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Miami Beach real estate in a New York state of mindBig money from the Big Apple is fueling Miami Beach's latest transformative wave of development.
2012-12-01 12:00:00 AM
In the years following World War II, visionary New Yorkers helped put Miami Beach on the map with the construction of the now-iconic Fontainebleau and Eden Roc hotels.
In the "Miami Vice" era of the 1980s, New York developers including the late Tony Goldman, Craig Robins, Mel Schlesser and Bob Christoff helped lead a revival of the city's South Beach district.
Now, in the wake of the Great Recession, New York developers and investors are again descending on the district, spending millions to upgrade historic hotels and acquire redevelopment sites.
The out-of-towners are promising to transform the vibrant city into an even more luxurious destination.
The Nakash family, whose Jordache Jeans were popular in the 1980s, is one. The family's Nakash Holdings owns five hotels in Miami Beach, including the Thompson Hotel Victor at 1144 Ocean Drive.
Nakash, which has acquired $2 billion worth of real estate in various markets in the past few years, is seeking city approval for a multimillion renovation of the hotel it bought for $27.5 million in July 2011. The company brought in Thompson Hotels to take the property to a higher level, said Jonathan Bennett, who leads Nakash's real estate division.
"[Thompson] is known for running ultra-chic, happening hotels with great restaurants and great scenes, night clubs and public spaces," he said. "They really know how to program their hotels."
Bennett, whose company is to close soon on a retail building in South Beach, said the Nakash family has made a significant investment in the city, especially in the last two years.
"Our investment in Miami Beach is well in the nine figures," he added.
The roster of other New York developers with big plans for Miami Beach includes the Chetrit Group, The Witkoff Group and the LeFrak Organization.
The New York money behind some of the planned projects is coming from deep-pocket investors like Elliott Management, one of the nation's largest hedge funds, and Russian-American billionaire Len Blavatnik.
LeFrak, in a partnership with Greenwich, Connecticut-based Starwood Capital Group and Atlanta-based Invesco, is spending more than $100 million to restore and reposition the former Gansevoort hotel and condominium. When it reopens, the 334-room hotel with 255 condos would be renamed The Perry South Beach.
Certainly, not all new development in the city can be credited to New Yorkers. Some local companies like Crescent Heights and Denver-based KSL Capital Partners are also involved in multimillion renovations of historic hotels. Crescent Heights just completed a $35 million restoration of the Gale South Beach & Regent Hotel at 1690 Collins Ave. KSL last month opened the former 393-room Royal Palm at 1545 Collins Ave. following a $40 million renovation and re-branding of the hotel, now called the James Royal Palm.
But when it comes to the volume of projects in Miami Beach, New Yorkers are the front-runners.
"There is a historic New York-Miami connection," land-use attorney Neisen Kasdin said. "Miami Beach is the sixth borough."
Rory Greenberg, South Florida director of The Witkoff Group, agrees. His boss, Steven Witkoff, owns a vacation home in Miami Beach and sent his son to University of Miami, he said.
Greenberg, also a New Yorker who also graduated from UM, said his and Witkoff's exposure to the city helped them realize the profit potential of Miami Beach real estate.
"It kind of reminds us of New York City in the early '90s," Greenberg said. "We found a tremendous amount of opportunity in a market like this with all the foreign influences and everything going on."
Hotel broker Gregory Rumpel said the renewed interest of New York developers and real estate equity funds is fueled in part by Miami Beach's healthy hospitality industry and its appeal to a diverse group of visitors.
And while Miami Beach's escalating property values may discourage investors from other U.S. cities, New Yorkers are comfortable making aggressive offers for properties.
"What the New York real estate folks understand about Miami Beach is that it's still incredibly inexpensive relative to other world-class cities," Rumpel said. "They have a great perspective on value relative to other destinations with huge barriers to entry."
As in Manhattan, Miami Beach has limited building inventory, scarce land for development and strict historic preservation, which discourages competition.
New York attorney Robert Ivanhoe, who represents many New York investors, said they see Miami Beach as an alternative to Manhattan, where few properties are for sale and the few on the market are "highly priced."
He said his clients including the Chetrit Group, the Witkoff Group and Elliott Management think Miami Beach properties have significant potential for appreciation.
Some hedge funds and real estate opportunity funds promise investors returns of 15 percent to 20 percent, an ambitious goal that's put out of reach by New York prices, said Ivanhoe, a co-chair of Greenberg Traurig's global real estate practice.
"So, they can convince themselves that if they buy things right in [the city] and hold them for a few years and professionally run the assets, that there is much more upside in Miami Beach," he said.
The Witkoff Group, which specializes in acquiring distressed properties, is finding plenty of worthy deals in Miami Beach. The group has a contract to buy the Wyndham Garden hotel at Washington Avenue and Tenth Street, according to Greenberg. He declined to disclose the price.
Kasdin, a shareholder with the Akerman Senterfitt law firm in Miami, represents the group in the city approval process to redevelop the site.
The hotel complex has five buildings ranging from one to four stories. The Witkoff Group wants to rehab them, add another floor to the structures and build a four-story hotel.
The improvements would increase the number of hotel rooms to 181, from the current 130, Kasdin said.
"We like properties that need real work and some level of sophistication to add value to it," Greenberg said.
The Witkoff Group owns the Allison Hotel at 6261 Collins Ave. The 151-room hotel was converted to condos at the outset of the housing boom but ended up in foreclosure during the recession. Miami-Dade County property records show Witkoff and its partners paid $11.26 million for the hotel in April 2011.
The group is renovating the hotel, which will carry the Hilton flag. The work includes adding two floors to the hotel and building a six-story tower to add a total of 80 rooms. Witkoff has a contract to sell the property to an undisclosed buyer, who will close the deal when the renovation is completed, he said.
Witkoff's Greenberg said he is negotiating to buy two more hotels and a development site in the historic district.
Witkoff's landmark New York properties include the Woolworth building, completed in 1913 and is among the oldest skyscrapers in the U.S., and the Daily News building, an Art Deco tower completed in 1929.
Another big player from New York is the Chetrit Group, which co-owns Chicago's Willis Tower (formerly the Sears Tower), 620 Avenue of the Americas in Manhattan and a large chuck of downtown Los Angeles.
Chetrit has assembled at least 13 buildings in South Beach over the past two years. Half the properties are in a block immediately east of the Miami Beach Convention Center. Chetrit wants to partially demolish, renovate and restore the two- and three-story buildings to make room for a hotel. Chetrit and its local partner, Ari Pearl, plan to make roof-top additions and build a five-story building as part of the new hotel.
The company paid $10.82 million for the entire Miami Beach block in April 2012. The project is to be called the Collins Park Hotel.
"That is going to be fantastic for that particular neighborhood because the whole area is in need of rehab," said Charlie Urstadt, a Miami Beach preservationist.
Chetrit recently received city approval to renovate and expand the Versailles Hotel at 3425 Collins Ave. During the last real estate boom, the Versailles' 289 rooms were converted to condos. Some sold to individual buyers. Chetrit has bought back 165 units, according to the Miami-Dade property appraiser.
The company plans to dissolve the condo association, said hospitality industry consultant Christian Charre. He is not involved in that project but is familiar with Chetrit's business plan.
Charre, president of The Charre Group in Coral Gables, pointed to Chetrit's acquisition of the Versailles condos as a creative strategy to increase its Miami Beach real estate holdings.
"There are more investors looking for opportunities than there are properties for sale," said Charre, who is involved in the sale of the Wyndham Garden hotel.
Chetrit has obtained city approvals to restore the hotel and to add a 10-story, 54-unit condo tower in the back of the property.
Pearl declined comment for this article and said Joseph Chetrit, the company's notoriously media-shy principal, also would not comment.
"The new tower is going to be a modern interpretation of what was previously built there," said Miami architect Kobi Karp, who designed the new Versailles project. "The tower that is there is in bad shape, so we are going to restore it the way it used to be."
Karp, who is involved in many of the Miami Beach hotel restorations, said the new wave of developers is interested in giving new life to the original lobbies and other public spaces.
"I see a higher motivation for seeking a better quality design with a more in-depth thought process into the design of the projects," said Karp, who is also designing The Witkoff Group's plans for the Wyndham Garden hotel.
Chetrit also owns the Tides Hotel at 1220 Ocean Drive, which it acquired for $20 million a year ago. It also acquired a parking lot, a low-rise office building and a retail property behind the Tides. It wants to re-develop them into a boutique hotel. The group paid $12.5 million for the three properties early this year. Chetrit also owns the Fairwinds Hotel, which would be restored and expanded, Charre said. Chetrit acquired the 50-room Fairwinds in a distressed deal for $14.5 million four months ago.
Chetrit isn't done with the hotel buying spree. The group has an undisclosed beachfront hotel in Miami Beach under contract, according to two sources.
Nakash Holdings began buying hotels in the Art Deco district in 2005. Its hotels include the Hotel Breakwater at 940 Ocean Drive and Hotel Barcelona at 1444 Drexel. It also owns nine units at The Setai Hotel and Residences on Collins Avenue.
Bennett said his company likes Miami Beach because of its similarities to New York. Both have a limited inventory and "beautiful" historic properties. The Nakash family, which owns the historic Fred French Building in New York City, is comfortable rehabbing historic properties, Bennett said.
"You need to know how to make it economical and make it work," he said, adding that the family holds its restored properties as long-term investments.
Preservationist Urstadt said New York developers are good fit for Miami Beach's historic districts.
"There is a very strong and long tradition in New York of preserving older buildings and people in New York really appreciate historic preservation," said Urstadt, a member of the Miami Design Preservation League.
"That strong tradition is showing in some of these developers' activities here recently," he said, adding that many of them have sought the league's input to come up with plans acceptable to the vocal preservationists.
The new group of New York developers is far removed from their predecessors. In a way, they are in Miami Beach to play it safe. The city's hospitality industry is thriving with one of the nation's strongest occupancy and room rates, a trend that began during the recession and survived it.
Resort tax collections have surged in Miami Beach. In the fiscal year ended Sept. 30, the city collected $54 million, up from $49 million in the previous fiscal year, $41.9 million in 2010 and $37.8 million in 2009
"These guys are very smart," Kasdin said of the New Yorkers. "Many are backed by Wall Street money and heavy private equity, and they look at these deals very carefully."
The New Yorkers who descended on South Beach in the 1980s were less bottom-line oriented and dreamed of giving new life to neighborhoods. The South Beach area was infested with drug-related crime and populated with abandoned buildings. Its future was uncertain.
"Not to say they were not smart investors but they were risk takers," said Kasdin, who belonged to the grassroots movement that helped create the South Beach historic district to preserve Art Deco buildings. "They were betting on the values going up and the area being discovered."
The New York money is targeting a different dream: capital appreciation.
"Today, where ever you put your cash, the return is slim to say the least ... 1, 2 percent," said Miami investment banker Jim Cassel, a principal with Cassel Salpeter & Co. "Investors are looking for yield."
Cassel said the investors will profit in Miami Beach if they pick properties with potential for revenue growth, renovate them properly and brand them correctly.
"You put all those things together and it makes sense for investors to look at places like Miami Beach to deploy capital," he said.
That's the case of hedge fund Elliott Management, which has more than $15 billion in assets under management. Its Elliott International Ltd. is a partner in the redevelopment of the former Miami Heart Institute at 4701 N. Meridian Ave. Backed by Elliot, developers Ricardo Dunin and Ophir Sternberg are seeking city approval to convert the hospital building into a luxury waterfront condominium with about 160 units.
Industrialist Blavatnik, a 55-year-old Russian native with an estimated net worth of $12 billion, is funding the proposed restoration and expansion of the Saxony Hotel & Condominium at 3201 and 3315 Collins Ave. Argentina-based Faena Group recently received city approval to rehab the 399-room hotel and build a 19-story luxury condo tower next to it. The city approval includes building a three-story boutique hotel with ballroom space, parking and retail space across the street from the Saxony, said Kasdin, who represented the Faena Group in the approval process. The group bought the hotel for $102 million in late 2007.
With this influx of big New York money and the development it's funding, Miami Beach is facing another transformation.
"I see a level of sophistication, culture, preservation and architecture that did not exist before the crisis," architect Karp said. "People are more open to finding a way to work with the historic preservation."
Big money from the Big Apple is fueling Miami Beach's latest transformative wave of development