Shaun Pappas, a real estate attorney who works with Magnum, said he has been contacted by smaller developers about whether rent-to-own would work for them. One of his clients, Italian-born developer Stefano Farsura, said he was considering it for his 14-unit condo on 139 East 23rd Street. Sales launched in January, and all units are asking below $4 million. “We decided to stay flexible and see how the market reacts,” he said.
We are thrilled to announce our litigation department’s successful representation of a sponsor-developer that brought suit against a defaulted purchaser, who claimed his default was justified because of construction delays that amounted to six months beyond sponsor’s anticipated closing projection.
Real estate agents have a fiduciary duty to represent their clients’ interests, but it’s a seller or developer that pays agents. And, in new development, payment terms are governed by a co-broke agreement that buyers aren’t party to, said Shaun Pappas, an attorney at Starr Associates, which represents both Magnum and 196 Orchard.
Samantha Sheeber, Starr’s managing partner, disputed that a bad market had anything to do with their discussions and called the resulting agreement fair.
She said she expects Starr to now handle less brokerage agreements, but noted that some of her clients, notably high-end developers, don’t put much stock in having their product on the RLS and will still require custom agreements.
Rudder Property Group sat down with Shaun W. Pappas, Partner of Starr Associates LLP—one of New York’s pre-eminent law firms providing comprehensive legal representation for the real estate industry—to learn more about the process of converting an existing office building into commercial condominiums.
Clients and Colleagues,
A significant change to the “tenant-protection” landscape has been pending before the New York State legislature over the past months. As of yesterday, it seems the legislature has come to terms on new regulations, which are to be implemented “immediately” and which will serve to change some of the legal standards for converting occupied residential rental buildings in New York.
The Real Estate Finance Bureau has announced that it will begin posting offering plans and amendments to the offering plan database search webpage. The database will now include a “Documents” tab where the offering plan and/or amendments associated with a particular filing will be posted. The database can be accessed at https://ag.ny.gov/real-estate-
The REFB states that the “Documents” will be screened and redacted as necessary to protect private information. A complete comply of the REFB bulletin can be found here.
Make sure your brokerage and co-brokerage agreements are always in writing. It may sound simple, but the litigation team at Starr Associates LLP was compelled to defend this issue for a client in New York Supreme Court when a purported “co-broker/finder” claimed he was entitled to 1/2 our client’s brokerage commission based on an alleged oral agreement.
Although the evidence provided by plaintiff during discovery was paltry, the court permitted the case to proceed to a jury trial, based on the claim by plaintiff that a gratuity offered by our client as a “thank you” once the deal was consummated, as is common in the industry, was really an effort to pay the co-broker less than the ½ commission orally agreed-upon. Our client wholly denied that any oral agreement was ever discussed and alleged that the “thank you” payment was a simple gift. Plaintiff provided no proof of such oral agreement, other than his own testimony.
As many of you may have heard, the budget bill for New York’s 2020 fiscal year, which begins July 1, 2019, was signed into law and includes an increase to the New York State (NYS) transfer tax and so-called “mansion tax” on transfers of real property where the real property is located in any city within the state having a population of one million or more (i.e. all 5 boroughs). By way
of background, the current rate for the NYS transfer tax is $2 for every S500 (or fraction thereof) of consideration, subject to limited exceptions and exemptions and the current rate for the mansion tax” is 1% on transfers of residential real property where the consideration is in excess of $1 million.
Attached are the new applicable tax rates. It should be noted that, while the new tax will take effect on July 1, 2019, there is a safe harbor provision for transfers made pursuant to a binding agreement entered into on or before April 1, 2019 and that close after July 1, 2019.
In preparation for the new tax rates, our office will be preparing an amendment to all existing offering plans and will address the new tax rates in all pending contracts until such amendment is accepted for filing by the AG. Please give us a call with any questions and to discuss what may need to be done for your project.
It was set to be the tallest condo tower in Lower Manhattan, capped with a ring of golden bands that arched toward the sky.
But as the new year arrived, with the high-end condo market in freefall, developers Madison Equities and Gemdale Properties pulled the plug last month on their 1,115-foot supertall at 45 Broad Street, citing “market conditions.” In the previous quarter, sales in the Financial District sank almost 45 percent.
Now, the project will be delivered later, and 80 feet shorter than expected, a spokesperson for the developers told The Real Deal — though time will tell.
“Assuming 45 Broad can’t be built as a rental, due to the costs of the project, then going on hold is a smart decision given the amount of inventory on the market,” said Andrew Gerringer, managing director of new business development at the Marketing Directors.
The site, a gaping hole encased in a cordon on a busy street in the Financial District, serves as a gloomy reminder for developers: The luxury condo boom that defined the past decade has come to an end.
Back in 2013, when the U.S. economy was rebounding and foreign capital was flowing through the city, 84 Manhattan condo projects were filed with the New York attorney general’s office, according to a TRD analysis. The next year, that number peaked at 86.
Today, many of the units in these luxury buildings are still sitting vacant, and they could take more than six years to sell, according to appraiser Jonathan Miller of Miller Samuel.
To put that in perspective: There is $5.7 billion in existing inventory on the market and $2.2 billion in contract, according to a 2019 new development condo report from Halstead Development Marketing, which counted $13 billion in sales that have closed since 2018. Those figures combined still fall short of $33 billion worth of inventory lurking in the shadows, according to Halstead.
Condos conceived at the peak of the market are launching sales at a time defined by oversupply and uncertainty, forcing developers to cut prices, seek lender lifelines and come up with creative concessions to stay afloat. There are more than 1,000 unsold units across Manhattan’s four biggest condo projects, according to an analysis of figures from Nancy Packes Pipeline and Transactions Databases that are licensed to the real estate industry.
“Anyone who thinks they can just sit there and charge the exorbitant prices they were able to get three or four years ago and they’re going to be able sell inventory in a prompt manner … it’s not going to happen,” said Christopher Delson, a partner at the law firm Morrison & Foerster.
While some developers are choosing to halt projects before they rise from the ground, others are opting for smaller boutique models over the gargantuan skyscrapers that hallmarked the boom. Eighty percent of the 51 Manhattan condo plans filed in 2019 were for projects with fewer than 50 units, according to TRD’s research. None of the projects had more than 200 units.
“I don’t think anyone is running to do a lot of new condo now,” said JDS Development Group’s Michael Stern, who argued the slowdown will clear the runway for new units to sell.
Others note that it’s a mixed bag for existing inventory, based on quality and price. “I think we are in a fragmented market, and all projects are not created equally.” said Robin Schneiderman, business development director for Halstead’s new development division. “While there are challenging spots, there are also spots that continue to perform very well.”
The decade’s boom-to-bust trajectory has taken a professional toll on many in the industry — and a personal one. Perhaps few have felt it more than Joseph Beninati. The Bronx-born developer burst onto the scene in 2013 with plans for a 950-foot-tall condo tower at 3 Sutton Place. But the 113-unit project collapsed under financial pressures, including costly payments on a $147 million construction loan. A 12-unit condo project at 515 West 29th Street sponsored by the developer’s firm Bauhouse Group also collapsed into litigation.
This January, Beninati filed for personal bankruptcy in Texas, disclosing that he has $24 million in liabilities and just $900 in his checking account. He surrendered the Mercedes and Audi he had been leasing. The developer, who could not be reached for comment, now earns $1,500 a month doing acquisition work for a company named Other Side Industrial, according to filings.
Beninati’s collapse was more a result of his inexperience and missteps than the market downturn. But the risk of casualty is high across the board.
“If the U.S. goes into recession, the stock market will be down, everyone will be hurting, and that will undermine the luxury market,” said Mark Zandi, chief economist at Moody’s Analytics.
“I do think recession risks, generally, are high and will remain high because of where we are in the business cycle,” he said. “The odds are probably one in five for this year, but if you told me we had a recession sometime in the next two to three years, I would not be surprised.”
A big correction?
Last March, veteran condo developer William Zeckendorf traveled to Albany to lobby against a proposed pied-à-terre tax. While his efforts helped kill the proposal, increased mansion and transfer taxes were imposed as an alternative, hitting high-end buyers directly.
These legislative changes, which followed a federal cap on state and local tax deductions, are part of a wider political shift that has rocked the industry’s long-standing power in New York and caused tension with a younger generation of activists concerned about gentrification, corporate transparency and climate change. The shift also put pressure on a sales market already struggling with a sharp decline in foreign buyers.
It’s difficult to know which factors had the most impact — from overpricing to politics to foreign buyers, the pool is vast — but by the end of the decade, no one doubted that the market had taken a major hit. In 2019, only 935 luxury contracts — which included condos, co-ops and townhouses — were signed for a total value of $7.65 billion, the lowest dollar volume since 2012, according to Olshan Realty.
As always, there were outliers: Vornado Realty Trust’s 116-unit tower at 220 Central Park South brought in record-breaking sales following its 2015 launch, including the $238 million penthouse purchased by hedge-funder Ken Griffin last January — the most expensive home sale in U.S. history.
Farther downtown, Amazon’s Jeff Bezos dropped $80 million on three units at 212 Fifth Avenue five months later, marking the largest downtown condo deal in history.
But while news of big sales gave the appearance of continued strength in the luxury market, they often spoke more to an extinct market rather than to current conditions: Many of the prices were fixed years ago when the units went into contract.
With the sales market in flux, high-end rentals reaped some of the rewards as buyers retreated to temporary homes to wait for prices to hit bottom. “Luxury rental prices boomed at the onset of the financial crisis and then stabilized for about six years, then began to climb again in 2019,” Miller said. In the last quarter of 2019, they hit a median price of $9,000 — the highest in 10 years.
Of course, in the world of big money, big stakes and big egos, real estate is an inherently risky business, and some brokers insist the narrative of doom is overstated. Volatility is par the course, they say, and New York will always be seen as an attractive place to buy.
“I think it’s easy to jump on the bandwagon and say how bad the market is,” said Douglas Elliman’s Richard Steinberg, who noted that, while 2019 was a particularly difficult year, his team saw a 50 percent increase in sales in the fourth quarter, and he was positive going into 2020.
He said the uptick showed that developers and sellers were slowly accepting that prices had to come down.
The last big drop in luxury pricing came at the onset of the financial crisis, Miller said. The current retreat is notably longer; prices peaked in 2016 and continued to fall through the end of last year. While there may be another price correction ahead, Miller said, the “heavy lifting,” by and large, is over.
Longtime Sotheby’s International agent Nikki Field said brokers themselves are jumping into the market, a vote of confidence for buyers considering their options. “My senior partner Kevin Brown bought a condo recently, and I’m buying a co-op,” she said. “When an experienced professional in the field is buying at this time, you know that we feel this is the right opportunity.”
But despite positive forecasts, the declines in recent years have undoubtedly led to collective soul searching about where things went wrong. The climate should be ideal for sales: The U.S. economy is still strong; the S&P 500 skyrocketed 30 percent last year; and interest rates are near an all-time low. Yet one-in-four new luxury condos built in New York City since 2013 were unsold as of last September, according to an analysis by StreetEasy.
The glut of inventory raises questions about whether there was ever enough demand for all the luxury units that were built and whether developers relied too heavily on all-cash foreign buyers who saw Manhattan as a safe haven for their money.
Donna Olshan, head of the boutique residential brokerage Olshan Realty, said developers should have given more thought to who was coming to the city, including the thousands of tech workers who are expected to move here in the coming years as companies, including Facebook, Google and Amazon, boost their New York operations.
“I think the developers suspend reality — if they can raise the money to build a project, they do,” she said. “They’re like Broadway producers. They always think they have a hit.”
One57 for all
When the financial crisis rocked Manhattan’s luxury condo market in 2008, everything from bank lending to construction ground to a halt. But in 2014, an ambitious skyscraper rose up over Central Park, built by Gary Barnett’s Extell Development.
One57 — a record-breaking, 75-story structure with a facade of silver and blue squares — cemented Barnett’s place as a pioneer, pushing prices higher and ushering in an ultra-competitive era of luxury real estate.
“It was the great project at the time,” said Charlie Attias, a broker at Compass who’s been selling condos in Manhattan for nearly two decades. “There was nothing else.”
But 10 years into the country’s longest economic expansion and one of the city’s most dramatic real estate cycles, Barnett — like dozens of other high-profile developers — is struggling to sell.
Extell’s One Manhattan Square, the biggest project on the market with 815 units, has sold just 223 apartments with another 39 in contract, according to TRD’s analysis of data provided by Nancy Packes.
At One57, resale prices have reflected the market’s decline. Last year retail heir David Lowy sold his three-bedroom unit at the tower for $19 million, about 32 percent less than what he paid in 2015. It was the largest resale loss of 2019.
Extell declined to comment for this story. But in an interview with this publication last December, Barnett said the city’s unpredictability has led his firm to look more outside New York and move further into rentals.
“We don’t have the velocity we’d like to see, but we are signing deals,” Barnett said of Extell’s Billionaires’ Row projects. “We are chipping away at the inventory. There’s less inventory at that super high level. There are also fewer buyers.”
He expressed confidence, however, that the Manhattan condo market would recover. For high-stakes developers, an aura of confidence can help to allay buyer nerves in a sentiment-driven climate. But some are seeing clearer results than others.
HFZ Capital’s Ziel Feldman famously paid $870 million for a full city block near the High Line — one of the priciest Manhattan land deals ever — and borrowed $1.25 billion — one of the largest construction loans of the cycle — to build his firm’s two twisting towers at 76 11th Avenue. Sales officially launched at the building in September 2018.
The developer is targeting a total sellout of $2 billion. But while New Zealand billionaire Graeme Hart reportedly went into contract for a $34 million penthouse at the building last June, there have been no recorded sales on XI’s 236 condo units to date, Packes’ data showed. HFZ declined to comment.
For now, the Related Companies appears to be leading the pack at its 15 Hudson Yards development, where 171 of the 285 units are sold, and 10 are in contract, according to the firm.
On the other end, Aby Rosen’s RFR Holding and Chinese firm Vanke have started to slash prices at its 94-unit, 63-story condo at 100 East 53rd Street, where just 23 of the property’s units had closed as of December 2019, according to public filings. The developers took on huge debt for the project, including $360 million from the Industrial and Commercial Bank of China.
“I don’t think there’s a single new development building that has not come under pressure from banks,” Leonard Steinberg, the Compass agent directing sales, told TRD in December. “But it’s not like there’s a gun to our heads.” RFR declined to comment.
Olshan said players who are being squeezed will need to renegotiate their debt, noting that every developer has a different relationship with their backers. “Obviously, if they’re not selling, they have to placate their equity partners,” she noted.
“Some of them will stay forever and hang in there. Others won’t.”
Money matters
In Downtown Manhattan, on the border of Chinatown, Extell’s One Manhattan Square stands as a symbol of boom-era goals and market realities.
Since sales launched in 2015 — the first push targeting buyers in China, Malaysia and Singapore — the developer has introduced an array of concessions to spur deals, offering to waive common charges for up to 10 years and even launching a rent-to-own program that allows residents to try before they buy.
The program has also been rolled out at two Downtown properties owned by Ben Shaoul’s Magnum Real Estate Group.
Jordan Brill, a partner at the firm, said the plan made sense in an uncertain market fraught with psychological barriers. “Product’s moving very slow because people are being extra cautious and want to make sure they make a sound investment amidst this relative state of paralysis,” he said.
Shaun Pappas, a real estate attorney who works with Magnum, said he has been contacted by smaller developers about whether rent-to-own would work for them. One of his clients, Italian-born developer Stefano Farsura, said he was considering it for his 14-unit condo on 139 East 23rd Street. Sales launched in January, and all units are asking below $4 million. “We decided to stay flexible and see how the market reacts,” he said.
The developer, who filed plans for his project in 2019, said he had changed course as he watched the market struggle. First, he scrapped a penthouse with a rooftop garden — an “ego apartment,” he called it — in favor of making the units more uniform in price and converting the rooftop into a communal space with open-air seating and a barbeque. His next step was to push sales back to when the project was all but complete, a trend that is becoming more common because buyers don’t have the same sense of urgency they once did and often want to see their units before signing a deal.
“We have a number of condo projects that are on the drawing board — things that we know will happen — but people are holding off putting them on the market until they are close to completion, as opposed to pre-construction marketing,” said Jay Neveloff, a partner at the law firm Kramer Levin Naftalis & Frankel.
But as concessions, incentives and even delayed sales launches become pervasive — in many cases coupled with price cuts — the line between solid strategy and marketing gimmick can narrow. In January, star Nest Seekers broker Ryan Serhant surprised some in the industry by posing behind a pile of cash for an Instagram video, in which he announced, “I’m going to offer $50,000 in cash to the first broker who brings me a deal at 196 Orchard in 2020.” (Magnum, the firm behind the Downtown project, later confirmed it was footing the bill.)
Brill said he was surprised to see a few people suggest the promotion was unethical and put the criticism down to shortsightedness. “Any broker looking to push a transaction through today is going to offer either a piece or all of that incentive to their buyer, and what would be unethical is not sharing that extra $50,000 with their buyer,” he said.
The need to lift sales is particularly pressing for developers weighed down by large amounts of debt. One luxury condo project that almost came apart because of missed loan payments and sluggish sales is 125 Greenwich. Sponsored by Davide Bizzi’s Bizzi & Partners, Howard Lorber’s New Valley, China Cindat and the Carlton Group, the building topped out last March but is plagued by litigation and has yet to be completed.
Singapore-based United Overseas Bank, which lent $195 million on the 275-unit project, moved to foreclose on the developers at the Downtown site last summer, then sold the debt to development firm BH3 Capital Partners. A separate foreclosure action by an EB-5 lender, Nick Mastroianni’s USIF, is also stalled after a planned auction did not happen last summer. And in December, a complaint was filed against the developers for skipping seven months of rent for the project’s sales office on the 84th floor of One World Trade Center.
“If you haven’t started and gotten your construction loan yet,” the Marketing Directors’ Gerringer noted, “why would you build today in a market like this when there is so much uncertainty and so much at risk?”
Despite the challenges at some big development sites, Neveloff predicted most well-backed projects would withstand the current market pressures with plenty of options for prominent sponsors to recapitalize.
But George Doerre, vice president at M&T Bank, predicted there would be fewer construction loans in 2020.
“The number of people coming forward looking for condo financing just isn’t there,” he said, noting that rent reforms had hampered condo conversions. For those projects that were initiated, Doerre added, “you have to feel really confident in their ability to sell out.”
Tall orders
JDS Development’s Stern — one of the luxury condo market’s newcomers of the last decade — has been building an ambitious 1,428-foot development at 111 West 57th Street on the backdrop of the luxury slowdown.
The 60-unit condo project, which has a projected sellout of $1.3 billion, was co-developed by Kevin Maloney’s PMG and equity investor Ambase, which was later sidelined from the project after a drawn-out legal battle over ownership stakes and missed capital calls.
But if Stern is worried about marketing 111 West 57th — the world’s skinniest skyscraper with just one unit per floor — he doesn’t show it. After launching sales in 2016, he suspended them amid the slowdown and relaunched in 2018. While the developer declined to discuss figures, he said interest has been strong, primarily from domestic buyers. The project’s first closings are expected in April, and construction is expected to wrap this year.
His project is one of the newest on Billionaires’ Row, which has become crowded since One57 was built and is known for both record sales and disappointing resales.
A recent Miller Samuel analysis of eight buildings in the area found that close to 40 percent of units remain unsold as of September 2019. (Extell’s Central Park Tower at 217 West 57th Street was not included.)
“The developers on 57th Street started building condominiums for people that barely exist in the world,” Terra Holdings owner and co-chair Kent Swig told TRD last December. “I don’t think people did their demographic homework.”
At Vornado’s 220 Central Park South — which Miller estimated to be 85 percent sold — the 116-unit building’s golden touch is soon to be tested: The first reported resale was listed this year with owner Richard Leibovitch asking $10 million more than he paid just a year ago.
Stern said that while 2019 was difficult for the industry, the slowdown in new projects was positive.
“We should see some of the older inventory absorbed, and that bodes well for moving more product in 2020 than we did in 2019,” he argued.
Future Outlook
In the past decade, 22,304 condo units were built in Manhattan, the most of any borough, according to data from Packes first reported by The New York Times.
Although the 10 biggest Manhattan condo projects on the market have hundreds of empty units among them, Miller said condos priced below $5 million were faring well. Commentators often speak about the condo market as a monolith, he said, but sales below $5 million make up 96 percent of it. That portion, he said, “is moving sideways or rising.”
Though often discounted, sales are still happening. There were 611 condos sold last year, according to CORE’s year-end report, fueled in part by the pre-mansion-tax rush in June. That was a slight uptick from 605 the previous year but down from 840 sales in 2017 and 883 in 2016.
Many luxury brokers are still optimistic about the year ahead, while reserving caution about the potential effects of the federal election. An analysis for TRD by Jonathan Miller of co-op sales between 2008 and 2019 shows this concern is warranted: Sales in presidential election years dropped 12.7 percent between June and October and peaked again in November and December.
Global volatility, which brokers say has wreaked havoc on the sales market in the past few years, will not slow any time soon. The impeachment trial, unrest in Iran and mounting concern over climate change all play into buyer sentiment.
“The biggest concern, for me, is the pied-à-terre tax,” Elliman broker Frances Katzen said. “I think if that goes into effect — excuse my language — we’re fucked because we are heavily reliant on that investor component to diversify and absorb a big chunk of what’s being built.”
Many in the industry argue that well-priced inventory will continue to sell, though disagreement persists about what pricing is realistic. “Part of the condo story is, What is the good inventory and the bad inventory?” said Stephen Kliegerman, president of Halstead Property Development Marketing. “At some point, when do we not count them as inventory anymore when they’ve been on the market for so long?”
Neveloff is confident developers can navigate the uneven terrain. “I don’t expect to see many foreclosures,” he said. “I certainly don’t expect to see many bankruptcies.”
Morrison & Foerster’s Delson differed. “My guess is we’re going to start to see foreclosures,” he said, noting that the process usually takes about two years.
Outside Manhattan, other boroughs are also showing growth, and Brooklyn has been transformed with new development in the past decade. “New York is a bifurcated market,” said Compass’ Elizabeth Ann Stribling-Kivlan. Despite industry fears of a recession, she has seen much worse.
“In the 1990s, you couldn’t give apartments away,” she said. “We aren’t in a situation like that.”
Source: The Real Deal
We are thrilled to announce our litigation department’s successful representation of a sponsor-developer that brought suit against a defaulted purchaser, who claimed his default was justified because of construction delays that amounted to six months beyond sponsor’s anticipated closing projection. Although not entitled to terminate the purchase under the offering plan or purchase agreement, the defendant-purchaser failed to appear at the closing and consummate the sale. Defendant-purchaser claimed that sponsor had materially misrepresented the timing for the closing, which led him to forego exercising a right of rescission provided to all purchasers that had since come and gone. Our firm filed and won summary judgment in its entirety, permitting the sponsor to retain the full deposit as liquidated damages as well as pursue reimbursement of all attorneys’ fees, costs, and expenses.
In granting summary judgment, the Court determined that sponsor met its initial burden of proof and that defendant-purchaser was unable to establish the existence of a triable issue of fact that would excuse his failure to close. In particular, the Court found that defendant-purchaser not only failed to establish the requisite “knowingly false” (a/k/a scienter) statement on the part of sponsor, but also that defendant was unable to establish any material misrepresentations or justifiable reliance.
This decision is an achievement for all developers as we are unfortunately in a time in which many purchasers will threaten litigation as a tactic to force settlement regardless of the quality of their claims. The decision underscores that the obligation to abide by the terms of the offering plan and purchase agreement flow not only to the sponsor, but also to each individual purchaser who purchases thereunder, and it serves to refute and deter unsubstantiated claims by a purchaser who ultimately had no legal right to avoid closing and cancel the contract.
UPDATE Monday, January 6, 2019, 11:22 a.m.: In less than three minutes, Ryan Serhant inadvertently acknowledged residential real estate’s elephant in the room: agent incentives.
“I went to the bank and I took out a lot of money and I’m going to offer $50,000 in cash to the first broker who brings me a deal at 196 Orchard in 2020,” the celebrity broker announced in a video he posted on Instagram on New Year’s Day. (He posted a second, longer video on YouTube.)
The building in question is Magnum Real Estate Group’s Lower East Side condo, which launched sales in 2016.
In one video, Serhant, clad in a pinstripe suit and seated at a table piled with bundles of $100 bills, explained his rationale: In a “tricky” market rife with “annoying” emails offering agents incentives and higher commissions, he’s dangling the king of all carrots.
“Game on,” he said.
Notably, the $50,000 — on top of a broker’s standard commission — is not actually coming out of Serhant’s pocket. Despite Serhant filming himself withdrawing cash, a spokesperson for Magnum confirmed the developer was footing the bill.
But the bold, dramatic move has reached thousands and has shined a light on the lack of transparency around the long-standing practice of developers dangling sweeteners in front of buyer’s brokers.
Compass’ Leonard Steinberg, who initially handled sales at 196 Orchard, didn’t mince words when told about the Serhant’s offer. He took a lengthy pause before saying “that’s my comment. Like, speechless.”
Nikki Field of Sotheby’s International Realty called Serhant’s offer “an alarming conflict of interest” and said any kind of cash-based incentive casts doubt on an agent’s credibility.
“It’s highly unethical in my book,” she said. “I’m so against it. I will not be taking my clients to this property and I do not take them to properties that have this kind of incentive.”
Magnum, which said it hired Serhant in December to sell off the remaining 30 percent of the 96-unit building, stands by the cash offer.
“This incentive demonstrates that we are proud of our product,” Jordan Brill, a partner at Magnum, said in a statement. “This is not a stunt, but a real cash offer that shows we are ready to close.”
Some critics say that these incentivizes raises ethical questions because agents can legally pocket these perks without their clients ever knowing.
Real estate agents have a fiduciary duty to represent their clients’ interests, but it’s a seller or developer that pays agents. And, in new development, payment terms are governed by a co-broke agreement that buyers aren’t party to, said Shaun Pappas, an attorney at Starr Associates, which represents both Magnum and 196 Orchard.
Field admitted the high-ball offer shows Magnum’s commitment to sell and said that, if she had a client who wanted to see a property at 196 Orchard, she would disclose the cash bonus upfront and pass the money to her client.
In one of Serhant’s videos, he said as much: “If you don’t care about fifty grand, tell your clients I’ll give them $50,000 off.”
In a later interview, he expressed surprise at the criticism.
“Ethics isn’t a part of it. All we’re doing is paying more commission,” he said. “[I’m] just the first one who put a dollar figure on it and blasted it on social media.”
Compass broker Michael Graves jumped to Magnum and Serhant’s defense, calling their $50,000 offer something that should be “applauded.”
“I’m a huge advocate for incentivizing and rewarding the agent community,” he said. “They’re working much harder for less… They need to be and should be rewarded for their work”
He said he doesn’t see additional compensation, regardless of form, as a conflict of interest.
“I believe the culture of brokerage hasn’t rewarded agents enough,” he said. “Agents often get overlooked and I don’t believe that agents are paid as well as they should be… This is a great step in that direction.”
Graves is putting his money where his mouth is at one of his new development projects in Williamsburg. At 138 North 10 Street, he’s personally paying to give buyers’ agents an additional 0.5 percent in commission, a Vespa and a yearlong membership at the Bathhouse valued at about $3,000 for any contract signed before Feb. 15.
“It’s us giving up a portion of our commission to reward the agent community,” he said. “Brokers can do what they wish with this.” Graves said he began offering the incentive in December.
In addition, incentives aimed at buyers’ brokers have been circulating behind closed doors, mostly by way of verbal agreement and email blasts.
An internal document produced by the Corcoran Group and shared with The Real Deal by an industry source shows an aggregated list of 46 new development projects offering a range of agent incentives as of October 2019. The document bears Corcoran’s logo and copyright notice, but the brokerage did not comment on its authenticity.
The most common sweetener was “above standard commissions” ranging from 3.5 to 4.5 percent, particularly for agents that did multiple deals within a building. Eight of the developers were offering to pay advanced commission upon contract signing for up to half of what they owed agents. (One email sent from Douglas Elliman in mid-December promised buyers’ agents up to 5 percent commission on sponsor units in five Tudor City buildings.)
More creative offers included a $5,000 Saks Fifth Avenue gift card and VIP personal shopper Magnum was giving out for every contract signed at 389 E 89 before Dec. 31. (Another late December email, this time from MNS, offered buyers’ agents a $5,000 American Express card for any deal signed by the end of 2019 at 1325 Fifth Avenue.) Meanwhile, at 34 Maspeth Avenue, a five-unit project in Williamsburg, boutique developer Black Diamond Design and Development offered agents a $15,000 closing bonus.
Finally, at 190 South 1st Street, a condo developed by Adam America Real Estate and partners, there was a $50,000 closing credit for the penthouse unit. The developers did not respond to requests for comment.
It’s all in the name of getting the job done, according to appraiser Jonathan Miller, whose firm Miller Samuel authors Douglas Elliman’s market reports and has been tracking industry data for years.
“This phenomenon is natural,” said Miller. “It’s something that we see in every down cycle.”
In the late 1980s and early 1990s, veteran broker Donna Olshan recalled developers offering up to 10 percent commissions, jewelry, vacations and, once, even a Rolls Royce to agents.
Tracking those incentives, outside of email lists and brokerage agreements, however, is challenging. Corcoran’s method of tracking incentives is unparalleled, according to multiple industry sources, though Compass is attempting to produce a comparable document to its agents. And Elliman has prepared similar reports for developer clients, one insider said.
What Magnum and Serhant did, postering their cash incentive publicly all over social media where homebuyers could easily find it, is unusual. But that’s why Magnum hired Serhant. “Ryan’s reach helps us connect with a wide range of buyers,” Brill noted.
Serhant ultimately shrugged off his haters.
“The fact that people are talking about it is exactly the point,” he said, “so, I guess, job well done.”
Clarification: The timing of when broker Michael Graves began offering incentives at 138 North 10 Street was added.
SOURCE: https://therealdeal.com/2020/01/06/ryan-serhants-50k-cash-offer-to-buyers-agents-ruffles-feathers/
Amid a surplus of new development inventory, there’s a new standard brokerage agreement that should, in theory, make life easier for buyers’ brokers.
The document, known as the universal new development brokerage agreement, standardizes contractual terms between developers and outside brokers. As of Oct. 1, signing it became mandatory for any developer that wishes to list its sponsor units on the Real Estate Board of New York’s Residential Listing Service. REBNY president Jim Whelan explained the matter to owners and managers in an internal memo.
Though previous versions of the agreement existed, this marks the first time REBNY has made its use a condition for listing units on the RLS.
The document defines the net purchase price upon which a broker commission is calculated (it excludes concessions, but includes ancillary features, like storage or parking); caps a broker’s indemnification at the amount of their commission; and allows buyers to switch their brokers at any time.
It also mandates an initial 60-day registration period for potential buyers with 30-day extensions. In new development, owners keep track of relationships with potential buyers and whether they’re working with a broker via a registration process. If the client has a registered broker, the developer is legally bound to pay their commission. To keep registration valid, the buyer and their broker must either visit the sales office or exchange purchase offers with the owner.
Before, each developer and their legal team prepared a custom agreement, with varying definitions and conditions, and then issued it to brokerages. If they signed, its brokers could bring buyers to the property; if not, they were not permitted to broker deals in the building. This disproportionately affected smaller brokerages which may not have received the agreements to begin with.
Other significant clauses in the agreement include the stipulation that any disputes between developers and brokers, aside from one over commission, be resolved in the New York court system, as opposed to in REBNY arbitration.
The legal threshold for broker misconduct under the new agreement is “willful misconduct or negligence,” and indemnification is unlimited if proven. So, for example, if a broker misrepresents certain amenities in a building, a developer could argue they were negligent, according to attorney Shaun Pappas of Starr Associates LLP.
“Everyone’s agreed now to these terms,” said Stephen Kliegerman, president of Halstead Development Marketing. “Basically, it makes life a lot easier for everyone.”
Kliegerman and Warburg Realty’s Steve Goldschmidt worked on the agreement for the past five years as the co-chairs of REBNY’s residential new development committee.
In the past, brokers would lose business if they lost track of a project’s individual registration term or other one-off terms that could void their commission in the worst case, according to Goldschmidt.
“The most common problem was simply getting a call on a Saturday afternoon [from a broker saying] we’re not on file and they won’t let me show,” he explained.
That dynamic has since changed with New York’s huge oversupply of new construction, and Goldschmidt said that’s helped their cause as he and Kliegerman consulted with developers and their attorneys to get buy-in.
“During the height of the market, developers were not inclined to be very flexible,” said Goldschmidt. “Now, they need brokers to be involved.”
One of their counterparts advocating for developers was Starr, which represents HFZ Capital Group, Hines and Magnum Real Estate Group, among others.
Samantha Sheeber, Starr’s managing partner, disputed that a bad market had anything to do with their discussions and called the resulting agreement fair.
She said she expects Starr to now handle less brokerage agreements, but noted that some of her clients, notably high-end developers, don’t put much stock in having their product on the RLS and will still require custom agreements.
“On a big project, on a high-end project, [the RLS is] really not that important,” she said, repeating feedback she’d fielded from clients. “On smaller projects, not as high-end, it’s a little bit more important.”
Steve Rutter, head of new development in New York at Compass, said he didn’t think any of the new terms were “onerous or anti-broker.”
“Anything that lends clarity to how a customer is registered and how that broker earns their commission, I think helps everybody,” he said.
SOURCE: https://therealdeal.com/2019/10/25/rebny-rolls-out-ground-rules-for-selling-new-development/?utm_medium=social&utm_source=email&utm_campaign=single_content_share
Rudder Property Group sat down with Shaun W. Pappas, Partner of Starr Associates LLP—one of New York’s pre-eminent law firms providing comprehensive legal representation for the real estate industry—to learn more about the process of converting an existing office building into commercial condominiums.
Typically a commercial condominium offering plan takes about 3 to 5 months to be accepted by the Attorney General’s office (AG). There is a comment stage after the offering plan is submitted where the AG can request additional information or clarity on the property and the disclosures made.
The best way to ensure a smooth conversion process is to assemble a team with experience converting properties to condominiums. To successfully execute an office condominium conversion you’ll need an architecture firm (to provide a building condition report), tax attorneys (to provide tax projections), income tax attorneys (to provide an opinion on mortgage deductions), budget experts (to create the initial budget for the property) and brokers (to certify common interest and conduct sales efforts).
They are actually somewhat similar. The biggest difference is that an occupied commercial building falls under a Part 20 Offering Plan (AG regulations), which allows for a faster review and comment stage. An occupied residential building is a Part 23 Offering Plan and takes about six more months for review and approval and has a multitude of residential tenant protections and requirements to adhere to.
A commercial land owner can also submit a no-action letter for faster approval. However, this is typically only permitted to create two- to three-unit condominiums LEGAL CORNER CONVERTING AN OFFICE BUILDING TO COMMERCIAL CONDOMINIUMS where the owner is not making a public offering but has a targeted purchaser who is a sophisticated investor and thus does not require protection of the Martin Act and AG regulations.
The cost is generally around $100,000.
If you own a condominium, your unit and a percentage of the common elements belong to you. The Unit is a deeded interest. A co-op owner, often called a shareholder, does not own the physical unit. In fact, we call that person a tenant under a proprietary lease. The co-op—which is usually a corporation consisting of all the shareholders—owns the entire building, including all of the individual units. Each co-op owner holds shares in the association (just like owning shares in any other corporation) under the “proprietary” lease. That lease spells out the rights and responsibilities of the owner, as well as the obligations and duties of the association.
The residential real estate world was changed dramatically after Governor Cuomo signed new legislation related to rent regulation reform. Part of this legislation applies to changes made to the conversion of occupied residential rental buildings, which makes it significantly more challenging to declare your offering plan effective if there are tenants in place at the time the offering plan is accepted — there is now a requirement that 51% of tenants in occupancy on the date the offering plan is accepted for filing must agree to purchase dwelling units before the offering plan can be declared effective. The good news is that the recent reforms to the General Business Law as they relate to the condominium conversion process in New York do not impact conversions to commercial condominiums.
The CPS-1 is a cost effective tool to test the market prior to submitting an offering plan. It permits an owner to set up a website and solicit interest from the market on the condominium conversion. The owner cannot enter into any deals or contracts but can get a better understanding of the appetite for the project from a market perspective.
This is the best news. The owner can retain the unconditional right to rent rather than sell units. So long as the owner sells the minimum number of 15% required under the AG regulations, the owner can then rent the remaining units in perpetuity.
Link to full article: Legal Corner
Clients and Colleagues,
A significant change to the “tenant-protection” landscape has been pending before the New York State legislature over the past months. As of yesterday, it seems the legislature has come to terms on new regulations, which are to be implemented “immediately” and which will serve to change some of the legal standards for converting occupied residential rental buildings in New York. These changes do NOT apply to offering plans that have been submitted to the Department of Law. In addition to eliminating the “eviction plan” process and adding an additional “exclusive purchase period” for tenants in occupancy (by way of a 6 month right of first refusal should the unit be sold to a third-party), the most notable change is that the legislature reforms Section 352-eeee of the General Business Law as it relates to conversions to condominiums and cooperative regimes by adding a new obligation that 51% of tenants in occupancy on the date the offering plan is accepted for filing must agree to purchase dwelling units before the offering plan can be declared effective. Previously, it was required that 15% of units be under contract with either tenants or bona-fide purchasers that intend to occupy their units in order to declare the offering plan effective.
We have attached the blackline of the relevant section of the legislation that pertains to conversions of occupied buildings. In addition, the press release from the NY Assembly can be found at the following link:
https://nyassembly.gov/Press/files/20190611a.php
We will keep you updated as continued developments unfold. As it stands now, this legislation in its current form is incredibly impactful to the conversion process in New York, both from a legal perspective as well as from an asset valuation perspective. We are available to discuss these changes and their impact on your current or potential projects.
AG BULLETIN
The Real Estate Finance Bureau is pleased to announce that it has started posting offering plans and amendments to the offering plan database search web page. The database search results will now include a “Documents” tab when the offering plan and/or amendments associated with a particular filing have been posted to the database. This new tab will appear to the right of the “Stat Card” tab. Users may download individual or multiple documents using the appropriate buttons and checkboxes on the “Documents” tab.
Documents will be posted to the database once they have been screened in accordance with New York State law, regulations, and policy. Accordingly, some of the documents posted to the database may have private information redacted (i.e., blacked out). Such information includes, but is not limited to, bank account numbers, residential addresses, and purchaser or tenant names.
Please note that, because only screened documents will be posted to the database, the “Documents” tab may not include all documents reflected on the “Plan Details” tab of the database search results. For example, even if the “Plan Details” tab shows the offering plan and 6 amendments have been accepted for filing by the Department of Law, only the offering plan and amendment 3 may be posted to the “Documents” tab. Moreover, the “Documents” tab will only appear if documents have been posted for that particular filing. If documents have not been posted to the database for a particular filing, there will be no “Documents” tab. Additional documents will be posted to the database on an ongoing basis as they are screened.
The Real Estate Finance Bureau offering plan database is available at https://ag.ny.gov/real-estate-
Make sure your brokerage and co-brokerage agreements are always in writing. It may sound simple, but the litigation team at Starr Associates LLP was compelled to defend this issue for a client in New York Supreme Court when a purported “co-broker/finder” claimed he was entitled to 1/2 our client’s brokerage commission based on an alleged oral agreement.
Although the evidence provided by plaintiff during discovery was paltry, the court permitted the case to proceed to a jury trial, based on the claim by plaintiff that a gratuity offered by our client as a “thank you” once the deal was consummated, as is common in the industry, was really an effort to pay the co-broker less than the ½ commission orally agreed-upon. Our client wholly denied that any oral agreement was ever discussed and alleged that the “thank you” payment was a simple gift. Plaintiff provided no proof of such oral agreement, other than his own testimony.
After jury selection and a three day trial, where our firm questioned the validity and existence of the alleged oral commission agreement on cross examination of the plaintiff, a unanimous verdict was returned in favor of our client. The jury found there was not enough evidence to support plaintiff’s claim of an oral co-brokerage agreement.
It is important to note that, during the trial there was much debate as to whether the “procuring cause” standard should be applied to co-brokers as it is applied to brokers in general. While the judge ultimately decided not to instruct the jury that plaintiff was required to prove its case based on the procuring cause standard, it is open for future litigation as to whether a co-broker must also show he or she is the procuring cause of the transaction or if any alleged interaction, no matter how peripheral, is enough to state a claim for an oral co-brokerage agreement. Thus, brokers open themselves up to a factual dispute and potential litigation if their commission agreements, no matter how big or small, are not memorialized in writing. Protect yourself.
Please call us at Starr Associates LLP if you need any assistance in preparing, reviewing or memorializing your commission agreement or if you are involved in a brokerage dispute.
As many of you may have heard, the budget bill for New York’s 2020 fiscal year, which begins July 1, 2019, was signed into law and includes an increase to the New York State (NYS) transfer tax and so-called “mansion tax” on transfers of real property where the real property is located in any city within the state having a population of one million or more (i.e. all 5 boroughs). By way
of background, the current rate for the NYS transfer tax is $2 for every S500 (or fraction thereof) of consideration, subject to limited exceptions and exemptions and the current rate for the mansion tax” is 1% on transfers of residential real property where the consideration is in excess of $1 million.
Attached are the new applicable tax rates. It should be noted that, while the new tax will take effect on July 1, 2019, there is a safe harbor provision for transfers made pursuant to a binding agreement entered into on or before April 1, 2019 and that close after July 1, 2019.
In preparation for the new tax rates, our office will be preparing an amendment to all existing offering plans and will address the new tax rates in all pending contracts until such amendment is accepted for filing by the AG. Please give us a call with any questions and to discuss what may need to be done for your project.
Our team has had the pleasure of working with Starr Associates on our project at 150 Rivington Street. The entire Starr team was a tremendous asset to the success of our project. Through very challenging times, Starr Associates came through time and time again. It is an honor to work with everyone at Starr!
I have known Allan Starr for many years and worked with him on many projects. He has always exceeded my expectations. He not only knows the ins and outs of the law, but knows how to make the whole process easy and quick. I’ve found him to possess an incredibly astute legal mind, combined with a common sense approach that always accomplishes my goals. He’s not only a gentleman and a friend, but a brilliant lawyer.
It has been an absolute pleasure working with Allan Starr and Samantha Sheeber over the past twelve years. They are not only the utmost professionals, but also wonderful people who I have grown to love like family. I trust them with all of my new development projects and private clients, and we support each other in our business and personal lives. Starr Associates LLP has always been there for me and my clients and I would recommend them as highly as I recommend anyone.
Allan and I have worked together for decades; along the way, I have worked with Samantha Sheeber, Andrea Roschelle, John Rodriguez and Erica Starr and have always been pleased with their quick and accurate responses. They have worked with us on closings (with great and efficient results), restatements of stale plans, amendments and other assorted AG requirements, always on a timely and cost-effective basis.
“Working with Starr has been great on three condo projects in Manhattan to date. The accessibility and direct attention of the partners is unsurpassed. Allan and Sam have the interests of the owner at heart and make every effort to protect our interests in a responsible and defensible manner. Their practical approach and deep knowledge of the offering plan process and requirements of the AG office combine to make a highly effective and efficient package. At the associate level they have good support as well. The closing office has to be the best in NY – never a failed closing in 15 years. We are repeat customers and will be going forward.”
“Samantha Sheeber is a partner in making transactions successful. She’s resourceful, respected, smart, funny as hell, and is swift to constantly embarrass us (and clients) because she sees the end while we all muddle in the middle. She saves time. She is selfless and fast and conscientious. She’s loyal to the notion of selflessly getting stuff done. She cultivates great talent. And she makes the process fun, even when she is mad at us for asking the same impossible question 11 times hoping for a new result (a solution for which — by the way — she often discovers).”
“As an active developer in New York City, Magnum Real Estate Group is proud to have partnered with Starr Associates, LLP as our legal counsel in 5 significant projects valued at approximately $800 million. Over the last 5 years, Starr has provided us with exceptional advice on condominium Offering Plans and related transactions. Partner Samantha Sheeber, Esq. and her team have professionally guided us, and provided creative and effective solutions when needed.”
“I have had the fortunate opportunity, over the past 16 years, to work with Allan Starr and Samantha Sheeber who I consider to be experts in the field of real estate law. They, together with their team, have a deep understanding of Attorney General Offering Plan registrations and continually seek to identify creative solutions to complicated issues. Their level of integrity and commitment are unwavering no matter how large or small a project. I completely endorse Starr Associates LLP and look forward to our mutual continued success.”
“Starr Associates’ specialty in the creation and representation of condominiums is unmatched. Their knowledge, experience and professionalism in the office condominium sector is best-in-class. Starr Associates’ hard work and expertise has been critical to the success of our firm’s office condominium projects.”
“Starr Associates have been our condominium attorneys for many years. Their counsel goes well beyond just drafting the condominium documents, which of course they do extremely well. They also represent us and our brand with condominium unit purchasers, and with our lenders and partners on condominium related matters. We have always found Starr’s attorneys to be professional, responsive and cost-conscious.”