All eyes in downtown Miami are focused on the partially-sold condo development Everglades on the Bay on Biscayne Boulevard. In late August, the project’s developer, Cabi Downtown Developers, filed for Chapter 11 bankruptcy protection—the first major downtown Miami condo developer to file for bankruptcy in this recession. Now, real estate players are waiting to see how they can possibly get a piece of Everglades on the Bay.

“Everyone is watching this project with significant interest,” says Peter Zalewski, a principal at Condo Vultures, a Bal Harbour, Fla.-based consultancy focused on the South Florida real estate market. “We are doing everything we can to dig our heels in and get involved. We see this as a significant opportunity for someone to make some dramatic cash in the mid-term future.”

Everglades on the Bay
Everglades on the Bay

As of early September, the developer had sold only 89 of Everglade’s 849 units. Cabi, the U.S. subsidiary of GICSA, one of the largest developers in Mexico, filed for bankruptcy because it was unable to sell the majority of units due to minimal release price covenants in its Bank of America $256 million construction loan, says Andrew Glenn, a partner at New York-based Kasowitz, Benson, Torres & Friedman, which represents Cabi. The bankruptcy filing states that Cabi has more than 200 creditors and between $100 million and $500 million in liabilities. On September 15, Bank of America filed a motion to dismiss the bankruptcy petition, alleging that Cabi has not identified funding to properly maintain and market the building. As a single-asset company, Cabi has a limited period to show how it will fund and reorganize its business. Cabi has filed a case management summary that shows it expects to fund the building and pay off the $266 million secured debt, using some cash from the debtor’s owners, the Cababie family of Mexico, and income from rentals and sales in the building, according to the South Florida Business Journal.  U.S. Bankruptcy Judge Laurel Isicoff set a hearing on the motion to dismiss for Oct. 7.

Assuming Cabi is able to restructure its debt, expect good things to follow. “I think it will have a positive on the condo market,” Glenn says. I think the bankruptcy will allow us to actually sell units and have further occupancy of the building. Also, I think part of the problem is there is a lot of fear in the market caused by uncertainty. Having the future of the building clarified will remove some of that uncertainly and perhaps other developers will be able to take advantage of this process.”

Zalewski says he has already been approached by some of the biggest names in the U.S. investment world. “Now that the bankruptcy court is involved and there is some transparency, everyone is trying to box others out and position themselves so if and when the write-down occurs, they are in a position where they can gobble this stuff up at dramatic discounts.”  But not everyone will fit the buyer profile. “This project is unique in that the number of units is too big for private equity to take down entirely, and too many units have closed to make it attractive to a hedge fund,” Zalewski adds. “It will make sense for somebody but that somebody is really going to have to sharpen their pencil and figure out a strategy as to how they can go in and sell two years of inventory.”

It will likely be until early 2010 before the dust has settled and buyers will have the opportunity to swoop in. In the meantime, expectations are that other developers will follow Cabi’s strategy of filing for Chapter 11 bankruptcy.

“I would assume that more and more developers will choose the bankruptcy route by putting the individual assets or single-purpose entities into bankruptcy as a way to try to gain some leverage over their lenders—mostly in cases where they have significant personal guarantees at stake,” says Jay Jacobson, a partner at Atlanta-based Wood Partners, a multifamily builder with numerous project throughout Florida. “They may not accomplish anything more than simply utilizing the process to gain time to negotiate a better exit strategy for themselves.”