Developers tap residential brokers for cash

While the construction lending spigot has loosened in recent months, some developers are still finding themselves with the right property in hand, but with too little cash to get a project off the ground.

To cope with that problem, residential developers are increasingly turning to an unlikely source: the brokers they’ve hired to market their projects.

In commercial brokerage, it’s long been common for developers to offer their real estate agents a chance to invest in projects. But industry experts say the phenomenon is now growing on the residential side of the business as well, with brokers getting a piece of the pie in lieu of, or in addition to, a commission.

And some developers view a broker’s willingness to invest as an expression of confidence in the product.

David Maundrell, president and founder of Brooklyn-based brokerage aptsandlofts

.com, said he’s recently been invited to invest in a wide variety of developments across the city, including a 60-unit condo building and a 100-unit rental property.

“Recently, I’ve had a lot of my clients ask me if I want to go in [on deals],” he said. “It’s kind of a test to see if I believe in what I’m saying to them. Put my money where my mouth is, so to speak.”

A new twist

It’s not new for residential brokers to pony up some of their own cash to bring a project to life. Brokers have always purchased units in the buildings they represented. Some brokers even tried their hand at development during the boom, only to get burned during the financial crisis.

Before the downturn, it was largely up to brokers to seek out these opportunities, but now they are increasingly being invited by developers to invest.

Citi Habitats founder Andrew Heiberger — who developed projects like 88 Greenwich and 1 Rector Park during the boom — is now taking a hiatus from investing and developing in order to focus on growing his new brokerage, Town Residential. He said, however, that he’s recently been invited to invest in several projects, including those that Town is marketing.

The reason for the uptick in these invitations, Heiberger theorized, is developers’ increasing need to fill a funding gap. These days, developers can finance only about half the cost of a project from a conventional bank with standard interest rates. From there, they can get another 20 percent at slightly higher rates from a real estate investment fund or high-net-worth investor. But finding the remaining 30 percent can be difficult.

“Five years ago, you could get 90 percent financing,” he said. “Now, 70 percent seems to be the cap.”

Inviting brokers to invest is also a way to make sure they put their full effort into marketing  the property.

“It serves to incentivize the broker, much more than 3 or 4 percent commission,” said Terrence Oved, a real estate attorney with the law firm Oved & Oved. Developers “want the broker to have as much incentive to be aligned with them as possible.”

These investment opportunities are often tempting for brokers, said Andrew Barrocas, CEO of Manhattan-based residential brokerage MNS, noting that he personally has skin in the game on a few MNS projects, though he declined to specify which ones.

Real estate “is what I know,” Barrocas said. “When you talk about investing in the stock market, I’m not as comfortable as I am [with] what I know best.”

Plus, he said, many brokers these days are seeking to diversify their income streams, so as to avoid a repeat of the hard times they experienced during the recent downturn when sales — and, in turn, commissions — dropped off. “People are looking to create annuities,” he said.

One brokerage head, who requested anonymity, said he’s considering introducing a firm-wide initiative that would allow brokers to invest around 20 percent of their commission-based income in investment pools put together by the company.

Others said some brokers or firms choose to invest in a project in hopes of securing a marketing assignment there, particularly when new development exclusives are hard to come by.

“There is intense competition to get these assignments,” Heiberger said. “If a $1 million investment gets you through the door and keeps everyone working for a couple more years, for some of these firms it makes sense.”

He said he has declined to make investments in projects Town is marketing, however.

A fine line

There is nothing illegal, or even unethical, about investing in and marketing the same project, according to real estate attorney Neil Garfinkel, who serves as counsel to the Real Estate Board of New York. The brokers must disclose their interest in the project in the building’s offering memorandum, however.

But when a broker becomes an equity investor in a project, there’s a danger that the firm’s identity or image could be impacted, noted Barrocas.

“You have to be careful because you don’t want to start looking like a competitor” to prospective new development clients, he said. “It’s a fine line, and you have to make sure you’re not breaking the barrier.”

Perhaps for that reason some brokers who invest in projects they’re marketing are often nervous about revealing that fact. One broker, who told TRD of three separate projects he’d invested in, later cut a phone call short after being advised by his attorney not to talk about his investments.

Before the recession, Maundrell said he personally invested in the Sanctuary, an HK Organization–developed condo involving the restoration of a Fort Greene church. But he prefers to keep his firm out of such dealings, he said: aptsandlofts

.com did not market the Sanctuary, but marketed the project next door.

“If you’re representing the building, I don’t know if I would recommend being on the equity side,” Maundrell said, because tensions can arise in certain situations — if, for example, a broker invests in a condo that the developer later decides to turn into a rental.

And if a project loses money, Heiberger said, the commission a broker stands to make could be higher than the value of their equity return. That could incentivize them, during the sales process, to push for a quick sale rather than holding out for the highest possible price.

There are other, less controversial ways for brokers to invest in property. The Marketing Directors’ Andrew Gerringer said he puts his spare cash into a real estate pool with other investors arranged by the financial services firm Morgan Stanley.

Still, for some brokers, investing directly in a project they’re working on is addictive.

“If you get a taste of it, you want more, naturally,” Barrocas said. “There’s nothing like having your own money in something.”