines of each and assign someone the rigorous task of applying.

Mayor Diaz efforts have also allowed the city to agree to transfer infill lots for just one dollar to affordable housing developers, but only on an RFP process. In‐fill housing virtually eliminated the city’s inventory of available vacant lots by designating them for affordable housing. Because of all the new construction they have compiled a map to keep track of the number of units and other data. The map on the following page is the City of Miami’s Developments of Regional Impacts (DRI) which identifies all new developments to make sure the city’s municipalities are working collaboratively. Mayor Diaz said in a news paper interview, “We are committed to continue reforming a once broken system and staying focused on our goal of a $1 billion of affordable housing by 2010.”

When crunching the numbers, affordable housing is all about filling the gap. Sources and uses are to equal each other, to break‐even. To visualize the idea for me, taxi drivers work for the concept of breaking even. They call it the nut when they make the amount of money they owe for lending their vehicle.


The Miami‐Dade County has allocated regions within their political map as distressed areas. These areas have been designated as Enterprise or Empowerment Zones. An Empowerment Zone is a federal designation to create economic opportunities. Businesses locating there will obtain many governmental benefits such as sales and corporate tax credits and tax exempt bond financing. It is considered, without a doubt, the most powerful engine for the economic revitalization of inner city areas.

Doing business in Enterprise Zones will qualify for tax exemptions among many other things. There are several sectors where the two intersect one another. This is beneficial for me as the developer as well as a lucrative investment for the ground floor retail.


The Fitch and Moddy Report said that the typical loans in Florida will cover 80% of value, have high interest, 10 year terms, may be interest only, and a 1.00 debt service coverage factor. Affordability products such as interest only loans and payment options mortgages have gone from nothing to being large shares of the market. (Joint Center for Housing Studies)

Leverage risk will decrease in 2008 since this is a highly liquid and stable debt market. Lower interest rates and the weak dollar will prop up the economy.

It’s a high priority for the new governor to have some insurance alleviation signed in 2008. A possible $32 billion reinsurance will improve availability, direct competition with other companies, and will expand Citizens policy offerings. (CB Richard Ellis) Resources suggest that Citizens will insure anyone. Private capital entities have to pay $2000 insurance per unit while institutional buyers are paying $600‐1000.

The below graphic demonstrates that Miami still has good economic potential in comparison to other metropolitans.


Lenders are becoming more cautious, banks are giving more scrutiny to deals, land costs have become very expensive, and the Miami 21 are all effects that I should be concerned about. The Miami 21 is the rewriting of the city’s zoning code to better regulate development. This may, or may not be beneficial and only time will tell.

Any good plot of land will base the value on its highest and best use. If the residual land value based on retail is greater than say office, the owner will sell for that maximum price. Because of this, land prices are high and keep rising. CBRE states, “Stubbornly high development land prices, construction costs, and impact fees will most likely limit new apartment unit development for the foreseeable future.”

An additional concern is the average 12‐18 months it takes to approve documents and break ground. From my research I understand that several months may be shaved off by partnering with local companies and firms that are familiar with the process and have close political ties.

Finally, people have said that holding the asset for a long period of time as I planed is a bad idea. Cash in pocket now is better in order to reinvest. Another reason is because more competitive properties may be developed, thereby increasing the supply thus increasing vacancy. Eventually the place will become older and its function and style may become obsolete, but that’s the least of my worries at this time. With all these possible predictions, I am still determined to hold on to the asset as long as possible because the value and rents will keep appreciating while the taxes and finance will steadily decrease.


Architects and contractors need specific licenses to practice in the state of Florida. It has been found to be complicated since the state has many retirees incoming; they have to save the local businesses from an influx of life insurance establishments, civil attorneys, pharmaceutical outlets, and other like‐companies chasing them. Office and industrial space require white and blue collar employment, retail depends on income generating communities, and residential depends more on household formation. (Peiser and Frej)

Multi‐family housing in the city is good for the economy because the municipality does not have to spread out their infrastructure and services to distant vacant land which we see occurring in massive numbers for single family housing in Florida.

Four out of five apartment tenants come from the local area in Miami. (Joint Center for Housing Studies) This demonstrates the target consumer would be local residents looking to move to higher quality or less expensive units.

Analysis of demand


Downtown areas have the greatest demand for housing, but of course, the land value will be associated with the location. By introducing retail at $35 per square foot, it may absorb the extra costs that will be required for the land. The retail rent can also be based on that merchants monthly income of sales, such that NOI x 5% = rent, then just choose whichever is a greater sum. Studies show that the demand will always stay strong with waterfront properties, thus the two sites that I am researching for possible development are both located on the water’s edge. Demand may strengthen even more if interest rates decline or job growth picks up.

The greater the public transportation investment by the government, the longer lasting it will be, and the longer a building located near it will retain its value.

The following images depict the vacancies for different types of units.

Statistics show that 95% of people who apply for apartments previously resided within one mile of that location, and even more so for low‐income. (Joint Center for Housing Studies) This is possibly due to those people having close familiarity with the neighborhood.

Also, as mentioned earlier, the demand for affordable housing is always there. With the new construction of thousands of market rate units, the city needs to make it feasible for developers to provide 10% affordable. If the affordable housing threshold is met, and new construction seizes, that would be the day that there is no demand. In other words, with a fast growing population, Florida will continue to build, and the oversupplied market will eventually be absorbed to generate demand again.


The two most important factors are the absorption and the influence of future cash flows; these will be continuously examined throughout my project. Absorption equals the net change of occupied space, or the total space available less vacated less space coming online. People say it is typically the most poorly calculated and hard to get accurate.

Analysis of Supply


In the late 1980's Miami was overbuilding multi‐family apartments, now it is infamously the condominiums. This is why I have diverted my study away from the condominium sector early on in my project. My market research showed that the apartment supply should stay in‐par with the demand for the near future.

Statistics show that smaller buildings are in higher demand than large scale apartment complexes, (Joint Center for Housing Studies) which is beneficial for me since my project is considered undersized.


They are in the process of rezoning the entire city under the Miami 21 master plan, which, as explained earlier, may or may not be beneficial for my project. As of today they are still in the east quadrant of the city. They are using agglomeration, which is the concentration of commercial activity to have a synergetic effect by increasing diversity, specialization, and overall business activity. New Urbanist applauded the idea to keep a diversified zoning plan instead of separating all the different zonings far apart. (Marksjarvis)

Building Codes regulate the construction of the building with such rules as two means of egress or 14/2 electrical cord for outlets. In some places the regulations might be based off of the code established 100 years ago when the city made the policy influenced by what the local manufacturers were able to produce. (Stockard) Presently they are trying to implement state‐wide building codes to avoid these irregularities, but in Florida it has proven a challenge. Having well defined rules is beneficial for developers in order to eliminate uncertainties. 95% of the building codes could be nationally set, but unique geographies, especially in South Florida, require specific regulations for hurricanes and other natural hazards.

Analysis of Capture Rate (Marketability Study)

Scientific studies have shown that what stimulate occupancy in buildings are seaports, minerals, low‐cost energy, and beaches. Additional studies have also shown that a highly trained and educated workforce, universities, transportation hubs, high tech research and development, oil and gas exploration, communication and computer assembly, medical technology/clinics, and entertainment all foster to the tenant market. (Brueggeman, Fisher and Irwin) Luckily, Miami and Florida as a whole often rank highly in the nation for the above stated categories.


From my research, I found that there are typically no concessions provided, however I will try to include one free month’s rent or possibly included appliances or furniture if possible to induce prospective tenants to sign a lease.

The big developers out there are my competition because their experienced and advanced delivery systems will consume the demand. By avoiding where they build will give my specific project a competitive advantage. The next maps show the amount of rehabs and new units coming online which for me translates to more competition.


Location quotients can be used to calculate the economic base of a specific geographical area. The variables from the results demonstrate incomes and how much consumers can afford. This study will be conducted when I have concluded which of the two following sites I will work with, and define the best use for that particular site. Nevertheless, the following charts and graphs show that immigrants are a likely candidate for tenants, and Hispanics dominate the demand.

Project Contexts

My preliminary due diligence was done by using real and current for sale lots. Yet they are just for establishing the numbers and considered ‘hypothetical’ because the chances of the sites still being there when the project is complete is minimal. Because of this the sites I located were either surrounded by other vacant plots where if they were taken by the time I needed it, I would have other options. They are both waterfront acre plots of land. One located on the Miami River just north of little Havana, and the other is a site on the Intercontinental Waterway on an artificial island. The first site is vacant and has recently been rezoned for affordable housing. The second property is an existing 12 unit condominium with more than half of the unit’s bank owned. As I concluded earlier, condos are not a viable market and the possibility can be omitted from my study. I will focus my attention on the rental market for new construction vs. existing property at the following sites.



The subject property, Rollins Land, is currently 2.11 acres of vacant waterfront land. It has over 385 feet of frontage on the Miami River and has recently been HUD approved for an affordable housing site. There are certain environmental challenges, which include remediation and continued monitoring, but this is a developable site, with great visibility. It has recently been taken off the market but they are still accepting offers. Additionally, it was said that the owner might have listed the property just to get a free appraisal based on what offers they received.


1950 NW 27 Avenue is located on the Miami River adjacent to the bridge at the North West intersection of 20th street and the 27th Avenue. It is close to Miami downtown, little Havana, and the Airport. Being between SR 112 and 836, major commuter routes, the site has great relation to the city center, transportation, circulation, accessibility, exposure. It also has easy access to all major highways in one of the most densely populated areas of Miami.

STATUS \ PRICE \ SELLER‐ The owner is Rollins Inc. “The leader in pest control” or better known as Orkin. The seller is Harper Realty, Inc. I have been communicating with Rick Harper via phone and email at (813) 243‐1223 and They are asking $3,000,000 for the 2.11 acres, such that it is $1,421,801 per acre. I was considering offering $1,000,000 for just half an acre.


The Zoning is considered Liberal Commercial. The city has indicated affordable housing, mixed use retail/multi‐family and or office/retail would be preferred uses for this site. Many variances such as height, density, etc. were applied for and put in place by a prior contract holder. The water on the site could also be used for a boatyard or marina development. There are permits in place for 25 boat slips. The below land‐use map shows that the site is immediately surrounded by industrial, a trailer park across the river, and single family housing across the retail‐busy 27th avenue.


Site control for me is a financial concern. Also the zoning could get complicated with setbacks from road and other detailed requirements that are unknown at this point. Preliminary designs showed that 12 units per acre is a low density for this building type. Thus attempting to acquire only half of an acre for more than its value per acre is a negotiation that might run into some trouble because the developer might not want to break up the parcel.


My calculations showed that the apartment rent is insufficient to cover the cost of financing the mortgage so I had to introduce ground floor retail to balance the costs.

Retail is a superior market in Miami and generally a very profitable sector in Real Estate. (CB Richard Ellis) Yet, I should not build any retail unless I have a preliminary contract with a tenant, this way I can build it to some specified requirements.

I would be interested in a specialty retailer like Whole Foods, but since they are a fast growing company, it is hard to allocate them as tenants. As I understand, they are in high demand and would only approve very low discounted rents, high income environment, or areas with fast growing economical potential. These types of ‘anchor’ tenants only rent instead of own because of their ability to find extremely low rents. (ULI and PCW)

Below grade parking costs $38,000 per spot, and less than half that when above grade. Yet with affordable housing, the city allows the reduction of parking requirements. Apartments typically have only one car but anymore that I can provide over the minimum will be beneficial. (Joint Center for Housing Studies of Harvard University)

I will attempt to provide only as many that will fit along the west side of the building and rent them out for an additional fee to tenants.

  • The following will be my developed baseline data, projected trend conjecture, and assumed sources of discontinuity. Set up formulas have been designed for the benefit of the doubt.

Another method to save on my operations cost would be triplenet leasing. This would lose some prospective tenants, but it will reduce operating costs substantially long‐term. Furthermore, to guarantee the NOI from declining I will use an expense stop. This is a predetermined amount that the developer will not pay in excess of from operations, the tenant will take on the additional expenses.



The window of affordability is 70% of 80% of the AMI, and then the tenant can pay 30% of that per month. (US Department of Housing and Urban Development )

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