While the chasm between buyers and sellers continues to be a central reason cited for the dearth of distressed sales, another factor coming to light is the quality of the underlying mortgage documents that have to be parsed in order to transfer a title.
Poorly drafted documents can amount in more delays and additional expenses when a note or building is offered for sale, said Robert Knakal, chairman of investment brokerage Massey Knakal Realty Services.
“It harms the value of the property,” Knakal said.
He was speaking today during a panel in Midtown on distressed real estate assets hosted by real estate publisher Bisnow that also included Jackie Weiss, partner at Arent Fox; Paul Griesmer, senior managing director with Schonbraun McCann Group; David Schechtman, senior director with Eastern Consolidated; and Robert Barone, senior vice president with IVI International.
Weiss, a partner with her firm’s real estate group, was reluctant to blame lawyering for the lack of sales, but said the complexities of the legal structures have impeded trades.
“Intercreditor agreements have failed us in innumerable respects and it does make it much harder to work things out because nobody knows what they own,” Weiss said.
For months brokers have been eager to make sales, with talk of dry powder funds at the ready to make purchases, yet the market remains listless, the experts said.
Today, those fund participants are pushing the managers to make purchases, Griesmer said.
“They are getting pressure from investors to deploy,” he said.
Knakal illustrated the lack of sales in the city with a statistic his firm uses to track citywide sales volume. He said the lowest percentage of New York City commercial buildings to trade in 25 years was 1.6 percent in both 1992 and 2003. So far this year, on an annualized basis, only 0.9 percent of the city’s 125,000 commercial buildings they track have sold, just a third of the average of 2.6 percent.
And his near-term outlook is not much brighter. “Today the value is higher than it will be six months from now,” Knakal said.
Weiss said in recent months she has noticed a change in lenders’ attitudes toward nonperforming loans.
“I am starting to see in the last two months lenders say, ‘Okay, I am going to bite the bullet. We are either going to market this or we are going to foreclose,’” she said.
Mark Grinis, a partner at Ernst & Young and the head of the firm’s distressed services group, addressed the Bisnow event as a keynote speaker shortly before the panel, and lamented that the government stepped in to support weak lenders.
“The government decided not to cleanse the system. The free market would basically allow these [financial] entities to collapse, to fail, to liquidate. It reduces the overall capacity of the system — the weak die. That is our free market system. [But] that is not what happened… It has certainly left a significant amount of overcapacity,” he said.