It’s traditional in lease negotiations for the owner of an office building to ask a prospective tenant to show proof that they are in good financial standing and can be expected to pay rent every month.
As legislation awaits Gov. Kathy Hochul’s signature, New York City residential brokers are pushing back against measures that would expose the ownership of limited liability companies.
The Array Apartments in Austin, Texas, has announced a ‘mandatory’ curfew between 10 p.m. and 5 a.m. each night. But legal experts are skeptical such a rule can be enforced.
Imagine a New York City co-op or condo building that certain lenders won’t touch: It could be a nightmare situation for a buyer, seller, and the building in general.
Despite the acute recent rise in interest rates, the tristate condominium and co-op market continues to show strength; a decline doesn’t seem to be imminent – at least not in the foreseeable future. For many seeking home ownership in a more urban environment, condominium and co-op units remain the model of choice.
Negotiating with a New York City condo developer as opposed to an individual seller is a very different apartment buying experience. Don’t assume you’ll get money off the purchase price—condo developers typically avoid outright price reductions on their apartments because their financing is structured around achieving a specific dollar amount for each apartment. Price cuts could also hurt future sales, so in order to keep them high, sponsors tend not to offer discounts.
Unless you’ve sold an apartment or townhouse in New York City in the recent past, you may be shocked by how big a bite closing costs can take out of your profit.
For many people, being able to buy an apartment or townhouse in New York City is a financial stretch, especially when interest rates are on the rise. Plus co-ops typically require ample cash reserves on top of a down payment. So it’s important to first factor closing costs into your total output and then to make all best efforts to reduce that amount.
It’s traditional in lease negotiations for the owner of an office building to ask a prospective tenant to show proof that they are in good financial standing and can be expected to pay rent every month.
But the public prognostications comparing office real estate to an “apocalypse” and a “Category 5 hurricane” haven’t escaped the companies in the market for office space, leading to an increasingly common role reversal: tenants asking landlords to open up their books and provide protection in case they go under.
“It’s not enough to just say, ‘You know, we have bulletproof institutional dollars behind us,'” CBRE New York Tri-State Region CEO Mary Ann Tighe said. “The landlords still want to know about the credit of their tenants, but the tenants now say, ‘OK, I’ll show you mine. You show me yours.'”
From New York to Atlanta, Miami to Los Angeles, across all types of building classes and lease lengths, more companies are forcing their potential landlords to reveal details about their financial backers and assure them of their ability to meet lease terms and hold onto buildings, industry players told Bisnow.
Tenants are taking a close look at the capital stack of buildings and considering the exact implications were a landlord to default on their obligations. The steady stream of office market pain is affecting big-name landlords, which would have been fairly inconceivable just a few years ago.
Distress in U.S. office real estate jumped to $24.8B at the end of the second quarter, up $6.7B from the previous three-month period, according to the latest MSCI U.S. Distress Tracker. Office is now the most distressed commercial real estate asset type for the first time since 2018, surpassing retail and hotels, which have recovered more quickly from the pandemic.
Brookfield, Blackstone and Related Cos. have all handed back properties to lenders, and defaults have been shooting up across the country. Last week, Starwood Capital Group defaulted on a $212.5M mortgage on Tower Place 100, a 614K SF, 29-story building in Atlanta — which sent a shockwave through the local market, said Jodi Selvey, a principal with Colliers in Georgia.
“If they can go belly up, anyone can go belly up,” Selvey said. “It scares you if you are trying to put a tenant in a space. … After the Starwood thing in Atlanta, you will see more questions.”
Among the questions tenants and their representatives are asking are which lender owns the debt on the building and specific terms embedded in the loans, sources said. These conversations are happening on the first space tour, they said, rather than during the final stretch of lease negotiations, as they have in the past.
“It’s like asking someone how much money you make on the first date,” Selvey said. “During the implosion in ‘08, ‘09 and 2010, I don’t remember asking these questions.”
Nationally, office leasing rose by 11.6% in the second quarter, the biggest quarterly increase since Q2 2021, according to JLL. The jump likely reflects an increasing return to the office and a solidifying of hybrid arrangements and workplace mandates.
Still, tenants are calling the shots in most markets. In Manhattan, availability hit a record high in the second quarter, per Colliers, reaching roughly 96.4M SF, a 78.9% increase since March 2020. SL Green, New York City’s biggest office landlord, last week reported an office occupancy “low point” of 89.8% across the company’s portfolio.
Tenants are now being extra careful about their tenant improvement allowances, which have been one of landlords’ top incentives to land deals in this market. Those allowances are going into escrow accounts in some instances, brokers said, to make sure the promised amount is paid up. In
some cases, commissions are being escrowed as well.
“I think the landlords recognize that is part of getting deals done today. … Being transparent and showing where the building stands in relation to financial health,” OPEN Impact Real Estate co-founder Lindsay Ornstein said.
She added that tenants are asking, “Is this landlord going to lose this building, and is someone else sitting in that seat next year?”
Real estate players have long discussed the flight to quality in the office market, as brand-new, well-located properties with significant amenities have dominated the leasing market.
In recent weeks, tenant representation firm Savills has begun using the term “flight to capital” to describe the new phenomenon of tenants factoring in the financial health of properties alongside their amenities.
“You’re seeing it right now, especially in Downtown LA, where those landlords that are in a better financial position than others are going to benefit,” Savills Head of Office Research Michael Soto told Bisnow. “Some landlords are stronger than others, and we all know which ones are in trouble right now.”
Sidley Austin’s move to 350 South Grand Ave., where the law firm will take 57K SF in the Related Cos. and CIM Group-owned property, was cited as an example of this trend. Sidley Austin is leaving Brookfield’s Gas Company Tower, which is now in receivership.
Marisha Clinton, Savills’ senior director of Northeast regional research in New York, said private equity firm Clayton Dubilier & Rice leased 144K SF at 550 Madison Ave. in the second quarter. It is moving from the Seagram Building on Park Avenue, where owner RFR landed a two-year extension on a $783M CMBS loan that was maturing this year.
“The firm will be going from an older trophy asset that has a significant amount of debt coming due,” Clinton said in an interview earlier this month. “They’re pretty much relocating to a recently redeveloped trophy asset that is also in better financial health.”
Despite tenants’ demands for information in a market that is highly competitive among landlords, opening up their books is not something landlords always want to do, said Shaun Pappas, a real estate attorney with Starr Associates.
“Many landlords are not keen on this type of due diligence and are not turning over such information without push back and questions,” he wrote in an email. “Usually there is a happy medium where the tenant and landlord can get comfortable with both of their financial positions and to make sure that the deal makes sense for both sides.”
That was the case for Suresh Sani, the CEO at First Pioneer Properties, a New York landlord whose office properties include 33-02 Skillman Ave. in Long Island City, which the firm converted from industrial to office.
A prospective tenant at one of the firm’s properties asked for financial information, but First Pioneer pushed back and showed due diligence on its loan-to-value ratio instead, Sani said.
However, across the board, tenants want subordination, nondisturbance and attornment baked into leases. An SNDA, as they are known, is an agreement from the landlord that in the event it defaults, the lender won’t foreclose on leases and will allow the tenant to continue renting in peace.
Sani said it has been common to have these kinds of arrangements in place for major tenants, but it is increasingly being requested across all tenant types — and not offering it is a deal-breaker.
“Thankfully, we have lenders that understand. … My guess is they are getting so many of these,” he said. “They want the building rented.”
The state of the office market is splashed across headlines around the world. Last month, Bloomberg referred to a “creeping rot inside commercial real estate,” and last week, New York Magazine ran a cover story calling Manhattan “New Glut City,” with office buildings “dangerously empty and crushed with debt.” Starwood Chairman Barry Sternlicht said the market is in a “Category 5 hurricane.”
The coverage is driving the extra focus from tenants because the topic is completely inescapable, said Tighe, CBRE’s top leasing broker in New York.
“I’m talking to my folks in capital markets, [asking] what’s the situation, then really getting the backstory from the parts of our firm that deal with that, talking to our investment sales operation about what’s the dynamic,” she said. “I think any thoughtful business person would probably be committing malpractice not to ask the questions.”
https://www.bisnow.com/national/news/office/landlord-finances-owners-open-books-119930
As legislation awaits Gov. Kathy Hochul’s signature, New York City residential brokers are pushing back against measures that would expose the ownership of limited liability companies.
State lawmakers advanced the proposed law, dubbed the LLC Transparency Act, to the governor’s desk on Tuesday. If approved, the bill would require the names of LLC owners and the addresses of their businesses to be published in a publicly searchable database maintained by the Department of State.
The legislation is intended to prevent the perpetrators of illegal activity such as money laundering and tax evasion from hiding behind anonymous shell companies, the bill’s sponsors have said.
But some brokers are criticizing the move for unnecessarily revealing information to the public they say could be limited to law enforcement agencies monitoring these bad actors.
“This is a law enforcement policy that I feel has been hijacked to create some kind of narrative,” Compass’ Leonard Steinberg said. “That is not serving the public well. That’s not serving the taxpayer well.”
Most buyers using LLCs to purchase real estate do so to maintain their privacy, Coldwell Banker Warburg president Frederick Peters said. He added that owners of LLCs are already required to register, the information is just not open to the public.
“The vast majority of corporate purchases are people who simply want to maintain their privacy and not see their names emblazoned across the media if they purchase an expensive property,” Peters said. “It is a terrible idea to further penalize the wealthy for spending money in our state, where such expenditure benefits us all.”
The public nature of the database could saddle some, especially those in the public eye, with security risks — and those concerns aren’t just limited to celebrities, Steinberg said.
“There are a lot of people who have absolutely valid security concerns that should not be overlooked,” Steinberg said, citing judges or psychiatrists with volatile patients as examples.
With these safety concerns top of mind for buyers, Steinberg said he anticipates an increase in demand for high-security, doorman buildings.
The bill would allow some LLC owners to submit a waiver for certain privacy concerns, though real estate attorney Samantha Sheeber expressed concerns that the legislation doesn’t define what concerns would qualify for the waiver.
“It is just extraordinarily overreaching,” Sheeber, who is the managing partner at Starr Associates and is working with REBNY to block some of the legislation’s current provisions ahead of the governor’s review, said.
However, real estate attorneys will likely work with buyers to find alternative ways to conceal owners’ identities, “which is going to probably, you know, fly in the face of what’s trying to be accomplished here,” Sheeber said.
“Any attorney is going to now try and come up with creative ways to protect their clients as they should be protected,” Sheeber said.
Despite the privacy concerns, several brokers say they don’t expect the law to have an inordinate impact on the market. The one exception could be foreign buyers, who may hesitate to buy property in New York due to concerns about the new guidelines and how to circumvent them.
“It will potentially turn off some foreign investment,” Nest Seekers’ Michael Fabbri
said. “People who want to buy in New York will buy in New York. They’ll figure out a way.”
The Array Apartments in Austin, Texas, has announced a ‘mandatory’ curfew between 10 p.m. and 5 a.m. each night. But legal experts are skeptical such a rule can be enforced.
In a move reminiscent of a dormitory for college freshmen, or perhaps a summer camp for children, an apartment complex in Texas has announced a legally dubious curfew that demands residents stay inside their units all night long.
The curfew at the Array Apartments begins at 10 p.m. and goes until 5 a.m., according to local news station KXAN, which first reported on the situation last week. The apartment’s management first announced the curfew in a notice to residents, KXAN reported. The notice states that “it is mandatory for all residents to remain indoors and restrict their movements outside their homes, except for emergencies or authorized activities.”
Ford Sanders, a reporter with local station KVUE, tweeted a photo of the notice, which states that the curfew is a response to “security concerns and potential public health and safety concerns.”
The notice also encourages residents to hunker down with provisions, saying they should “make necessary arrangements to procure essential items like groceries, medications and other supplies ahead of curfew hours.”
The notice doesn’t include additional details about what might have prompted the curfew, nor does the notice explain how managers plan to enforce the rule or what might happen to those who break it. The notice concludes by saying that “together, we can overcome this challenging situation and emerge stronger as a community.”
According to KXAN, Austin 311 — the city’s information and help line — has received about 950 calls since the beginning of 2022 from the street where the apartment is located. Of those calls, 91 reportedly came from the apartment complex itself, and 62 of those calls were “police-related.”
Array management did not respond to Inman’s request for comment Monday.
Despite the official sounding language in the notice, legal experts were skeptical of the curfew.
“I don’t see how they can do that,” Shaun W. Pappas, a New York-based attorney who focuses on real estate, told Inman. “It’s ripe for a lawsuit.”
Pappas said apartment managers can close certain areas of their properties —
think common spaces, terraces or pools — during certain hours. But ordering
residents to stay inside all night would likely violate their civil rights.
“To actually say you can’t leave your apartment, you can’t get away with that,” he added.
Pappas said some residents may be tempted to obey the curfew because they won’t know it is illegal. But if it were him, Pappas said, “I wouldn’t comply whatsoever.”
Austin-based attorney Bill Gammon had a similar take while speaking with KVUE.
“The apartment complex can’t do this. This is ludicrous,” Gammon said, adding that he’d advise residents to simply ignore the rule.
In all likelihood, residents who do ignore the rule won’t face any penalties; KXAN reportedly got in touch with an unnamed property manager who said he couldn’t enforce the rule and that the security company working at the complex suggested sending out the notice.
The apartment curfew comes after a period during which curfews generally became more widespread thanks to the COVID-19 pandemic. As case counts rose in 2020, for instance, California issued a stay-at-home order for multiple counties that required people to remain inside between 10 p.m. and 5 a.m. Parts of Ohio, New Jersey, Colorado, Massachusetts, Florida and many other states also imposed curfews, as did a number of foreign countries.
However, the COVID curfews were imposed by elected officials, not private property managers, and in any case have long since been lifted.
Despite the questionable legality of property managers attempting to keep residents inside at night, the Array Apartments is not the first complex to announce a curfew. Over the years, managers at apartments in Gainesville, Florida, Dallas, Texas, and Raleigh, North Carolina have all imposed curfews at their properties — often to the consternation of residents.
Now, that appears to be exactly what’s happening in Austin. Speaking to KVUE, Array resident Kristie Broadaway said the curfew notice she received makes it sound “like I’m in some hurricane area where they have martial law.” Broadaway also said she searched her lease but couldn’t find anything giving management the authority to impose a curfew.
“If I can’t go outside or have friends over after 10,” she added, “I may look for somewhere else to live.
https://www.inman.com/2023/06/13/this-apartment-complex-wants-to-lock-residents-inside-all-night-long/
Imagine a New York City co-op or condo building that certain lenders won’t touch: It could be a nightmare situation for a buyer, seller, and the building in general.
That scenario is the new reality for nearly 40 apartment buildings in NYC that appear on a list putting them off limits for Fannie Mae lenders—and there is the potential for that number to grow exponentially in the next couple of years, according to at least one real estate professional. While some real estate lawyers and mortgage brokers that Brick Underground spoke to have not yet encountered a buyer unable to get financing as a result of this banned building list—they concede it could be a significant problem in the near future.
Orest Tomaselli is the president of the project approval division at CondoTek, which provides data on condos for lenders, and the CEO and president of Strategic Inspections, which conducts co-op and condo reserve studies. He sounded the alarm about the Fannie Mae unavailable condo and co-op list in a recent post on his firm’s website.
More than 1,400 U.S. condo and co-op buildings have been added to this list since 2022 and thousands more are likely to be added in 2023, he says, explaining that the unavailable list prevents lenders from closing and selling loans in these designated properties to Fannie Mae. There are 39 condo and co-op NYC buildings on this list, he tells Brick. (CondoTek works with buildings to help get them off the unavailable for lending list.)
The list is part of a response to the Surfside, Florida condo tower collapse in June 2021. Following that tragedy, which occurred after building managers were warned about major structural damage, Fannie Mae, one of the government-backed entities that buys loans from banks, issued new guidance to lenders essentially shutting off loans for buyers in buildings with low reserve funds for structural repairs, among other risky scenarios.
Freddie Mac, the other quasi-government agency that buys back conforming loans, also issued similar guidance. Other lenders tend to follow Fannie and Freddie’s lead and are likely to align their rules—and Tomaselli sees this alignment extending to jumbo lenders and underlying mortgage financing as well.
Being on the list means buyers could run into trouble if they’re seeking conforming loans (mortgages that meet Fannie and Freddie guidelines). A higher conforming loan limit for 2023 gives New Yorkers bigger loans that are cheaper and easier to qualify for and depending on how much they are seeking, an alternative to jumbo financing.
“If Fannie Mae is unwilling to purchase loans in ‘unavailable’ condo and co-op properties, few, if any, lenders will extend mortgage financing borrowers in these properties,” Tomaselli writes.
The original goal was to discourage the practice of deferred maintenance in buildings with aging infrastructure—meaning putting off needed repairs because of budget shortfalls. To put some teeth into it, Fannie Mae said it wouldn’t buy back mortgages from condo or co-op developments that used an assessment to pay for repairs involving structural integrity until the repairs have been made. It created the new status of “unavailable” for buildings that don’t meet eligibility, and a new requirement: Condo buildings need to accumulate reserve funds by setting aside 10 percent of their annual operating budget every year to put toward their reserve fund, a departure from past practices that allowed buildings to obtain a reserve study instead.
Ryan Greer, senior vice president at National Cooperative Bank (a Brick sponsor), points out that while Fannie Mae’s requirement to collect 10 percent of the operating budget for reserves only applies to condos, not co-ops, NCB does “include a reserve ratio in our financial analysis for co-ops as a measure of overall financial stability.”
Buildings are increasingly using assessments to fund capital improvements or shore up their reserve funds for capital improvements, often in excess of $1 million, he says. “Cooperatives typically offer a discount for payment upfront and will allow shareholders to make payments in installments over two to five years,” he says.
But even though a good majority of NYC buildings do rely on assessments to pay for upgrades, the list of banned buildings has only grown slowly—at least until now.
Tomaselli explains that there are several triggers that can land a building on the list, including when a questionnaire is sent to building management as part of the mortgage application process.
If the building is non-compliant with Fannie Mae guidelines, some lenders may just reject the loan. Others may send the documentation to Fannie Mae and request an override—and that review may be what puts the building on the no-lend list.
There are many reasons why a building may end up on the list, Tomaselli says, but these four reasons are the main ones:
– It doesn’t have a 10 percent reserve line item in its operating budget. (Freddie Mac does accept a reserve study in lieu of a reserve fund requirement.)
– It is not compliant with Fannie Mae’s insurance requirements.
-It has violations related to structural or mechanical repairs that need to be completed.
-Investor-owned units exceed Fannie Mae’s maximum thresholds. (More than 20 percent of units are owned by one investor or more than 50 percent of units are owned by investors—which can be a problem in rental-to-co-op or rental-to-condo conversions.)
Local Law 97, which requires buildings over 25,000 square feet to reduce harmful gas emissions by 2024, will also likely land “thousands” of buildings on the list in the future, Tomaselli says.
The city estimates about 20 to 25 percent of buildings will exceed their emissions limits in 2024 if no action is taken. Fines will be issued in 2025 if a building exceeds the limits or fails to report its energy use.
“Local Law 97 is going to have a gigantic impact,” he says. If a building receives a Local Law 97 fine for not repairing or replacing its outdated heating system, for example, or the building does not have enough capital in its reserve account to replace those components, then the building would be ineligible for Fannie Mae mortgage financing and is likely to end up on the unavailable list.
If you’re a seller, buyer, or on a building board—wouldn’t you want to know if your building is on the list? Good luck with that. The list is not public; it is only available for view by Fannie Mae lender partners. (Tomaselli has seen the list.)
“Unless a lender notifies the property manager or [a board] then there is no official way you find out if you’re on the list,” Tomaselli says. “The lack of transparency is shocking.”
Since the goal of changing Fannie Mae’s guidelines in the wake of the Surfside tragedy was to “make sure buildings pay attention to finance and structural problems, you would think they would want to make sure boards were aware,” Tomaselli says. But the only way a building finds out if it is on the unavailable list is when a buyer applies for mortgage and is informed the building is on the list. (Brick reached out to Fannie Mae for comment but did not get a response.)
Mortgage broker Kevin Leibowitz, founder of Grayton Mortgage, says he hasn’t heard of a NYC deal blowing up because of Fannie Mae’s unavailable list, but sees the potential for problems in buildings where buyers are likely to need a conforming loan.
Still he cautions against overreacting: “Just because a building is on this list doesn’t mean the value of the building is going to become worthless,” he says. That’s especially true in high-end buildings where buyers have lots of options for loans.
These guidelines may create more headaches for jumbo loan borrowers, he predicts. They are already tougher to qualify for—you need a higher credit score and more cash reserves, for example. In other words, lenders are not giving these loans away easily. “It may be worse for the jumbo borrower because there are no more stupid loans anymore,” Leibowitz says.
When you’re buying in NYC, you need an attorney who will dig into the financial health of a building, explains Shaun Pappas, a partner at Starr Associates. That includes reviewing board meeting minutes to see what’s been going on. Be patient and allow your attorney to investigate, he suggests.
A building that has been pre-approved by a lender or where a lender has lent in the past means you’re less likely to run into problems, he adds.
Another strategy in the current market: Requests for financing and funding contingencies to protect the buyer are also making a comeback, he says. These days it’s harder for a seller to push back on those.
Some buildings have not yet put a strategy in place for dealing with Local Law 97, he says, and that has repercussions for lending.
“Everyone in NYC is so busy, and we don’t often look down the road as we should,” he says, adding that “a bank is not going to take a step if a building doesn’t have a plan in place for LL97,” he says. But the outcome may not be that dramatic: The closer we get to these deadlines, two things could happen, he notes: “If buildings aren’t ready, the city will push the dates back. Otherwise banks will have trouble finding buildings they can lend in.”
And that latter scenario will likely prompt banks to come up with workarounds.
As attorney Bettina Miraglia, a partner at DL Partners explains, “We all need residential mortgages. My guess is the banks will figure out solutions,” she says, pointing out how Freddie Mac’s guidelines offered some flexibility to borrowers. That kind of variation is necessary in lending and it’s part of the bigger picture. “We need the regional banks, the First Republics,” she adds.
Despite the acute recent rise in interest rates, the tristate condominium and co-op market continues to show strength; a decline doesn’t seem to be imminent – at least not in the foreseeable future. For many seeking home ownership in a more urban environment, condominium and co-op units remain the model of choice.
That being said, recent changes in the laws governing the conversion of existing properties to condominium ownership in both New York and New Jersey have thrown some curveballs into the market and the conversion process.
In New York State, the conversion of existing rental apartments to co-op or condo ownership came under direct threat with the passage of the Housing Stability and Tenant Protection Act in June of 2019, by which the state legislature turned back the clock on rules governing such conversions to something resembling the landscape of the early 1980s.
Changes included increasing the required percentage of bona fide purchases by occupants from 15% to 51%, “Which was the requirement under the former law,” explains Shaun Pappas, a partner at Starr Associates, a law firm based in Manhattan. “Under the 2019 law, the sponsor has to sell 50% of the offered units to current tenants – which is impossible. In the past three years, despite the strength of the market and despite covid, this requirement has had a terrible effect on conversions, and has seriously affected the value of assets appropriate for conversion.”
“It’s hard to know how Governor Hochul was convinced to change the law,” Pappas continues, “but she is a fairly moderate person and understands the value of real estate, and the real estate industry in New York. She recognized how the 2019 law affected the industry, and was open to a discussion and a repair of the law. These changes are designed to address those problems.”
The changes to the law, while modest, start with smaller buildings with five units or less. An owner can convert based on the old 15% rule instead of the new 51% requirement. “The wrinkle in the new law,” explains Pappas, “is that the sponsor must live in the building. At this time, we have put questions to the Attorney General’s office to clarify the new rules. Specifically, what if the sponsor isn’t necessarily a person? What if the sponsor is an entity with many partners behind the curtain? Under this new law, it appears the investor would have to put someone in ownership into the building for two years to qualify for conversion. Overall, this looks like ice in the winter.”
For owners who also occupy a unit in their building containing five units or less, the change in the law is helpful – but Pappas reports that he has seen this situation exactly once in the past decade.
In New Jersey, the situation is not very different. While there’s no onerous state law dictating the percentage of existing rental tenants who must buy in order to convert a rental property to condominium ownership, a state statute was passed in 2022 to exempt “affordable housing units” from conversion in an overheated and highly priced condominium market.
Scott Piekarsky, an attorney with Hackensack-based law firm Phillips Nizer explains: “There isn’t a distinction in conversions between large and small buildings in New Jersey, but there is a lot of regulation. There must be a three-year notice to the tenants, for starters. There’s also a requirement of a notice to evict, because in fact, it’s an eviction. Tenants must have adequate time to find someplace else to live, if they choose not to buy. Also, there’s a requirement of a notice of intent to convert, and an offering plan to convert the property. Extra protection is provided for seniors and people with disabilities as well. Legislation was passed to block the conversion of affordable rental units last year. Advocates wanted a five-year moratorium, but it never passed.”
‘Affordable’ housing units, explains Piekarsky, means units where renters have lower income, “Certainly five-figure incomes in most cases, and they have to qualify according to the terms of the law. If they do, there’s a designation of their unit as an affordable unit. This legislation was passed so that units like these couldn’t be removed from the market just to sell buildings. We haven’t seen much repercussion from the change though. There were relatively few affordable units as opposed to market units to begin with.
For now, it’s clear that there is a growing conflict between the interests of those who rent, and those who desire to own – or put another way, between the rights of those who cannot afford to enter the overheated owned housing market, and the market’s own tendency to dictate the highest and best use of existing housing stock.
Negotiating with a New York City condo developer as opposed to an individual seller is a very different apartment buying experience. Don’t assume you’ll get money off the purchase price—condo developers typically avoid outright price reductions on their apartments because their financing is structured around achieving a specific dollar amount for each apartment. Price cuts could also hurt future sales, so in order to keep them high, sponsors tend not to offer discounts.
“In new development typically transfer and mansion taxes are paid for by the buyers—also the sponsor attorney fees—so rather than just trying to get the price down I would look to those types of payments to negotiate,” says attorney Shaun Pappas, a partner at Starr Associates.
The sponsors are much more open to those conversations. However, every deal is unique and your ability to negotiate will depend on market conditions, the developer’s construction timetable, and the number of units that have already been sold. The more educated you are on new development sales, the better your chances of getting a deal you’re happy with.
Successful negotiations often come down to mutually respectful relationships, so it’s important to have a broker with a good attitude and reputation. Your broker needs to be someone you trust and someone who will support you as you work to close the deal on the right apartment. Find a broker who understands the nuance of buying new development.
One negotiating tip is to have a price range in mind—rather than a specific number—that you would be prepared to pay for the apartment. Focus less on the purchase price and more on the net payment you’ll be making. You can think of the deal as a package that takes into consideration other aspects of the deal like the deposit, the contingency, or the closing details.
“When you know those little nuances you have a better chance of having an honest conversation and getting some additional discounts,” Pappas says. As you move forward with the deal you’ll need to be flexible and your broker and attorney will be the people to guide you.
You may have more leverage at the beginning or end of a developer’s project. This is because during the pre-construction phase, the sponsor will want to get 15 percent of the apartments under contract. This is typically the magic number at which the offering plan is declared effective by the attorney general and closings can legally begin.
Some developers will wait a little longer, until 30 or 40 percent of the condos are under contract before getting the attorney general’s official sign-off on the building. This is usually down to lender requirements. Once the building is declared effective, sales can go ahead.
If you’re buying at this early stage, financing is typically offered through the sponsor’s preferred lender until the building meets Fannie Mae specifications.
You might also have more room to negotiate at the very end of the project, when a sponsor may be eager to close down the sales office and move on to their next project.
If price cuts are not on the table, you may have more success with concessions. These are buyer incentives a developer might offer to encourage you to close on a brand new condo. If a developer won’t lower prices, they may offer inducements instead. In the past developers have offered to pay your common charges for a limited time, or allowed rent-to-own options
With mortgage rates higher than they’ve been in years, you may find a developer is willing to buy down your mortgage interest rate for a limited number of years. This mirrors the concept of buying mortgage points to lower your payments and is a way for sponsors to induce you to buy in spite of higher rates. “It helps to alleviate some of the short-term pain of how high rates are—and it’s a very creative solution,” Pappas says.
These types of concessions can save you thousands of dollars so it’s always worth exploring what a developer is willing to offer.
When you buy in a new development you often have to pay some of the closing costs that, if you were buying from an individual owner, would be covered by the seller. This includes the sponsor’s attorney fees as well as transfer taxes. Part of your negotiations might be to see if you can get the sponsor to pay the transfer taxes, mansion tax, mortgage recording tax, or offer a more tangible perk like free storage or a parking space.
You may also be able to negotiate on the deposit for the unit. The amount of leverage you have depends on whether you are an early buyer and what kind of market it is.
Most sponsors ask for 10 or 15 percent down when you sign the contract. If you are being asked for between 10 and 20 percent during the pre-construction phase, when the sponsor is eager to hit the mark of having 15 percent under contract—you may be able to negotiate it down or have them agree to spread out the payments.
Sometimes a sponsor has a two-step deposit where you initially put 10 percent down and then put another 5 or 10 percent down when the building is declared effective. “Those are all numbers you can talk about,” Pappas says.
The offering plan explains all the features in the building and apartment. It has details of how sales are conducted and how the condo will operate, including what you’ll pay in common charges. The monthly common charges are based on the percentage of the building that you’ll own—or your common interest—and although this isn’t negotiable, you may be able to come to an agreement with the sponsor about other elements.
For example, you might be able to negotiate for upgraded flooring, fixtures and appliances. The offering plan typically states appliances will be a certain brand or equivalent so you can make sure any equivalent brands meet your standards.
You may also be able to negotiate certain building amenities, like access to storage lockers, parking spaces or roof rights.
A closing credit is money paid to the seller at the closing table—a topsy turvy way for the developer to record a higher sales price but also give the buyer a discount. You’ll encounter closing credits when the market is slow but it’s worth talking about this with your broker and attorney.
Asking for a credit at closing can be savvier than asking for the same amount to come off the asking price at the start of your negotiations. If you’re using financing, a drop in the sales price will make a nominal difference to your mortgage payments but the same amount in closing credits can be more meaningful. Another tip is to multiply your savings by using a closing credit to buy down your rate.
Unless you’ve sold an apartment or townhouse in New York City in the recent past, you may be shocked by how big a bite closing costs can take out of your profit.
Most experts advise allocating a whopping 8 to 10 percent of the purchase price to cover these fees and taxes—double what buyers can expect to pay on their end. That means you’d have to fork over $80,000 to $100,000 in closing costs on a $1 million sale—and this amount is on top of paying off any outstanding mortgage balance. Ouch.
Plus to get deals done in a soft market, sellers face covering some of the buyer’s closing costs at the negotiating table. Double ouch.
Besides avoiding surprises at the closing table, knowing what your net profit will be (minus closing costs) will help you set a realistic budget before you begin your next home search—and before you fall for something that might be out of your price range.
As with all real estate transactions, the actual costs will vary depending on the type and location of the property and you’ll want to explore your options with an experienced broker and attorney to get the most out of your sale.
Commissions represent the biggest slice of the closing-cost pie. In NYC, sellers are expected to cover the broker fee, which is typically 5 to 6 percent of the purchase price and split equally between the seller’s and buyer’s agents—or all to the seller’s agent if the buyer is unrepresented (aka a direct buyer). That’s $60,000 on a $1 million deal.
There’s no law that dictates what brokers charge, however; that 5 to 6 percent is based on an industry standard and is ostensibly negotiable.
“My recommendation for a seller who wants to negotiate a broker commission is to speak with/interview a few different brokers at different companies and ask each what the best they can do on their commission is,” says attorney Adam Stone, partner and founder of The Stone Law Firm. “But I’m generally not a proponent of negotiating down a broker commission because if I was a seller I’d want the broker to be incentivized as much as possible to focus attention and assets on my deal to achieve the best result.”
Daniel Gershburg, an attorney with Konner Gershburg Melnick Darouvar, agrees. “While there has been some market pressure to lower commission percentages, what I’ve found is that the top tier brokers continue to charge 5 or 6 percent and they bring tremendous value to their clients. They’re the gatekeepers and the reason as to whether your sale has a good chance to go through quickly, so I would be very hesitant to negotiate that down to save costs.”
This being NYC, sellers of co-ops, condos, and townhouses pay a combined state and city transfer tax of 1.825 percent if the sale price is over $500,000 or 1.4 percent for deals $500,000 or less. That works out to $18,250 on a $1 million sale, and $7,000 on a $500,000 sale. The New York State transfer tax increases to by 0.25 percent for transactions greater than $3 million (meaning you’d pay $83,300 on a $4 million deal).
Note that buyers are responsible for paying transfer taxes when buying a co-op or brand-new condo from the sponsor, though this often becomes part of the negotiation process.
Some co-op and condo buildings have flip taxes (also known as transfer fees) ranging anywhere from 1 to 2 percent of the purchase price and up to 3 to 5 percent. Some buildings charge 10 percent of the seller’s profit. Flip taxes are not really taxes, but a fee paid to support building reserves and capital improvements.
In some buildings, the buyer pays, and in others the seller. In slower markets, a seller may be more willing to pay the flip tax in order to close the deal, even if it’s technically the buyer’s responsibility. “A knowledgeable buyer is going to try to get a transfer fee covered,” Stone says.
Most attorneys in NYC charge a flat fee (rather than an hourly rate) that’s due at the closing.
“This really depends on the location and type of property, but I would always counsel that you usually get what you pay for,” Stone says.
Expect to pay at least $3,000 for a basic transaction and more like $5,000 on up for “luxury” sales (over $5 million) and complex deals such as when the sale involves an estate or property with liens—anything that’s going to require extra time and expertise.
These are easy to overlook, but most condo and co-op buildings charge move-out fees ranging from a few hundred to a couple of thousand dollars. Plus you might also have to pay a $1,500(ish) fee for the managing agent and co-op attorney.
According to attorney Shaun Pappas, a partner at Starr Associates, concessions have begun to creep back into the market with the high-interest rate environment. “Sponsors are more aggressive with the negotiations and are offering certain incentives to purchasers, such as free common charges for a year, transfer taxes paid on behalf of purchasers, and interest-rate buy-downs for a period of time.”
What’s more, sponsors of new condos may be willing to pay buyers a closing credit rather than reduce the asking price of their units. Gershburg says he’s aware of a new development where the developer was offering a $500,000 concession on a cash purchase of a $4 million apartment; $200,000 was offered to cover the closing costs and the rest was a closing credit.
Similarly co-op boards may be more willing to approve a sale with a credit at the closing table versus a price cut.
It might seem like an odd thing to do, but it allows a building to keep the purchase price the same to maintain a certain dollar amount per square foot—the universal measuring stick of real estate, especially in competitive areas like NYC.
“Whether you are willing to negotiate closing costs really depends on the type of property and the location as well as the market,” Stone says. In other words, you may only need to play this card if sales are sluggish.
For many people, being able to buy an apartment or townhouse in New York City is a financial stretch, especially when interest rates are on the rise. Plus co-ops typically require ample cash reserves on top of a down payment. So it’s important to first factor closing costs into your total output and then to make all best efforts to reduce that amount.
Depending on the type of property you are buying, closing costs can run from 2 to 4 percent of the purchase price—more like 5 percent for brand-new condos. (Read Brick’s closing costs guide for a breakdown.) That’s a possible $40,000 in closing costs for a $1 million co-op or $50,000 on a new condo construction.
Because closing costs are highest for brand-new developments, simply limiting your search to existing buildings can help shave off a percentage point or two off the bat.
Otherwise, brokers and attorneys can help mine opportunities to lower certain fees and taxes at the bargaining table.
“A knowledgeable broker with lots of experience can guide buyers to negotiate and take advantage of all the available savings,” says Kayla Lee, a real estate agent at Serhant. “Whether it’s a buyers’ market, slow market, or the project is down to the last few units, there are often opportunities to negotiate closing costs.” (And remember: The seller pays your broker’s fee too!)
Read the following to be an informed and empowered buyer.
The mansion tax kicks in at $1 million, triggering a 1 percent tax for the buyer. At $2 million, the tax goes up to 2 percent, rising in stages until it reaches 4.15 percent on units at $25 million or more
“Buyers can avoid or at least reduce paying this tax by sticking to properties that are below the different thresholds,” Lee says. “For example, that $950,000 vs. $1.05 million property has a larger difference than meets the eye.” Go with the former and you can save $10,000 at closing. Likewise for a $1.99 million vs. $2.05 million loft.
You might be able to convince a seller to lower the asking price in a soft market, but not if there are other buyers lined up behind you. Just don’t expect to convince a seller to pay it for you—the math never adds up.
Besides having a higher price tag, a newly built condo comes with higher closing costs than your average co-op. That’s because buying directly from the developer (or sponsor of a brand new co-op) means paying as much as 1.825 percent of the purchase price in transfer taxes imposed by the city and state to the tune of $18,250 on a $1 million condo (not to mention other costs some developers heap on to help run the building).
Lee’s advice? Buy an almost-new (pre-owned) unit instead. “When it’s a resale, the seller takes on various closing costs, including transfer taxes and the seller’s attorney fees, which are usually passed on to the buyers for NYC new construction.”
That said, in a soft market, you might convince some developers to cover at least some of these taxes.
Shaun Pappas, a partner at Starr Associates, says concessions have begun to creep back into the market with the high-interest rate environment. “Sponsors are more aggressive with the negotiations and are offering certain incentives to purchasers, such as free common charges for a year, transfer taxes paid on behalf of purchasers, and interest-rate buy-downs for a period of time.”
Daniel Gershburg, an attorney with Konner Gershburg Melnick Darouvar, says the negotiability of closing costs often depends on how well sales in the building are going. Specifically, for a building’s plans to be declared “effective” (or officially approved by the state Attorney General’s office), the condo needs to reach a certain percentage of sales.
Along those lines, Vickey Barron, a broker at Compass (who has represented many luxury developments), offers this tip: “Buy when the developers need a sale to meet the 15 percent occupancy rate for a pre-construction plan to be deemed effective or at the tail end of the sell-out when they have mentally moved on to their next building.”
Condo and townhouse buyers who take out a mortgage must pay a state and city mortgage tax of 1.925 percent on loans over $500,000 or 1.8 percent for loans under $500,000 (note the tax is based on the loan amount, not the purchase price).
But get this: If the seller has an outstanding balance on the original mortgage, you might be able to use a little-known tool called a purchase consolidation extension and modification agreement, or “purchase CEMA.” This legal maneuver involves combining the seller’s mortgage with the buyer’s mortgage and then modifying the terms to current rates.
You’ll need to work with an attorney to suss out the details. “A purchase CEMA can be the most effective way to save on closing costs, but the circumstances of your deal have to line up correctly in order to use it,” Pappas says. “The seller must have a high enough principal amount left on the mortgage to make it worthwhile. Both seller’s and buyer’s banks have to agree to it. And if all goes, depending on the loan amounts, there is the potential to save tens of thousands of dollars.”
For example, if the seller has an $800,000 mortgage balance and the buyer is getting a $1,000,000 mortgage, then doing a purchase CEMA can save around $15,400 in mortgage taxes. Bear in mind you may have to deduct $1,000 to $2,000 in extra fees to achieve those savings, but still.
And Pappas says most sponsor sales involve a purchase CEMA as part of the negotiations, which can help make buying a brand-new condo more doable.
New condo developers may be willing to pay buyers a closing credit rather than reduce the asking price of their units.
Gershburg says he’s aware of a building where the developer is offering a $500,000 concession on a $4 million cash purchase (it happens!); $200,000 is being offered to cover the closing costs and the rest is a closing credit.
This way the sponsor can get the sale without bringing down the purchase price and negatively impacting prices for other units. Call it big-picture bargaining.
Finally, assuming the apartment fits within your budget—and the savings aren’t canceled out by covering the developer’s closing costs—buying into a building with a heavy tax abatement can significantly lower the cost of your monthlies for years to come.
Just be sure you can afford the monthly taxes once that abatement period runs out lest you end up having to sell it—and start the closing cost cycle all over again.
In 2022, spiking interest rates, inflation and a war in the Ukraine brought considerable change to commercial real estate and the U.S. economy overall. With interest rates and values eventually stabilizing, and all stakeholders rethinking the highest and best use of their property and capital, this year promises to be an interesting one, too. Here are 10 trends likely to shape the events and transactions of 2023.
In U.S. cities that zone commercial real estate, developers are prodding city councils to consider rezoning some districts to residential, said Shaun Pappas, a partner at Starr Associates LLP.
This trend has been underway for some time in Manhattan. Pappas believes it will become a greater movement as commercial vacancies increase and residential real estate continues being squeezed. With the housing market stifled by rising mortgage rates, creating more housing development opportunity could ease home prices.
Almost 40 percent of U.S. greenhouse gas emissions derive from building construction and operation, said Eve Picker, crowdfunding platform SmallChange.co founder & CEO. Developers and property managers must ensure building efficiency and sustainability, or risk being ignored by tenants and financiers alike.
“The new normal isn’t just about embracing ‘green,’ it’s about avoiding ‘red,’” Picker said. “If your operational or development costs start to show up in that color from a maintenance or climate risk standpoint, you’ve got no hope of being in the black.”
As companies look to rebound from the pandemic, tax credits and incentives should play an even more vital role in launching projects, said Nancy Cox, partner and real estate industry leader for Top 50 accounting firm The Bonadio Group. To maximize profits, CRE execs will need to consider Low-Income Housing Tax Credits, Qualified Opportunity Zones and Historic and Brownfield Tax Credits, she said.
In the coming year, commercial real estate buyers and sellers will encounter a more stable market likely to furnish buyers with greater options, said Tomas Sulichin, president of the commercial division at RelatedISG Realty. The market, he believes, will be characterized by a slight increase in inventory.
“In the past years, buyers and tenants have been at the hands of owners and landlords,” he said. “We will soon see a market stabilization. These are all good signs of a healthy real estate market, which is cyclical.”
Commercial real estate owners will aim to ink golden anchor tenants to long-term leases, Pappas said. “There’s a big push for long-term leases with significantly established tenants in restaurant spaces, technology or other types of ‘experience’ leasing, such as large fitness centers and spas,” he noted.
“I see commercial landlords looking for those types of tenants that are established and sacrificing significant rent or providing significant tenant allowances so they can lock in long-term leases.”
With high interest rates producing elevated cap rates and declining asset values, there will be insistence on higher returns on real estate investments than on alternatives providing less risk and more liquidity. “Illiquidity demands a premium, and that’s become more and more apparent as rates rise,” said Ran Eliasof, founder & managing partner of Northwind Group.
“We’ll see more transaction volume take place in 2023,” he continued. “Some lenders will force the hands of borrowers to make the transactions a reality, and there’ll be refis of deals done four years ago…not everyone will walk away happy.”
Prospects for office real estate will continue to be clouded, with occupancies lower and office tenants re-evaluating their needs in the face of remote work.
“It may get worse before it gets better; that trend will hold,” said Mitch Rosen, managing director and head of real estate for New York City-based Yieldstreet. “I think there’s somewhat a race to the bottom on price for some of the more inferior buildings. You’re not competing anymore on what the tenants are looking for. You’re competing on dollars. There are tenants for that appeal, but not high enough quality or quantity.”
The pandemic deepened economic pressures and social inequalities existing before COVID-19, leading Americans to seek greater access to amenities, activities or job opportunities nearer their homes.
“The idea of the 15-minute city, where you can do all things you need to do within 15 minutes, has taken off since the pandemic,” said Karin Brandt, founder & CEO of coUrbanize, a community engagement platform for real estate development.
ESG’s impact on real estate will be reflected in an increase in brownfield cleanups. In New York State, for example, the Brownfield Cleanup Program incentivizes the remediation and redevelopment of eligible contaminated properties by letting taxpayers reduce their taxable income by the cost of eligible cleanup expenses in the year they’re incurred.
“The credit is for between 22 and 50 percent of qualified remediation project costs and/or 10 to 22 percent of eligible construction costs,” Cox explained. “The credit percentage varies based on the version of the program the project qualifies for and the level of contamination.”
The credit can be claimed for various time lengths depending on credit component following the issuance of a certificate of completion by the New York State Department of Environmental Conservation.
Some forget, Rosen said, that there is still plenty of dry powder in real estate that will need to be invested in the next 24 months, referring to the “tens and hundreds of billions” raised in 2021 and 2022.
“It will be a flight to quality, better assets, better markets,” he said. “If you own superior assets the liquidity should be better than in tertiary markets and poorer assets. A rising tide lifts all ships. The first to see that investment will be the better-quality assets.”
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