Much has been said about the ever diminishing supply of condominium inventory and the reluctance of banks to lend to construct new condominium projects since the market collapse. As previously discussed, several determined developers, including The Related Group, NewGard Development Group, and Terra Group, are relying upon buyer deposits of 70-80% of a unit’s purchase price to finance the next wave of state-of-the-art projects.
Buyer Deposits vs. Traditional Financing
Using buyer deposits instead of restrictive and relatively expensive traditional construction financing has obvious appeal to developers. The risk of the project failing or the money running out is largely borne by the buyer. Unlike traditional financing, unit purchasers do not expect repayment with interest and lack the leverage (and sometimes the sophistication) necessary to extract typical protections from developers such as guaranties backed by the assets of the parent company or the developer individually. Moreover, except for the initial 10% deposit that is escrowed in accordance with Florida law, unit purchasers have no mortgage lien or other security interest to protect their investment should the developer fail to deliver the unit on time and as promised. Unlike a single construction lender with a large amount of money at stake, individual purchasers, many of whom are foreigners, may have difficulty mustering the clout or justifying the expense of proceeding against a developer and, as a result, may be left with little effective recourse in the event of a project failure.