In the mid-2000s, there may have been no better symbol of the condo boom than Jorge M. Pérez, founder, chairman, and CEO of Miami-based The Related Group. His opulent South Beach developments married art with design and location to create fashionable condo living. But, as it turned, many of the people who bought those units never planned to live there. When the music stopped playing, condo flippers abandoned Perez’s buildings.
But after spending a couple of years negotiating with his lenders, Perez says he’s “almost done” working through his condo inventory from the boom years. The units in his Icon I project on South Beach are almost gone, while he’s selling about 50 a month in his Icon II development (with 400 remaining). At his Viceroy tower, he has “a handful” of units left, while his two Brickell projects, 500 and The Plaza, have about a dozen units left. In downtown Miami, he has about a dozen units left at his 50 Biscayne project and he thinks his Sunny Isles project will be absorbed by next year this time.
It may sound like a lot of units to work through, but things are a lot better than they looked two years ago. In fact, Perez is once again talking about new development. In the first of a two-part interview, Perez took some time to talk with Multifamily Executive senior editor Les Shaver about how he survived the recession when many were wondering if he had a chance.
MFE: What have you taken out of this last cycle?
PEREZ: Look, you can take positives and you can take negatives. Of course, the negatives are that you have to make sure that you have speculation under control. We will be much harder with the amount of deposits that we take and the scrutiny of the people that we are selling to. I think that’s the main lesson. The other [lesson] is to not overleverage your deals. Even if the banks were to forget their lessons, you can’t be doing deals that are 95 percent or 100 percent leveraged. If anything goes wrong, you’re in trouble. Leverage worked really well in increasing returns, but it was also a double-edged sword. It came to show its ugly face when prices went down and the loan amounts that people owed were below the values.
I think banks are being conservative now. That’s good. The developers need to be very conservative to make sure that the products they build are sustainable even if there is a reduction in values the future. The other lesson is that you shouldn’t be so scared that you’re paralyzed. You learn your lessons, but you need to be able to react. Markets are like a pendulum. Things are good, suddenly it goes way down, and no one wants to do anything. But when the euphoria starts to come back, everyone gets really euphoric. I just hope the smart developers and smart lenders find a middle ground that is sustainable.
MFE: What do you think your best decisions were to keep the company going over the last couple of years?
PEREZ: We were honest, transparent, and not pigs. We were telling the people early that were in trouble, we couldn’t sustain [the pace and pricing of condo sales], and we couldn’t sell for resale prices. The company had only so much cash and debt. We needed to work together with the banks to find a solution and survive. We would pay them [each] as we as could so the pain was widespread and it didn’t take anybody down.
We had advice from people to declare bankruptcy. I didn’t want to do that, everybody knew that I didn’t want to do that, and it cost me a lot of money. We took a position that it was best to negotiate in an honest and transparent manner. We paid for outside accountant that hired by the banks and went each detail [on each project] so it was very clear that what we were saying was the truth. We did that early. We didn’t want to be pigs about it. We worked very hard at doing the right things as fast as possible.
MFE: Do you feel like you maintained a lot of banking relationships?
PEREZ: If you look at the phone calls we’re getting now, we are. Whenever you negotiate something where no one really comes out ahead, there are catches there. But we negotiated in an honest way. We never made money on any of these deals. We took the high road. I think when you’re talking to some of them now, they’ll say that it [the negotiations] was done in the best way possible and everybody accomplished their goals.
Of the seven projects that were distressed, I think the lenders we only end up losing money on two. We will end up losing money on all seven. We feel very good about the way everything was handled.
MFE: When we visited you in 2005, limiting investors was a focus for you. You said you cross checked names on a database to limit buyers. What went wrong?
PEREZ: We tried to do the best we could in limiting speculation. Investors and speculators are a little different. The investor will close on a condo, keep it for a year, and will either live in it or sell. The speculator will put 20 percent down or 10 percent down and will flip it as soon as they can. Those are the ones that cause the most problems. We misread how many they were.
When I put in a directive that we will sell no more than one unit unless a manager approves it and no more than two unless I approve it, buyers were changing the names they used, managers were making mistakes, and salespeople helped [the buyers game the system]. It was a mess, but we were selling 3,000 units and it was hard to maintain the accountability.
MFE: How are you planning to limit speculators?
PEREZ: In the future, we’re going to be very careful in analyzing each individual. We will have a more critical review period in which every buyer is scrutinized so that we are sure they have the right down payment and they’re capable of closing. We are going to try to have the buyers put up a significant amount of money. We won’t have buyers scrounging for money to come up with enough to close. We will be much critical because of the lessons from the last downfall.
MFE: We will ever see a time like the mid-2000s again?
PEREZ: I don’t think you’re going to see the type of speculation again. But whenever we have a boom cycle again, people forget what they learned the last time and repeat the same mistakes. Particularly in the real estate industry, you see new players come into the market [who didn’t live through past mistakes]. The ones that should have learned their lesson aren’t in business anymore. Thank god, we’re one of the surviving companies. We have the lessons [of the last downturn] ingrained in our brains in a very clear way.
EDITOR'S NOTE:Check back in next week to hear Jorge Perez discuss what he's working on now, what developments and acquisitions he has in the pipeline, and his role with the Miami Dolphins, charitable activities, and foreign housing ventures.