Midtown Miami/Walters/1

NEWS ANALYSIS

Midtown Miami DISCOUNTING MIAMI BY DAVID ARTHUR WALTERS July 2006, Miami The hottest topic in town among all classes of society is this: When will Miamis white hot real estate market crash? Published prices are stable but the market does seem to be cooling: white has already dimmed to a dark red. Interests already vested would naturally like to see prices rise even more. Latecomers, who want a piece of the action if

Midtown Miami/Walters/2 not a home to live in, as well as the vultures from New York circling overhead, would like to buy on the expected dip. Productive workers, doomed by low economic status to paying relatively exorbitant rent because the supply of apartments has been absorbed by the condominium boom, would like to see investors abandoning ship like rats. And now a confusing leading indicator of what lies in store for everyone concerned has appeared in Miamis prestigious Miami Herald, whose so-called liberal journalists and editors have lately shown some sympathy for the renting working class who feel they are being gouged or are being priced out of the market. Matthew Haggman's (July 18, 2006) Herald report raised the issue of whether Joe Cayre, one of the savviest investors in the United States, a Miami Beach boy who went north and got rich in entertainment and real estate, is bailing out of the $2.3 billion (as advertised on its Midtown Miami website) Midtown Miami real estate development project, because he expects its value to tank as the South Florida condominium balloon deflates, or whether he is just following his CFO's advice to take a raw-land capital gain now instead of holding and selling developed property at ordinary income tax rates. The difference between the two is 15% for capital gains, and double that or more on ordinary income. "My CFO tells me we have to sell it now," quoth Mr. Cayre. The Herald reported that Edie Laquer, the broker who will try to sell up to an 80% stake in the Midtown Miami development for her client and try to still leave him in control of the whole, said that Joe Cayre "always planned to sell after construction started." But that is out of character for Joe; that is, if there is any truth to the January-February 2005 edition of South Florida CEO, which represented Joe Cayre as the sort of man who likes to hold real estate instead of flipping properties like pancakes for fast bucks. After all, real

Midtown Miami/Walters/3 estate investors usually hold awhile for capital appreciation, while developers and sales organizations are usually committed to selling everything theyve got as soon as humanly possible. Miamis towering condominium projects, if we are to believe the advertisements including the ones posing as news reports to keep up the civic spirit - have often been sold out in a single day. The IRS considers the difference between holding for appreciation, and selling out regularly in the ordinary course of business, as an important factor when determining whether sales should be taxed at lower capital gains rates or higher ordinary income rates. Again, Mr. Cayre was characterized by South Florida CEO as the sort of man who prefers to hold real estate instead of folding at the drop of a hat. For instance, he reportedly did not want to sell even one of the 111 Manhattan buildings he had picked up from foreclosure for almost nothing. Yes, he did relent, no doubt in a moment of weakness, and sold one building for 100 times what he bought it for. In respect to the Midtown Miami development, South Florida CEO quotes Mr. Cayre as saying, "This is a long-term development. We're not looking to grab cash and run away. We have 10 buildings to do, so the customers in the first building have to say this is the greatest [the first building, which he described as a loss-leader], because we believe word-of-mouth advertising will sell out all our buildings." No doubt the Herald report, suggesting that one of the most savvy investors in the country has serious doubts about South Florida real estate, has raised further doubts in the minds of all those concerned. The Midtown Miami website states that three towers have been sold out. Maybe presales buyers are lined up for the rest? Who knows? The Herald report provided no information on sales and defaults, which might be obtained from

Midtown Miami/Walters/4 Deborah Samuel, who oversees marketing and is the principal broker for Midtown Brokerage, L.L.C. In any event, it appears that the Herald reporter launched a leaking vessel and declined to get aboard to follow up on his scoop for fear that the great white whale of a market would drag all aboard to their doom. First of all, the capital gains tax motive does not seem to hold much water. Given the fact that Mr. Cayre and his colleagues are not amateurs, the development is probably structured in such a way that the capital gains rate on the land can be enjoyed by the investors without selling 80% of the development to outsiders. Real estate investors may land bank raw land in investment companies; and then, when development is about to proceed, the land may then be sold to a related development corporation at market value; hence the investment company gets the capital gain rate while the development corporation gets the higher (market) basis for the land purchased. In other words, investors can virtually sell land to themselves by trading their developer hats for investor hats in order to get the favorable rate on the land, provided they can show some other reason for the structuring besides getting the favorable rate. For example, a large development might be parceled out among several entities so that no entity would be liable for the failure of another. Each investment entity in turn could sell its respective parcel of raw law to the development and sales organization when it is timely to do so. At least that appears to be the current state of the law Phelan and Phelan vs. Commissioner of the IRS (T.C. Memo 2004-206) is often cited as the leading case in support of that view; other relevant cases are cited therein to support the courts decision. Newspaper reporters may notice that twelve separate Midtown Miami Limited Liability Companies have been registered with the Florida Department of State. The development

Midtown Miami/Walters/5 corporation is The Midtown Group, a partnership between Joy Cayres Midtown Equities of Manhattan, and developer Michael Samuels Samuel and Company. As we have already noted, Deborah Samuel heads up sales at Midtown Brokerage, L.L.C., where she is also Director of Design Development. It was Mr. Samuel who introduced Mr. Cayre to the 56acre Buena Vista rail yard, once used to store cargo containers, and then blighted by drug users and homeless people. They bought it for $34 million and planned to build $ 1 billion for residential and retail use. They went into cahoots with city officials, who deemed the project a crucial key to the wanted whopping success of Miamis revitalization plan. Half the land, by the way, was sold by Mr. Cayre and company to Diversified Developers Realty, for roughly what was paid for the entire property. In any case, it appears that Mr. Cayre could keep the property, howsoever it is divided, somewhere in the close family of entities and still get the favorable capital gain rate on the raw land. So that leaves the question: Why does he want to sell to an outside party? Who knows? The news of his intention to sell has cast doubt on the value of his property and therefore on South Florida real estate at large, and tends to point to a decline in prices. Cautious investors and their bankers will want to employ even more diligence than might otherwise be due. Maybe Mr. Cayre does not believe the market is going to take a bath. Perhaps he is hurting from his investment the World Trade Center six weeks before the twin towers fell. Maybe he needs to raise cash; maybe he needs to restructure debt. Who knows? Perhaps the press or news release to the effect that "my accountant made me do it" along with the brokers statement that "they intended to sell anyway" was tossed out to the public because someone figured such deals are just too complicated for readers to

Midtown Miami/Walters/6 understand. Still, the tax justification angle has caused many cynical people around Miami to laugh out loud. Given the current state of the news, investors will certainly take into account the psychological impact it has and discount Midtown Miami accordingly until a more appetizing story is told.