Is the Sky Falling? BrickellHouse Holdings in Foreclosure (First Post-Recession New Construction Foreclosure Filed)

Yesterday, we reported that 2201 Collins Fee, LLC a/k/a the W South Beach faced a foreclosure suit over a $378 million mortgage. Data provided by Condo Vultures, a real estate consultancy and brokerage, shows condo sales at the W basically stopped in January, with prices hovering around $1,800 a square foot.

If you believed the hype, one would have thought that all new construction in South Florida was safe, secure and that consumers had nothing to fear from putting down 50% deposits on real estate.

That may be true, but BrickellHouse is the first post-recession project to deal with foreclosure. JBG Development filed a foreclosure lawsuit on Oct. 4 against BrickellHouse Holdings, which broke ground in December on the 374-unit, 46-story project at 1300 Brickell Bay Drive.

BrickellHouse paid $25.8 million to Kenneth Baboun-led JBG Development for the property in August 2012. JBG Development provided $15.8 million in financing. Court records show the loan document required BrickellHouse to obtain a construction loan between $20 million to $45 million, while keeping JBG’s loan as the first mortgage, and the construction contract price wouldn’t exceed $80 million. JBG would have approval power over both the construction loan and the construction contract, according to the mortgage document.

According to a reading of the complaint by The Miami Herald, BrickellHouse asked JBG to make its loan subordinate to a pending construction loan but JBG refused to weaken its position in the collateral.

Whether or not the claims have merit will be for a Court to decide, but the concept that real estate is safe, secure and fool proof as presented by many on the sales side of these transactions should not be accepted as fact. The truth is that the same mantra was espoused in 2003, 2004, 2005 and 2006 when people lined up and essentially begged to buy. Hopefully, people have learned something since then.