If you drive down Sunset Boulevard in Los Angeles and look up into the Hollywood Hills, you'll see massive white-box houses lining the hillside. Many were built on spec by developers aiming at luxury clientele in search of homes with stellar views and the latest amenities. However, the troubles that have befallen one of the biggest names in the Los Angeles development scene show there are risks to this strategy.
Nile Niami has created some of the most luxurious estates in the Hollywood Hills -- the types of homes marketed with elaborate marketing videos shot like blockbuster movies and launched to the market with lavish parties to showcase the homes to the city's biggest players. He's made headlines for years, but he's also struggled to sell some of these homes quickly.
The Wall Street Journal reports Niami filed for bankruptcy protection on a home in West Hollywood that he listed for $55 million in 2019. According to the filing, the company that used to control the property has liabilities of $59.24 million, but the property itself is only valued at $30 million. It's likely Niami made this move to avoid losing the property to foreclosure, as one of his lenders had filed a notice of default on the property.
This isn't the only legal issue Niami's facing. He's also being sued by Compass Concierge for nonpayment of a $200,000 loan he took out to prepare another mega-mansion for sale. In February 2020, one of Niami's lenders took control of the "Opus," a Beverly Hills spec house once listed for $100 million.
According to the LA Times, Niami sold another home in the Hollywood Hills for $9.58 million recently. He bought the home for $9.5 million in 2015 but renovated it and listed it in 2017 for $19.9 million. The property, which I visited when it was for sale in 2015, is beautiful and has great views but sits on only around a quarter of an acre of land.
Niami has been playing a high-stakes game for years buying properties, but his biggest bet is on The One, a mega-estate in the elite Bel Air neighborhood. The three acre-plus property sold in 2012 for $28 million. He's been working on the 100,000-square-foot spec home since 2014 and has previously said it would list for $500 million.
It's highly unlikely it would sell for that price despite some very pricey sales in Los Angeles in recent years, including the sale of the Chartwell Estate for $150 million. Another high-end spec developer in Los Angeles, Bruce Makowsky, listed a very elaborate estate for $250 million and sold it for $94 million in 2019.
Lessons for spec developers
Few people in the world would take on the types of projects Niami has created, but there are still some lessons here for real estate investors and developers. The first and most obvious is to not overestimate the price of your finished project.
An overambitious estimate of what the final product may be worth often leads someone to overimprove a property. In Niami's case, it's hard to find many comps to assess value. Each $50 million-plus estate that sells in Los Angeles is very different. For the average spec developer, if you can't find a comparable property in your neighborhood for your spec build, that might be a sign your project isn't right for where it's located. Also, make sure you have a pool of potential buyers willing to pay your list price when the property hits the market.
Niami's projects are elaborate, done with high-end finishes and features like candy rooms, bowling alleys, multiple pools, and showroom-style garages with rotating turntables. They take years to create, which means he's carrying a lot of costs hoping for a payout in the end. Clearly, he's become majorly over-leveraged and now has to hope his projects will sell for enough money to make everyone whole.
Construction and improvement loans are shorter-term loans closely tied to specific phases of a project. In Niami's case, it appears he's used private lending to fuel some of his development. He sold a mansion in the Holmby Hills area of Los Angeles for $44 million and built a home for the Winklevoss twins in the Hollywood Hills. His track record of success with a few high-profile properties gave lenders confidence in his ambition.
If you're developing a spec house, try to keep to your construction schedule as much as possible and establish consistent communication with your lenders so you can strategize if you start to get in trouble.
The Millionacres bottom line
Building spec homes can be a risky proposition, and it's very easy to wind up in trouble. Niami's story has gotten media attention because of the scope of his ambition, but smaller stories of spec projects that didn't achieve their goals happen all the time. Building a spec house without a solid plan, a realistic assessment of final value, a firm timeline, and a solid team of lenders and construction professionals can be a recipe for disaster.