The Real Deal New York

Quietly sealing deals with fewer parties

Commercial brokers try to stay in game through note sales

April 30, 2009
By Adam Pincus

Commercial sales brokers are often viewed as brash big mouths who broadcast a property’s availability. But in the current recession, where a slip of the tongue can put a loan into technical default, that sort of reputation is no longer an asset.

What banks and distressed property sellers want now is discretion, and some experts believe more direct sales with a minimum number of parties are taking a larger piece of the thinning note and property sales market.

“We are certainly seeing many situations where we don’t deal with a broker,” said developer Matthew Blesso, president of Blesso Properties.

He estimated that just half of all distressed deals he knew of were negotiated with a broker, down from an overwhelming majority of all sales in a traditional market.

Experts said borrowers and lenders need to keep a low profile on distressed assets. A borrower who had cross-collateralized debt would not want a lender to know the asset was undervalued, which could lead to a technical default. And a lender does not want to publicize a borrower’s default because the borrower could then accuse the lender of harming its chances of refinancing the debt.

To stay in the game, brokers are forging closer relationships with lenders in the hope of brokering note sales, with the anticipation that once sales begin to flow again, they will get a piece of the pie.

Blesso’s firm has bid on about half a dozen distressed properties and notes with and without brokers. He said he sees about three offers for note sales in the city each week.

But recently his firm, which was using a broker, was beaten out of a deal in Brooklyn because the competing buyer went directly to the lender. He declined to identify the parties involved.

He said the broker came to him several months ago with a proposal for two distressed condominium construction projects in Williamsburg. His firm put in a bid for about $9.5 million. But he believes at some point word got out that the buildings were for sale, leading the competing buyer to contact the lender directly and execute a short sale with the lender and developer. In mid-March, he learned he was out of the running.

“I think the person who ended up buying went to the lender first and structured a deal. They got the lender to put pressure on the developer,” he said, while he and the broker had only been negotiating with the developer.

Several brokers, however, disagreed that they were getting a smaller cut of sales. And with the anemic market, it is difficult to find any data.

An analysis of data from tracking firm CoStar indicated that about 78 percent of the $18.6 billion in New York City commercial property sales was through brokers last year.

Robert Knakal, Massey Knakal Realty Services chairman, said banks may be leaving money on the table if they deal directly with buyers.

For his part, he had brokered six note sales and was preparing another three. He said his firm had reviewed hundreds of properties for note sales, but most of those had not been put on the market.

“I would argue that if they did not do their reasonable diligence to make sure they got their best price possible, that is not keeping with their fiduciary responsibility,” he said.

As an example of a recent note sale, Knakal had a buyer in hard contract last month to pay $18.5 million for a $23 million mortgage, secured by a 62-unit elevator apartment building in Manhattan.

Frank Mancini, executive managing director with full-service realty firm Grubb & Ellis, said his office has not sold any notes this year. However, his New York office is providing valuations on about a half-dozen distressed assets each week.

Grubb & Ellis has been in contact with lenders and special servicers over the past few months, he said.

“But in the last few months those conversations have gotten a little deeper,” Mancini said.

Brokers such as Marco Lala, associate vice president of investment sales at full-service firm Marcus & Millichap, acknowledged that brokers are being cut out of deals, but to compensate he said he is working more closely with lenders to position himself to broker properties as they make their way through the foreclosure process.

Lala said he was tapped by two lenders to act as an approved vendor for the Northeast to provide asset valuations. He has completed about 50 over the past several months, he added.

“I have been doing that under the guise that one day they will foreclose and they will engage me as the broker,” he said.

Brokers also anticipate losing out on deals at the start of the federal government loan-workout programs.

Michael Mittleman, president of Manhattan-based Mittbros Loan Advisory & Brokerage, said he expected brokers to be cut out on the front end, as assets are bundled in packages and sold to investors.

“The government program effectively eliminates the brokers, which is bad for folks like us,” he said.

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