The Real Deal New York

In July 2008, Lev Leviev’s Africa Israel Investments entered a deal with Versace to convert the landmark Clock Tower building on Madison Avenue into luxury condominiums, a project that would rival the biggest conversions in U.S. history.

However, it now appears as if the only ticking clock is the time bomb ready to destroy Leviev’s far-flung empire. After investing billions of dollars in New York real estate at the top of the market, he’s now in a race to cash out before his lenders catch up to him. Tick tock for Leviev” class=”read-more-link”>[more]

Not so long ago, many New York City developers modeled their sales efforts on stores like Barneys, marketing luxury wares to consumers with nary a half-off sticker in sight. Nowadays, builders seem to be taking cues from businesses like Costco. Faced with a stagnant market and looming loans, more developers are finding the notion of bulk condo sales attractive. New units sell Costco-style” class=”read-more-link”>[more]

Until about 18 months ago, New York City office building owners mostly didn’t have to worry about their tenants’ ability to pay rent. Now the picture is different. Pillars of the American economy, from AIG to General Motors, have collapsed and it’s difficult for landlords to discern which tenants are truly creditworthy. In this economy, there’s no guarantee that today’s Google won’t turn into tomorrow’s Lehman Brothers.
For office landlords, harder to tell who’s healthy” class=”read-more-link”>[more]

The wave of job losses unleashed by the credit crunch has made buying property impossible for many New Yorkers, who are now choosing to rent in greater numbers, as The Real Deal explains in a series of stories. [more]

Condo developments around the city have hit troubled waters as a result of the financial crisis, lawsuits, over-saturation of product and an inability to sell or even begin construction. The Real Deal surveyed 57 of these troubled condos in Manhattan, Brooklyn and Queens for a project-by-project look at what’s been canceled.
[more]

Corcoran was the first of the two big brokerages in the city to close up an office. And like real estate companies throughout the city, the 35-year-old company is weathering a steep drop-off in sales due to the credit crisis and Wall Street layoffs. But unlike its chief rival, Prudential Douglas Elliman, it also faces the challenge of being linked to a parent company that’s highly leveraged and drowning in debt. [more]

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Beleaguered owners of chain stores in New York City are asking for permanent or temporary rent reductions through deferred payments, reduced payments or leases based on a percentage of retail sales, several retail brokers said.

“Virtually every national chain has a rent reduction program that [will] affect metro New York real estate,” said Patrick Smith, executive vice president of the northeast region of Staubach Retail. “Performance is down so significantly they are trying to bring their four-wall occupancy costs to an acceptable rate.”

Tenants and landlords are negotiating over a wide spectrum of options that include simply not paying rent in a given month — equaling as much as an 8 percent reduction over the year — to rent deferments of up to 20 percent. In the deferment cases, the amount saved would be tacked on to future years.

The retailers seeking relief include local sports chain Modell’s Sporting Goods, as well as national retailers such as Borders, CVS and Big M, the owner of women’s clothing retailer Mandee, according to various brokers who asked not to be identified.

Lon Rubackin, managing partner with GFI Capital Resources Group, explained how a rent deferment plan might be structured.

Property owners “might say, ‘for a period of three to 12 months, you can pay a 10 or 20 percent discount,’ and whatever that savings is might get tacked on at the end of the lease, or two or three years from now,” he said.

Street retailers, or those stores not in malls, are also seeking a leasing option more often seen in malls, in which rents are based on a range between 8 and 12 percent of gross sales. The corporate office of Urban Outfitters made such a request in recent weeks, said one broker, who asked not to be identified.

Modell’s, CVS and Borders declined to comment. The other retailers did not immediately respond to a request for comment.

The move to reduce rent payments is part of a national trend by tenants to save money in a weakening economy and to stave off going belly-up, said Robin Abrams, executive vice president at Lansco.

Chain-store tenants are contacting landlords irrespective of whether the location is performing well or poorly, she said, arguing that times are tough and they want a rent reduction for every site.

Henry Goldfarb, a retail broker and vice chairman with Grubb & Ellis, said he knew of two chains seeking rent reductions in two buildings, but declined to identify them.

“Two owners called me for advice” about how to deal with the tenants’ requests, he said.

In addition to chain stores, landlords are being badgered for rent reductions from local shops. “Right now it is a small percentage, but we feel it is going to grow,” Goldfarb said.

He said such requests were unheard of a year ago but had occurred in the economic downturn of the late 1980s and early 1990s. Today, landlords remain skeptical and at times demand a look at the books for proof that the company is in a very weak financial situation and not simply seeking to increase profitability.

In recent months, “a few of the chains are sending out actual form letters … that say because of the economic situation they are looking for rent reductions of 20 to 25 percent from all owners,” Goldfarb said. He did not identify which retailers were involved.

This story was originally published on The Real Deal’s daily blog.

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While the rest of the real estate market sputters, private schools and colleges in New York City have been snapping up real estate.

Experts say the recent burst of activity does not mean schools are recession-proof, but that many of them are well-positioned to take advantage of the soft market.

The Convent of the Sacred Heart School, for example, closed on a three-story building at 406 East 91st Street in September, paying $23 million for a space it plans to use for athletics. A month earlier, the Spence School, a private girls’ school, inked a deal to purchase a mansion at 17 East 90th Street that is adjacent to the school’s main building. Columbia University is pressing forward with its $6 billion Manhattanville expansion plan while New York University has been closing deals Downtown, including last summer’s purchase of a new dormitory at 316 Third Avenue and a building at 726-730 Broadway that it bought in December for $210 million.

“This is a wonderful time for them because they don’t have as much competition when they try to acquire property,” said Dan Fasulo, managing director at the research firm Real Capital Analytics.

Indeed, purchases by Manhattan schools and other non-profits mushroomed last year, accounting for 6 percent of overall sales in 2008, up from about 3 percent between 2004 and 2007, according to Real Capital.

“A couple of years ago, whenever a property came up for sale, there were 10 or 20 buyers. Now, you get five,” Fasulo said.

In the past, schools and colleges have been notoriously hungry for real estate to accommodate aging facilities and expanding student populations.

“On the Upper East Side, there are probably a dozen private schools that have been in the market for expansions,” said David Lebenstein, senior managing director at Colliers ABR and director of the firm’s non-profit division. “If a townhouse comes up for sale right next to them, they’re all over it, irrespective of the market.”

Given the down economic climate, Lebenstein said some schools may reconsider expansions while they assess any negative impacts on their enrollment or endowments. But ultimately, schools press forward whenever possible.

“A lot of these older schools, their plants are obsolete. Whether or not we’re in a recession, they need to go forward with that,” he said.

On the collegiate front, Columbia and NYU have argued that they need updated
facilities and more space to house students, faculty and laboratories. In NYU’s case, the university borrowed to finance its recent purchases, according to John Beckman, a university spokesman.

“At this point, we don’t foresee the economy’s difficulties having an effect on the acquisition of these two buildings,” he said.

To be sure, doing business with a school is an elaborate process. Schools often have specific facility requirements, such as high ceilings for auditoriums and gymnasiums, and many schools looking to expand have narrow geographic constraints. The process also hinges on approval from the school’s board, which can mean cajoling staff, alumni, parents and neighbors to agree. Working with a school is rarely quick.

“Everyone has got to buy into the solution, or you’re going to have a problem,” Lebenstein said.

For the new Greenwich Village High School, slated to open in September 2009, finding the space for the private school to rent was more difficult than its founders anticipated before they signed a 10-year lease at 30 Vandam Street in November.

“It was tougher than I thought it would be to find a landlord that was amenable to having teenagers as tenants,” said Aimee Bell, a co-founder of the school.

But because schools are so eager for space, they can be attractive business partners, especially if they have strong endowment funds.

“Obviously, they are a logical buyer for adjacent properties and often can be the highest payer,” said David Noonan, a principal at Newmark Knight Frank who represented Verizon in the sale of its building to Sacred Heart.

In the current market, Noonan said, sellers are more likely to be patient with slow-acting schools in the absence of bank financing for developers. He said the same was true for other non-profits, like hospitals.

“This is a good opportunity for them because they face diminished competition and their views are long,” he said.

Brokers say the same goes for a variety of other non-profit and institutional buyers, like medical facilities. In December, for example, Memorial Sloan-Kettering Cancer Center bought a four-story commercial building at 1133 York Avenue for $42 million.

In this economy some developers are feeling fortunate to have the non-profit business. For some, housing needs of doctors is seriously bolstering business.

“Especially on the East Side, there are multiple medical institutions that are fairly landlocked,” said David Kramer, a principal at the Hudson Companies, which partnered with the Related Companies to develop a nine-building complex on Roosevelt Island. Several buildings there house doctors and medical residents from Memorial Sloan-Kettering Cancer Center and Weill Cornell Medical College.

Recently, the Hudson Companies completed a dormitory for NYU at 120 East 12th Street that was originally conceived as a condominium and hotel.

“We knew that it would be a less risky proposition if we had a deal already sewn up with NYU,” Kramer said. “If schools are in it for the long run, it’s a good time to buy low.”

Asking rent reductions that accelerated through the fourth quarter of 2008 continued in January, with prices down by as much as 30 percent from the peak last summer, commercial brokers said.

The number of blocks of space in Midtown with dramatic price cuts quadrupled between September and December, according to a CB Richard Ellis report released last month. [more]

Many still mourn the loss of the Second Avenue Deli to a Chase bank branch, including this writer, who counts it as a childhood favorite.

I had just stopped short of laying it on thick and telling Andrew Mandell, a broker with Ripco Real Estate, about how my father used to give me half of his matzo ball every time we went to the East Village staple, when Mandell gently interrupted.

“I did that deal,” Mandell said.

It is one he doesn’t like to advertise.

While the broker community is indirectly complicit in the displacement of New York City institutions — from the Second Avenue Deli to CBGB, the fabled punk club that shuttered in 2006 — brokers themselves have mixed feelings about negotiating deals that replace icons with things like chain stores, banks and luxury buildings, often as a result of steep rent increases.

Brokers argue that they have not created the conditions that have made New York one of the most expensive cities in the world. And indeed, it’s the landlords who set the asking rents.

But some brokers still shy away from deals that result in the ouster of a venerable spot — or at least try to come up with alternative solutions.

For one, brokers concede that the loss of New York’s landmarks has dulled the city’s character. And several brokers, native Yorkers themselves, miss the old New York.

As a result, even though their business has been hurt by the economic crisis that has spread to the New York City real estate industry, some brokers voiced a hope that the downturn would have an unintended benefit: The Big Apple just might feel a little more like its old, less-polished, gritty self again.

A deli’s departure

Andrew Mandell has generally kept hush-hush about brokering the lease for the Chase branch that displaced the Second Avenue Deli from its home on Second Avenue and 10th Street in 2006.

“I always said I would never take the credit or the criticism for it,” he said.

The restaurant reopened last year in Murray Hill in a building it purchased.

The air in the original space in the East Village, which opened in 1954, was always thick with nostalgia. The Second Avenue Deli sat in the heart of a neighborhood with strong Jewish-immigrant roots, and was a nod to the old Yiddish theater that once defined the area.

A “Walk of Fame” outside the restaurant paid tribute to 58 stars of the Yiddish stage. The restaurant later took on the aura of a shrine when owner Abe Lebewohl was murdered in 1996 and the neighborhood mourned his death.

So when the news came that the rent would soar when the lease came due and the restaurant would leave its longtime home, neighbors mourned once again.

Mandell kept a low profile on the deal to replace the deli with a Chase. His office didn’t issue a press release. Mandell told a colleague that when the press got word of the deal, he would direct all phone calls to him.

“I was afraid of the backlash,” Mandell said.

“It definitely is difficult,” he added. “You’re trying to earn a living, and at the same time, you have an appreciation for tenants who have been somewhere a long time and have served the neighborhood.

“I’m a New Yorker. I grew up here. I have the same [warm] feeling about the local tenants, and I was a customer of the Second Avenue Deli.”

He added, “The city has changed river to river.”

But if Mandell had opted not to broker a new lease for the spot, there would have been a line of brokers more than happy to fill his place, he said.

Mandell said the Second Avenue Deli could have remained in the East Village and still made money. Because they had such a loyal following, “they probably felt they could operate out of a less high-profile, and less expensive, location,” he said. “The rent was bumped up to where the market was.”

The asking rent at the time in the neighborhood was $200 a square foot, likely twice what the restaurant would have been paying had they signed a lease a decade before, Mandell said.

Building owners now also tend to prefer bigger, credit-worthy tenants, such as banks and drug chains, to smaller businesses because they figure “my asset is worth more; my access to capital is greater,” said Mandell.

Punked

For many of punk’s disciples, CBGB, formerly at 315 Bowery on Bleecker Street, was the music scene’s seminal club. Founded in 1973 by Hilly Kristal, CB’s, as regulars called it, was home to bands such as the Ramones, Blondie and the Talking Heads.

The club sat on an avenue synonymous with flophouses in a neighborhood infamously dubbed “skid row.”

So when CBGB was slated to close after a dispute between Kristal and the landlord, fans and musicians alike protested, picketed and lamented.

Even Mayor Bloomberg tried to find a home for the club on Essex Street, but Kristal said the cost to move would have been prohibitive, according to the New York Times.

Jonathan Krieger, senior director at Robert K. Futterman, brokered the lease to replace CBGB with a boutique from menswear designer John Varvatos.

Brokers estimate the rent was $125 a square foot.

Krieger said he can hold his head up high about that deal, because the space was replaced by a tenant who went to great pains to pay homage to the pantheon of punk music.

“It’s not like we put a Duane Reade there,” Krieger said. “John [Varvatos] went unnecessarily out of his way to preserve the history.”

Taking an unconventional tack, the boutique on the Bowery — where flophouses have given way to luxury condos — seems like a ghost of CBGB’s past.

The designer fashioned his store to be a cultural experience for rock music lovers. The walls in the store remain untouched from its club days and are still inscribed with graffiti and plastered with original concert fliers.

The store also hosts concerts for up-and-coming artists.

As for Krieger’s take on the deal, “I didn’t have mixed feelings,” he said. “The [building] owner, to his credit, was more concerned about the type of tenant than the money and the rent. He turned down a lot of offers from different drugstores and banks for higher rents.”

And the feelings toward the old CBGB’s were not all warm and fuzzy, Krieger said.

While he conceded that the club’s loyalists were beside themselves, “I met a lot of tenants — people who have lived in the neighborhood and are now restaurant and bar owners — who said, ‘I performed in this place and never got paid once,’” Krieger said. “A lot of people said, ‘to hell with it.’”

‘Blood on your hands’

If he can help it, David Firestein, president of Northwest Atlantic, shies away from deals that ditch an icon.

“Even if they’re going away, I just don’t want to be a part of it,” he said. “It’s like having blood on your hands.”

Landmark sportswear store Morris Brothers was an Upper West Side fixture for over half a century.

When its lease was coming due a few years ago, prospective tenants including Starbucks eyed the space, said Firestein, who is also the retailer’s broker.

Firestein discouraged Starbucks from setting up shop in the Morris Brothers location. He said he told them, “There will be negative PR from the community.”

“It was an institution. An added kicker was that I knew the owners personally,” Firestein said.

The store closed in September 2007, as the rent was about to more than double, brokers said.

The irony is that a year later, the space is still vacant.

“There are places that are unique to New York: Katz’s, H&H Bagels,” Firestein said. “They are an important part of the culture. That’s why we need to preserve them.”

Catering to the affluent

It’s not only the physical loss of New York institutions that has changed the city.

A residential market that caters to affluent residents has chipped away at New York’s socio-economic and ethnic diversity — a fact that was not lost on one broker.

Douglas Heddings, senior vice president of the Heddings Property Group, a division of Prudential Douglas Elliman, expressed mixed feelings about the units in Stuyvesant Town and Peter Cooper Village, one of the last bastions of middle-income housing, becoming market-priced in recent years.

Tishman Speyer Properties purchased the 101-building development of rent-stabilized apartments in Downtown Manhattan for a record $5.4 billion in 2006.

The postwar residential enclave had been where teachers, secretaries and police officers raised families.

An enclosed community peppered with parks and playgrounds, it was the closest thing to growing up in the suburbs for a New York City kid.

Heddings admitted that he looked forward to reaping the residual benefits of the sale; yet he was also a bit queasy about that idea.

In his 2006 True Gotham blog, Heddings wrote, “The sale would only add to the seismic cultural shifts already under way in New York City and especially in Manhattan, where soaring housing costs have made the borough increasingly inhospitable to working-class and middle-class residents.”

But he added: “I also must say that … the development of such a large-scale project as this is quite exciting for me as a real estate broker.”

When contacted, Heddings told The Real Deal that he is not cleared to talk to the press.

A silver lining

The city’s economic crisis could slow the erosion of New York City’s character, brokers said.

Tenants long considered a sure bet to landlords, such as banks and national chains, are not such a sure bet anymore, as the crisis on Wall Street has changed everything, brokers said.

“Many publicly traded companies are struggling. Local businesses have been unable to expand over the last many years — now there’s more opportunity for them,” Mandell said.

Mark Finkelstein, president of Retail Strategies, agreed. “Look at how many vacancies there are,” he said.

The economic crisis will “take everything down a notch: the pretentiousness, the urge toward excess,” he said. “Enough is enough.”

Then there are the New York institutions that will never fall prey to soaring rents, brokers said — such as Zabar’s, the gourmet food store; J&R, the music store; and Paragon Sports, which all own their own real estate.

So unless those merchants grow tired of the city, they’re not going anywhere, brokers noted.

On a personal note, friends gave me a gift certificate to the new Second Avenue Deli. It took me nine months to use it.

My father and I ventured to its new digs in Midtown. The pastrami was terrific — the tables were even set with the same familiar paper placemats with the painted street scene of the 10th Street spot.

But it wasn’t the same.

You can’t go home again.

Across Manhattan, companies from nightclubs to hair salons to eateries facing higher rents than they can handle are pulling up stakes and moving to less expensive locations. That’s because with the recession, the name of the game now is survival. [more]

Go to chart: Troubled NYC portfolios easy to find

Sales, foreclosures, bankruptcies, cash infusions or government-supported workouts top the list of outcomes that may unfold over the next two years for the mostly rent-regulated, residential buildings bought at the height of the housing boom with easy credit.

A handful of the highest-profile rental portfolios purchased over the past three years will burn through their interest reserves by the end of 2009, while others will limp along into 2010, according to an analysis by city housing advocates of data provided by mortgage-loan tracking firm Trepp.

Once the reserves have been spent, the owners of housing developments such as Stuyvesant Town in the East Village and Savoy Park in Harlem will need to find other sources of equity, or cover the payments themselves, because in many instances the properties are not generating enough money to make interest payments on their loans.

“We think there are about 54,000 units of affordable rent-stabilized housing in the city that are coming close to defaulting on their debt,” said Benjamin Dulchin, deputy director of the Association for Neighborhood and Housing Development, which did the analysis.

“It seems to us that most of these portfolios are within a couple of months of depleting their loan reserves, their debt service reserves, or have already depleted them and are dipping into some other source of funds,” he said.

In recent years, some 90,000 apartments in the city, most of them rent stabilized, have been purchased by firms backed by private equity investors such as Apollo Real Estate Advisors and the Praedium Group, with the expectation that the buildings would become more valuable as existing tenants vacated and renovated units were released at higher rents.

There are about 1 million rent-stabilized units in New York City.

The problem for owners and investors is rents have not risen as quickly as anticipated. According to December data from Trepp, in nine high-profile portfolios in Manhattan and Queens, the buildings are not generating enough cash to make debt payments.

Dulchin predicted three Manhattan portfolios owned by Vantage Properties and Apollo would default in 2009, while one covering Queens will stabilize despite burning though three-quarters of its debt reserve.

The East Side apartment building known as Meyberry at 220 East 63rd Street is heading toward default; the Pinnacle Group’s portfolio of 1,083 apartments in East Harlem could default by the end of the year; and Tishman Speyer’s Stuyvesant Town is heading toward restructuring, the housing advocacy group said.

Meanwhile, a 1,142-apartment portfolio in East Harlem purchased by Dawnay Day was allocated to a special servicer, and its finances continue to deteriorate. And the Riverton Houses’ 1,230-unit portfolio in Harlem is earning less than a third of the cash flow needed to pay its debt, the group said.

Real estate experts see several scenarios likely to play out over the next few years as owners run out of money and short-term loans come due.

Once interest reserves are depleted, owners will have to make up the difference either by providing their own cash or finding partners to buy in, said Joseph Forte, a former president of the Commercial Mortgage Securities Association, and now a partner with law firm Alston & Bird.

“That would obviously have to be true equity, because in this market there isn’t any leverage available. You could also bring new money in … as a real equity partner or preferred equity,” Forte said.

Vincent Carrega, executive managing director at real estate services firm Grubb & Ellis, said most loans that are expected to default eventually have not yet failed. But the fallout will depend on the financial backing of the owners.

He said the companies with deep pockets have a better chance of surviving with their holdings intact. “Tishman Speyer is a savvy, well-capitalized, well-regarded entity with very strong staying power,” he said. “They have sources of capital that a large number of troubled owners don’t have.”

According to Vantage Properties, speaking on behalf of Apollo Real Estate Advisors, the two companies had the resources to pay their loans and maintain the portfolio, company president and CEO Neil Rubler said in a written statement.

“These are long-term investments, and we are well positioned to meet today’s challenges and improve our assets for the benefit of our residents,” he said.

Other companies either declined comment or did not return phone calls from The Real Deal, but financial documents outline plans for increasing value over time.

A former special counsel to the city’s department of Housing Preservation and Development and now a senior fellow at Citizens Housing and Planning Council, Harold Shultz, said there are three basic possibilities that would play out as default looms: Loans could either be modified with reduced payments, foreclosed on or the owners could file for bankruptcy.

He noted that any of the three outcomes would be harmful to the buildings’ tenants.

Manus Clancy, senior managing director at Trepp, said to begin the modification or foreclosure process, the loan would be sent to a special servicer, which has more discretion to alter the loan.

“The special servicer faces a fork in the road. Typically they have to decide what is the best path for the bondholders: Is it to foreclose or modify the loan, or sit tight and watch?” he said.

Shultz expected loans would be modified by placing a chunk of the loan in forbearance, meaning that interest on that piece would not have to be paid for some time period, say 10 years, effectively reducing interest payments in the meantime.

In foreclosure, the value of the property is reduced, but owners are reluctant to permit that option because they are liable for income taxes on forgiven mortgage amounts (known as phantom income).

Forte said additionally that a rush to foreclosure would aggravate the already depressed prices by increasing the supply of the portfolios.

“If you do tons of foreclosures, the values will fall,” he said.

One way owners can fight foreclosures and maintain control of the property is to declare bankruptcy. At the same time, that process reduces the value of the portfolio.

Shultz said the loan modification option was the worst from a housing policy perspective because it maintained the high value of the assets, which advocates believe are fundamentally overpriced.

“It keeps a huge debt load on the property, which will basically be starved for capital for years, which translates into worse living conditions,” he said.

The federal government may become involved in the process, adding to its complexity, Shultz said. He noted the Commercial Mortgage Securities Association wants to be included in the government’s Troubled Asset Relief Program, known as TARP.

Local housing advocates, led by an umbrella group called the Partnership to Preserve Affordable Housing, were pushing proposals with the New York congressional delegation to include multi-family housing in future TARP regulations.

The New York delegation is “committed to making sure whatever protections we have for single-family will also be for multi-family,” said Dina Levy, director of organizing and policy for the Urban Homesteading Assistance Board, a group that is a member of the partnership organization.

The Real Deal’s Jen Benepe attended the Real Estate Board of New York’s annual banquet last month and spoke to some of the biggest names in the business about the 2009 market, distressed asset funds, the impact of the Bernie Madoff scandal on New York City real estate and more. Industry experts predicted a difficult year before the market rebounds.

Log on to www.therealdeal.com to see the full segment and to access the archives. Every week, The Real Deal posts a new edition of the Webcast, which features exclusive interviews with industry insiders.

The Real Deal: What are your views on 2009?

Steven Spinola: We’ve got 2,300 people coming here tonight, which is phenomenal in this economic climate. Maybe that’s a sign.

Stephen Ross: Being a real estate developer today is like an oxymoron … Today to say you’re going to go out and develop something … I think anybody who told you that … is smoking dope or something.

Darcy Stacom: I have a new saying … I borrowed it kind of from Sam Zell, which is his ‘Stay alive till ’95.’ I’ve got ‘Keep it lean ’til 13′… I just think that’s when we’ll finally be coming out of it.

Robert Knakal: Clearly the market has been challenging, particularly since Sept. 15 … [But] we believe that in 2009, people are going to look more favorably at real estate as an investment class.

TRD: Will federal government support for commercial loans help real estate in New York?

Ross: I think it’ll help development … You have all this expiring debt on perfectly good properties and today it’s a question of the lack of liquidity in the markets or the lack of confidence, and you have to be able to provide the ability to refinance properties.

TRD: How do we know [federal money will] be applied to the CMBS situation, and how do we know that it’ll improve liquidity for the commercial market?

Spinola: I can’t believe that the second $350 billion that is coming out of TARP will not have requirements connected to it about getting the money back out into the private sector.

TRD: You [had been planning to] start buying property in the spring of 2009 with [your firm's new $300 million distressed asset fund]. Has that timeline changed at all?

Douglas Durst: It’s probably been pushed back a bit … The financing markets have stopped, so it’s very difficult to do anything right now.

TRD: As one of the oldest real estate companies in New York City, are you looking to start up any distressed funds?

William Rudin: I’m glad you say I’m not one of the oldest real estate developers in the city … but no, we’re not looking to do a distressed fund. But we will keep our eyes and ears open for opportunities.

TRD: Have sellers and buyers become more realistic about pricing yet?

Diane Ramirez: Our lower end, under $2 million, they’re absolutely there and they’re together. I think as you go up into $6 million and $10 million and above, it’s going to be a little bit slower for them to come together.

Jacky Teplitzky: Today, one of my Russian buyers … calls me up and says, ‘so Jacky, what should I buy?’ And I said, ‘look, 15 Central Park West, you had to spend $7,000, $6,000 per square foot, suddenly I’m seeing $3,500 per square foot, $4,000 per square foot.’

TRD: Which retailers are still taking space in the down market?

Faith Hope Consolo: What we’re seeing is a continued surge in fine restaurants, affordable fashion … and a lot of beauty accessories … I still think that after the second or third quarter we’ll be OK.

TRD: What kind of impact has the Madoff scandal had on New York City real estate?

Teplitzky: I had actually a very sad story. Two sets of parents helping their darling kids to get a $1 million apartment. Suddenly, three days after, no phone calls from [them] … I knew something was wrong … the lawyer said both families had invested with Mr. Madoff. So, therefore, the deal is off.

TRD: Are you hearing that happening a lot with other brokers?

Teplitzky: Yes. I actually think that Bernie Madoff has affected New York real estate even more than the stock market.

TRD: You were a vice president at ABC, deputy chairman of the National Endowment of the Arts and art adviser to Vice President

TRD: You were a vice president at ABC, deputy chairman of the National Endowment of the Arts and art adviser to Vice President Walter Mondale, among other things. So does that prior experience lend itself well to what you’re doing now?

Mary Ann Tighe: The amazing thing is that everything that came before, once I learned the basics of real estate, proved useful to me … I was hard to intimidate, even as a neophyte.

TRD: Do you think the market is close to the bottom yet?

Bruce Mosler: I think that we’re close to approaching the bottom of not just the subprime crisis but a crisis of confidence in our financial system. I think it’s going to take another quarter or two.

Spinola: We’re going to see serious problems over the next year … [But] I think New York is still the place that people want to live and work …

[W]e have to make sure that New York City is ready to recapture the job growth and recapture residents when people have a little more confidence than what they have right now.

Compiled by Sara Polsky

 
Real estate and business swindlers have seen New York as fertile ground
ever since the Dutch governor Peter Minuit picked up the island of
Manhattan from the Lenni Lenape tribe for 60 guilders.

That’s the modern-day equivalent of $34, in a city whose
fourth-quarter average per-square-foot price was $1,162, according to
brokerage Brown Harris Stevens.

Scammers, meanwhile, have only gotten bolder with the passage
of time. In 1925, for example, New Yorker Victor Lustig convinced scrap
dealer Andre Poisson to “buy” the Eiffel Tower, which Lustig swore the
French government could no longer afford to keep up.

While real estate and business fraud has been just as
pervasive today, it isn’t as easily grasped — it’s tougher to
understand the daisy chain of investment banks paying for favorable
ratings on packages of mortgage debt in order to sell them.

And, it’s almost incomprehensible for many to fathom the
damage caused by the alleged swindle that Bernard Madoff pulled off.
That scam has taken down fortunes both inside the real estate community
and far beyond. But, while Madoff may be the most high-profile case of
late, these days, fraud has taken all shapes and forms.

Indeed, mortgage fraud, which typically involves
artificially inflating property values to extract extra cash from
lenders, has been widespread in New York. The state was among the
nation’s top 10 for mortgage fraud in 2007, according to FBI
statistics. That year, there were 46,717 mortgage fraud reports in the
state, up from 35,617 in 2006. The real problem could be even worse
than the statistics. The FBI Web site states that “the true level of
mortgage fraud is largely unknown.”

Still, some con artists do get caught, as this wall of shame from the last decade indicates.

1. Howard Adler

Total amount accused of ripping off: $1.15 million

Alleged signature rip off: A developer renovating 387 Greenwich
Street paid a tenant $292,000 so the tenant could find temporary
housing, but Adler, the tenant’s attorney, pocketed the money.

Outcome: After pleading guilty to grand larceny, forgery and
tampering with public records in 2002, Adler was sentenced to nine
years in prison.

2. Ira Berman

Total amount accused of ripping off: $3.2 million

Alleged signature rip off: A couple selling their West 88th
Street brownstone hired Berman, an attorney, to handle the closing, but
instead Berman walked away with the buyer’s $497,500 down payment.

Outcome: Berman pleaded guilty to grand larceny last February, and was sentenced to nine years behind bars.

3. Chak Yin Lee

Total amount accused of ripping off: $813,839

Alleged signature rip off: Lee, an attorney, was given $426,859 for a Brooklyn home but he never passed the money along to the seller.

Outcome: Found guilty of grand larceny in May 2005, Lee was sentenced to three years behind bars.

4. Gwenerva Cherry

Total amount accused of ripping off: $500,000

Alleged signature rip off: A buyer gave Cherry, a lawyer,
$80,000 for a down payment on a West 140th Street townhouse. Cherry
deposited it into a personal account to pay for office expenses.

Outcome: Cherry was convicted of two counts of grand larceny in November 2007 and sentenced to two to six years in prison last June.

5. James John Armenakis

Total amount accused of ripping off: $735,000

Alleged signature rip off: When attorney Armenakis failed to
appear at the closing for a $7.35 million condo at 285 Lafayette
Street, the seller suspected he had made off with the deposit.

Outcome: Armenakis, who was indicted last month, awaits trial.

6. Andrew Kissel

Amount accused of ripping off: $15 million

Alleged signature rip off: The real estate developer was charged
with swindling mortgage lenders out of $11 million, and his co-op at
200 East 74th Street out of $3.94 million, which was earmarked for
elevator repairs.

Outcome: Kissel was stabbed to
death in 2006 in a Greenwich home. At the time his attorney told the
Associated Press that he was planning to plead guilty to the charges
within days.

7. Frederic Dryer

Total amount accused of ripping off: $250 million

Alleged signature rip off: In
his “Right Place, Right Time” seminars, held in Manhattan, among other
places, the Mile High Capital Group head conned money out of attendees
for apartment complexes that were never built.

Outcome: Dryer was convicted
last summer of 44 of the 60 counts against him. He will be sentenced
this month and faces between eight and 500 years behind bars. The D.A.
is also seeking $3 million in restitution.

8. Maurice McDowall

Total amount accused of ripping off: $20 million

Alleged signature rip off:
McDowall and a number of other defendants targeted distressed
homeowners in Brooklyn and the Bronx, offering them fake refinancing
plans if they would to sell to straw buyers. In some cases the scheme
included forging signatures to steal homes.

Outcome: After pleading guilty
to conspiracy to commit bank and wire fraud, McDowall was fined $2.5
million and sentenced to 10 years in prison.

Sources: Manhattan District Attorney, United States Attorney for the Southern District of New York, news reports.

Although many sales brokers are seeing their commission percentages increase on each transaction, rental agents have not been quite as lucky.

In fact, with rents falling and landlords trying to attract new tenants with any tactic they can dream up, rental brokers have been watching their profits shrink. [more]

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Though the New Year ushered in more grim news for the residential real estate market, a few positive signs appeared as brokers reported a slight uptick in sales activity and saw more action in rental transactions.

Still, at the beginning of last month, news surfaced that a slew of real estate companies had shuttered offices in hopes of cutting costs in the economic downturn. [more]

The trend of sales brokers picking up rentals to buffer themselves from the down economy has advanced to the next level.

More and more brokers are now fully abandoning sales firms for companies that focus on the rental market. It’s a sea change that would have been unimaginable even a few months ago, in a business where rental firms traditionally occupy a much lower position in the status hierarchy than sales firms.

“It’s very rare that rentals are in vogue,” said Gordon Golub, a senior managing director at the rentals behemoth Citi Habitats. Still, he said Citi Habitats is seeing an influx of new agents from brokerages — including some of the city’s most prominent — that specialize in sales.

“We’re getting agents from large sales companies, who are seeing this as an opportunity to build their business in rentals,” he said. “They feel the quickest way to do it is by joining our firm, as opposed to staying at their own firm. It’s unprecedented.”

While The Real Deal reported last month that an increasing number of sales brokers were taking on rentals to compensate for lost income, agents actually leaving sales firms for rental companies is very unusual, said Robert Doernberg, a senior vice president at Warburg Realty.

“You don’t leave a firm like Warburg or Stribling to go to a rental house,” said Doernberg. He said such a move would generally be considered “going backwards.”

That is, until the credit crisis hit Manhattan real estate this fall. Based on weekly figures he’s seen, Jonathan Miller, the president of Miller Samuel, estimates that the number of contracts for sales signed in the fourth quarter fell between 35 and 75 percent from the same periods in 2007. Contract prices have also shown an average decline of 20 percent since August 2008.

That dearth of sales has left brokers without much business.

For the past year, for example, Virginia Pizzi worked for the sales and marketing firm Shvo, selling condos at the new luxury development Gramercy Starck on 23rd Street. But after she was laid off recently, she started as a sales associate at Bond New York, in large part because the brokerage focuses on rentals as well as sales.

“I could have gone to Douglas Elliman,” said Pizzi. “But it’s primarily a sales company. I don’t want to limit myself to one thing.”

In the past two months, some 75 percent of Citi Habitats’ new agents have come from other firms, Golub said. That’s up from 30 to 40 percent normally. While some of the new hires are refugees from real estate brokerages that have closed, others are sales agents looking to grow their rental business.

“A lot of the agents who are joining us have sold previously,” Golub said. These agents, he said, come from a range of different companies, including some of the city’s largest, though he declined to name the firms.

Marc Lewis, president of Century 21 NY Metro, whose business is about 60 percent rentals and 40 percent sales, said the company has hired some 25 people in the last month, nearly three times more than average. Of those, 43 percent came from sales companies, the company’s recruiting data shows, while 12.5 percent came from rental firms and 43 percent were newly licensed.

Many of those who come from sales firms are dissatisfied with their current employers’ ability to facilitate rental transactions, he said.

One broker who is starting at Century 21 is leaving “one of the top five” sales firms in the city. The company “has nothing to offer her except referrals for rental clients,” Lewis said. “They gave her clients, but no listings. She has to fish for her own listings.”

Noting that their agents are doing more rental transactions, real estate companies all over town are working to step up their rental operations.

“Right now, just about every brokerage, if they haven’t made significant changes in their organization to create revenue through rentals, they certainly have been talking about it,” Golub said.

Prudential Douglas Elliman, for example, recently announced that for the first time since the early 1990s, it is opening a new office specifically for rentals, and will recruit 50 to 75 new rental agents to work there. Warburg Realty, meanwhile, has revamped its rental training program this fall to place more emphasis on finding listings and working with renters, said Doernberg. In the past, the company focused mostly on helping owners rent their apartments.

But for some firms that specialize in sales, those efforts may be too little, too late.

Real estate companies have “started to pick up on the trend that residential leasing will put more money in your pocket,” said a new recruit at Bond New York who previously did investment sales for a large national commercial brokerage company. Still, “when you think of Elliman and Corcoran, you’re not thinking about leasing.”

The broker, who asked to remain anonymous, said he moved to Bond New York because it does a large number of rentals, which have comprised the majority of his transactions since he came on board. “I wanted to find a brokerage company where I could be multifaceted and keep rentals on my belt [to generate] cash flow,” he said.

While it’s one thing for an agent to pick up a few rentals to earn a bit more money, it’s nearly impossible for real estate firms to shift a large portion of their business to rentals from sales in a short period. It takes time to develop a large database of listings and relationships with rental landlords, said Gary Malin, president of Citi Habitats.

“It’s not easy unless you’re set up with the infrastructure to handle the rental business,” Malin said. “It’s a hurdle for a lot of these firms.”

That’s especially true in the current climate, with so much rental business hinging on negotiations with landlords, said Bruno Ricciotti, CEO of Bond New York, which earned about half its 2007 revenue from rentals.

“It’s about relationships, being in the rhythm with the landlords,” he said. “That’s why we’re getting agents from other companies.”

Switching from sales to rentals isn’t an effective strategy for all agents, especially since the downturn is having an impact on rentals as well, said Paul Purcell, co-founder of Charles Rutenberg Realty and the real estate consultancy Braddock + Purcell.

“Rents are dropping and people aren’t leaving their apartments as quickly now,” Purcell said. Moreover, “the revenue associated with rentals is a lot less than sales.”

Although Golub said transactions at Citi Habitats in December outpaced 2007 by 10 percent, the company recently closed two offices to cut costs.

“You will see a lot of mid-sized to smaller firms not being able to survive in a market like this,” Purcell said. “It’s very hard to make a buck in this business.”

Distressed sales, long a burden on housing markets across the country, are increasingly hurting far-flung neighborhoods in New York City’s outer boroughs.

And, according to experts, the worst is yet to come. So-called teaser rates, or initial rates, on five-year adjustable mortgages have not yet expired, and spreading job losses are pulling more and more city homeowners into the red. [more]

With Bernie Madoff in the crosshairs of federal prosecutors for his alleged $50 billion Ponzi scheme, real estate insiders are not only speculating about his fate as a free man, but also are buzzing about what’s going to happen to all of his properties and assets.

Madoff was ordered late last year to turn over a detailed list of his personal assets to federal officials. And while the full list has not been made public, it’s no secret that Madoff owns a slew of homes, boats, cars and other luxury items that could soon go on the auction block.

Madoff, a former chairman of Nasdaq, has been under house arrest at his $7 million penthouse at 133 East 64th Street since December. Among his neighbors at the 11-story co-op is “Today” show co-host Matt Lauer, who bought a sixth-floor apartment in 2004 for $5.88 million.

Legal sources say Madoff’s apartment would likely be sold at auction once his case is adjudicated, which could take months, if not years, to resolve. And, late last month, the New York Post reported that several brokers had been asked by lawyers working for a court-appointed trustee to visit the apartment and assess its value. The paper also reported that the apartment is technically owned by Madoff’s wife, Ruth.

Real estate brokers that The Real Deal spoke to were divided about the level of demand for his assets because his reputation is in tatters and because so many charities were fleeced in the alleged scheme.

“It’s like when you see an apartment and find out somebody shot themselves in it,” said Michele Kleier, chairman and president of Gumley Haft Kleier, a boutique brokerage on the Upper East Side. “I don’t know of anyone who would want to live in an apartment with the history of what he’s done.”

That may very well be the case in New York City, but it seems there is less hesitation about scooping up Madoff’s other luxury properties.

Madoff’s homes include a 1.2-acre beachfront property in Montauk, where brokers say inquiries have been fast and furious. “There are people already coming out of the woodwork to see if they can pick it up,” Lynden Restrepo, of Atlantic Beach Realty Group, said.

Published reports have put the value of the property, which Madoff had built in the early 1980s, at $3.3 million, but brokers say they believe it’s worth far more.

In Palm Beach, Fla., where several prominent Jewish families lost hundreds of millions in the alleged scheme, Madoff owned a $9.4 million home on the Intercoastal Waterway. Late last month, a few teenage boys who claimed to have lost their trust funds with Madoff took credit for wrapping the house in toilet paper in a prank officials noted was approved by their parents.

And, Bloomberg News reported last month that Madoff owned a “modest” three-bedroom retreat at Cap d’Antibes, a popular French Riviera celebrity destination between Nice and Cannes. Guillaume Turquois, the broker who sold Madoff the apartment six or seven years ago, told Bloomberg that it was probably worth about $1.6 million. The property is reportedly also listed in Madoff’s wife’s name.

Madoff also reportedly has a vast array of yachts, luxury cars and jewelry. But lawyers say his assets will likely be auctioned off to compensate victims of his alleged scheme.

“The government can do that to pay the cost of your jail time and whatever damages they assess in the criminal prosecution,” said real estate attorney Lisa Breier Urban.

Investigators are still trying to determine whether Madoff hid any additional assets, either in secret accounts or by putting them in family members’ names.

Most initial investor claims will go before an organization called the Securities Investor Protection Corp., a federal agency that provides up to $500,000 for individual investors who are damaged by the insolvency of a failed brokerage. As of early January, more than 8,000 claim forms were mailed out, and additional investors were expected to emerge.

Adding insult to injury, lawyers say that under so-called clawback provisions in the law, investors who redeemed money from Madoff-controlled funds will likely have to return the interest and principal, as administrators try to compensate victims of the alleged scheme.

On top of Madoff’s personal assets and victim compensation, real estate insiders in New York fear the scandal will have a chilling effect on new investment here.

Madoff’s alleged victims included an all-star list of real estate investors. They range from Fred Wilpon’s Sterling Equities, which owns the New York Mets and $3.5 billion in real estate-related funds, to Blumenfeld Development Group principal Ed Blumenfeld, a partner in Forest City Ratner’s East River Plaza.

Eric Anton, senior director at Eastern Consolidated, worries that the real estate industry will have a much harder time raising equity due to the mistrust generated by the scandal.

“The way real estate developers typically put together their equity is through friends and family, or syndications, putting 10 to 20 people together in a deal,” said Anton. “This is going to make people nervous. They may not invest equity in deals because of this lingering noxious feeling.”

Anton said the scandal could further spook new investors from stepping forward with new capital.

And the Madoff affair is already having an impact on residential deals in New York. Jacky Teplitzky, executive vice president at Prudential Douglas Elliman, said several of her clients have backed out of deals after being fleeced by Madoff-controlled funds.

Three days before Madoff turned himself in, she said one of her clients, a young couple, signed a contract to buy a $1 million apartment on the Upper East Side, and their respective parents were scheduled to pay a $500,000 down payment.

However, parents on both sides of the family had invested in Madoff-controlled funds and the deal fell through.

“Everyone is in a state of shock,” Teplitzky said. “My belief is it’s going to impact Manhattan real estate even more than the stock market has.”

Go to chart: Median Manhattan apartment prices drop

As prices drop in Manhattan, sellers are inevitably feeling like they are losing money because they can get less for their apartments now than they could a year ago.

But while they may not profit the way they would have if they had sold while the market was booming, chances are that if they bought before 2005, they will still come out ahead.

According to data compiled by Jonathan Miller, the president of the appraisal firm Miller Samuel, the median price of a condo in the fourth quarter of 2008 was $1.12 million. That compares to $1.15 million during the same time in 2007, $1.16 million in 2006, $1.04 million in 2005 and $941,768 in 2004. Going back even further to 2000, for example, the median price was $913,027 — still lower than today’s median. These numbers are adjusted for inflation unlike the usual market report data the firm releases, thus showing bigger dollar declines than those reports.

On the co-op side the median price was $675,000 in the fourth quarter of 2008. And while it was higher than that between 2005 and 2007, it was lower in 2004.

According to the Miller Samuel data, an apartment owner who bought in the last quarter of 2004 and sold in the last quarter of 2008 could have made a profit of 3.4 percent.

That notion, that current prices represent merely a “give-back” of the last four years of gains, is cold comfort for many co-op owners, who may be facing drops of as much as 20 percent in price since August 2008.

“It’s not much comfort for sellers that present prices are still higher than they were [a few] years ago,” said Michael Serman, a salesperson with the Corcoran Group.

“Rationally, they still strive to maximize return — and there’s some denial, driven by how strongly they need to sell,” he said.

Lauren Cangiano, an executive vice president with Halstead Property, echoed that point, saying that the intellectual argument that prices are still higher than they were a few years ago doesn’t do much to buck up sellers. “What I can tell you is, nothing’s selling,” she said. “So it’s hard to say we’re going back to 2005 prices, because if nothing’s selling, I have no basis to even make that comment.”

In general, brokers said they’re skeptical of the data they’re seeing now because there have been so few transactions in recent months.

“It’s a little bit hard to judge that because there have been so few transactions over the last three months,” said Stuart Moss, a vice president at the Corcoran Group.

On the condo front, Miller said the data shows that all sellers in that market would have made money had they sold in December. However, he said, that may not continue to be the case.

He noted recent closings, which showed an increase in new development prices in the last quarter of 2008, could actually reflect sales that occurred 12 to 18 months ago.

He believes that the prices of condos are going to drop as new development dwindles. But, he said the first quarter of 2009 should be far more revealing when it comes to co-op and condo prices. “A lot of the change [in prices] we saw in the fourth quarter of 2008 wasn’t for the closed data, it was in the contract data,” he said.

Shaun Osher, founder and CEO of Core Group Marketing, recently began publishing the Core Real Time Report, a monthly report that uses contract data.

That report shows that during the fourth quarter of 2008, 552 units went into contract, on average about 14 percent below the asking price. The report also notes that on average, offers were being submitted almost 20 percent below the asking price.

Osher said the numbers reflect a return to “normalcy” in the New York market. “People have to understand that the essence of buying a piece of real estate traditionally is not for investment, even though you would like it to turn out to be a good investment,” he said. “Returns of 20, 30, 40, 50 percent year after year on a piece of real estate don’t happen historically, and for sellers to have that expectation now is very unreasonable.

“The historic information is somewhere between 2 to 3 percent year-after-year return on a real estate transaction as a primary residence,” Osher added.

As for “comps” — the comparable sales of properties used as benchmarks in home real estate appraisals — most brokers said they are not a useful tool in this market.

Cangiano said mortgage brokers have told Halstead agents they should recognize comps dollar for dollar only if they closed in the last quarter of 2008, and agents should shave 1 percent off the comp price for each month prior to that in which it closed, or up to 12 percent a year.

Cangiano, a broker of 23 years, said she believes that current prices are similar to those in 2005. She points to her own apartment.

“I bought my apartment in 1996 for $750,000, and at the height of the market a couple of years ago, I probably could have sold it for $2.6 million,” she said. “Now, in this market, I could probably get $2.3 million, which is comparable to what I could have gotten about four years ago.”

Cangiano said that, data aside, she has a gut feeling that prospective buyers are looking for prices to go back to 2002 or 2003 levels. According to the Miller Samuel data, that would mean a median price for a co-op of about $528,551.

With a new president in the White House and the possibility that the government might force interest rates even lower by buying up housing debt, many brokers say they are optimistic. They, of course, hope that the free fall in prices will come to an end soon and that apartment owners won’t have to “give back the gains” they made when the market was hot.

The average contract interest rate for 30-year, fixed-rate mortgages in mid-January had already decreased to 4.89 percent, according to the Mortgage Bankers Association.

But, not everyone is optimistic and there are plenty of bears out there.

Michael Gordon, a senior vice president with the Corcoran Group, said he sold an apartment he owned in a Midtown building in November 2008 for $990,000 by slicing 10 percent off the last comparable sale, which took place prior to the Lehman Brothers bankruptcy in mid-September. “Everyone told me, you’re crazy to price it like that,” he said. “But I have no regrets, and I think there’s more price declines to come.”

Gordon said some buyers have gotten a bit cagey with the realization that their money is worth more now.

“A broker in our office offered $19 million for a property at 15 Central Park West a while ago, and the sellers said no,” he said. “So now, the property has been reduced to $19 million, and the sellers called the guy who made the offer up and said, ‘Will you buy it?’ And he said, ‘No, my $19 million is worth a lot more now.’”

As far as the future, Gordon said he believes apartment prices in Manhattan will continue their downward trend.

“I do see further declines, and I think we’re going to see prices come down another 20 percent,” he said.

Renters looking to be just a convenient train ride away from Manhattan are finding more choices as vacancies tick upward in the popular alternative-to-Manhattan neighborhoods of Long Island City, Astoria and brownstone Brooklyn.

As Manhattan rental weakness appears to be spreading, landlords and management companies in prime outer-borough locations are trying a number of tactics to entice renters. Among them are lowering credit standards and absorbing brokerage fees — but sources said the relaxation does not always extend to lowering rents.

Some real estate experts interpret the recent data of fairly strong pricing amid increasing vacancies as a show of continued strength in the brownstone Brooklyn and Western Queens rental markets, while others believe it’s only a matter of time before the areas see significant, across-the-board rent cuts.

Brooklyn inventory rises

Anthony Lolli, CEO of the Brooklyn firm Rapid Realty NYC, says that while the borough’s rental market is “alive and well,” there are more apartments on the market than in years past.

In particular, the firm is seeing more inventory in “prime” neighborhoods such as Park Slope, Brooklyn Heights, and Cobble Hill than ever before, as fewer renters are willing to shell out big bucks to live in Brooklyn’s toniest enclaves.

Lolli notes that 65 percent of the firm’s closed deals in November 2007 came from so-called prime neighborhoods, while in the comparable month in 2008, lease signings in those areas accounted for 51 percent of the company’s business.

“More and more apartment hunters are looking for the most bang for their buck,” he says. “Neighborhoods like Bushwick, Crown Heights and Bed-Stuy are much more marketable now. Prospect Heights, Greenwood Heights and Sunset Park are really attracting former Park Slope residents.

“We expect that this will not change anytime soon,” Lolli says.

Data from other firms that specialize in brownstone Brooklyn rentals also show an increase in the area’s apartment inventory.

Ideal Properties, which rents apartments in numerous brownstone Brooklyn neighborhoods from Brooklyn Heights to Windsor Terrace, logged a whopping 54 percent increase in the number of one-bedroom apartments available in those neighborhoods in the fourth quarter of 2008 as compared to the same period in 2007.

In fact, the company’s data showed an increase in inventory for all unit types: There were 13 percent more studios available in the fourth quarter of 2008 than a year before; 53 percent more two-bedrooms; and 74 percent more three-bedrooms.

Some rents rise, some fall

In terms of pricing, Ideal recorded marked decreases in average asking rents for studios and three-bedrooms: Studios were asking $1,607, on average, in the third quarter of 2008, a $156 drop from the same period in 2007. Average rents on three-bedrooms went from $3,662 in 2007 to $3,313 in 2008.

“In this climate in particular, three-bedrooms would be declining in price due to the simple economics of it — they are normally more expensive, and renters are looking to scale back whenever possible,” says Aleksandra Scepanovic, Ideal’s managing director. “So the people who would have been looking for a three-bedroom are now deciding that two-bedrooms might be doable.”

Still, even though there were more units on the market, Ideal’s numbers for the fourth quarter of 2008 — based on 816 rentals in brownstone Brooklyn during those three months — show average rents rising substantially for one- and two-bedrooms, when compared to the same time the year before.

The firm reported that one-bedroom rents rose an average of $222 and two-bedroom rents rose by an average of $186.

Rapid Realty’s data from December 2007 through November of last year also showed rent increases for most brownstone neighborhoods.

One-bedrooms rented by the firm in Park Slope, for example, increased by $160 over those 11 months, from $1,696 to $1,856.

Lolli says that while the Brooklyn rental market is still strong, that landlords need a “harsh reality check” in regard to pricing. “We have plenty of clients who were looking to buy, but are looking to wait it out and have decided to rent until the economy straightens out.”

Tenants gain upper hand

Other rental specialists in the area are less cheery about the state of the market.

“I think every neighborhood has taken a hit, especially the ones with higher rents, like Park Slope and Brooklyn Heights,” says Andre Campodonico, the CEO of Standard Living Realty, a firm that specializes in no-fee Brooklyn rentals. “People still desire Park Slope more than other neighborhoods, but they have a lot more to choose from.”

He continued, “the ball’s in the renter’s court.”

Campodonico says that “luxury” rentals are sitting vacant because renters are deciding not to move from their current apartments — and those who are signing new leases are seeking out more affordable leases.

All three Brooklyn firms say they’re seeing a big increase in the number of no-fee apartments on the market.

Ideal Properties’ no-fee listings jumped from 1.8 percent in the fourth quarter of 2007 to 22.6 percent in the fourth quarter of 2008, though the company says the trend isn’t taking root yet in the most desirable areas, such as Park Slope.

Rapid Realty’s Lolli says that “no-fee listings are the key to survival in this market,” as are other incentives.

“Over the last six to nine months, tenants have had the upper hand with regards to getting approved, rent negotiations and other perks that sweeten the deal,” he says. “Landlords almost always resort to offering rent concessions as incentives. They realize that nobody wants to pay a broker fee anymore.”

Queens: Prices flat to down

Agents active in Long Island City are also reporting more incentives for rentals there, particularly in relatively new construction buildings, such as Rockrose’s EastCoast development, AvalonBay’s Riverview complex, and the Ciampa Organization’s 140-unit Packard Square near Queens Plaza.

“They are working with renters and they know they have to be a lot more flexible right now,” says Edward Milton Cisneros, an agent with the firm NY Living Solutions.

Cisneros notes, for example, that net effective rents at EastCoast — which, as of last month, included two months’ free rent and an owner-paid agent fee, according to a leasing agent at the building — were basically at the same level as when the units were first offered a couple years ago.

A leasing agent at the building said last month that its studios were starting at $1,900, its one-bedrooms were going for $2,450, and its two-bedrooms were beginning at $3,450. Those prices were nearly identical to the ones on offer at Riverview last month, according to rental numbers provided by an AvalonBay leasing representative.

Cisneros says he has rented about 60 units in Long Island City towers such as EastCoast and Riverview over the past couple years, and it’s the only market outside of Manhattan in which he’s active.

“Rents are coming down in Manhattan because owners are becoming more practical and want their apartments filled,” says Cisneros. “Before it was very clear that Long Island City was a cheaper alternative to Manhattan for renters who didn’t want to compromise on amenities. It used to be a very clear contrast, a $250 to $400 difference between renting in the same sort of building in Manhattan and Long Island City.

“Now the difference is not that striking,” he says.

As a result, says Cisneros, Long Island City doesn’t have a competitive edge in terms of pricing right now, and in recent months he’s had prospective renters choose Manhattan over the neighborhood.

Cesar Guevara, a principal with MQ Realty, a firm that specializes in Long Island City and Astoria rentals, says he believes owners of luxury Long Island City high-rises are going to have to lower rents in the near future to reflect market realities.

“The quality in the new buildings is great, but the problem is that the whole market has changed,” says Guevara. “There’s a definite glut in the market, and it’s going to get worse if New York doesn’t have its typical influx of new hires moving here in the spring.”

On the other hand, Guevara says that “middle-of-the-field” apartments in prime Astoria are renting relatively well, although his firm has seen about a 15 percent increase in the neighborhood’s apartment inventory over the past year and a slight decrease in rental prices.

Guevara says that one-bedrooms in Astoria are renting for between $1,400 and $1,600, two-bedrooms are fetching an average of $1,600 to $1,900, and three-bedrooms are going between $2,000 and $2,500.

“People aren’t coming to Astoria to rent in a luxury building,” he says. “Still, there are an unusually large number of apartments on the market, and some landlords are going to have to lower their rents.”

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Levine is president and CEO of RAL Companies & Affiliates, a developer of luxury apartment, condominium and resort communities in New York, Colorado, Texas and Maryland. The firm, founded in 1982, also offers architecture, interior design, construction, landscape architecture, staffing, leasing and management services through its affiliate companies. [more]

Leave aside the financing crisis for a moment and some real estate experts believe this could actually be an optimum time to launch a residential project.

While development has ground to a halt, costs are falling or anticipated to fall for many line items in a pro forma — land acquisition, construction materials and labor. At the same time, units on the market are expected to be slowly absorbed, leaving a dearth of apartments on the market in the coming years.

A residential developer brave enough to break ground might end up doing very well in 18 to 24 months, experts said.

“It can take two years to deliver a project, and that can be two economic cycles in normal times, so if you didn’t have the current capital constraint, this is when you should be looking at developing,” said Veronica Hackett, co-founder and managing partner of the Clarett Group, which has developed nine residential projects of 100,000 to 350,000 square feet in the past seven years.

Another boutique property developer, who asked not to be identified, agreed.

“Conceptually, it’s a great time to do something, so when the market turns around, you’re ready, as opposed to waiting till the market actually turns,” he said.

The trouble with this theory is that most developers point out that financing isn’t largely available. Even when it is, the terms under which it is offered — and the large amount of equity required on the part of the developer — have offset any gains that might be obtained through falling hard costs.

Though LIBOR and Treasury bill rates are at historic lows, banks are offering loans at spreads over indexes that are unprecedented: 400 or 500 basis points over the respective indexes, said Jeffrey Levine, the chairman of Douglaston Development.

“Banks are basically neutering these all-time low rates with these all-time high spreads,” he said.

Kenneth Horn, president of Alchemy Properties, agreed that while LIBOR has dropped, the spread has increased from where it has been the past few years.

“What LIBOR giveth, the spread taketh away,” he quipped.

Alchemy’s story

However, Horn said that a developer might end up reaping great value by being countercyclical. In fact, as of mid-December, Alchemy and its partner, Jamestown Properties, were in the process of bidding out a 95-unit mixed-use condominium development at 800 Tenth Avenue, he said.

“If you buy a piece of property today, [the project is] not going to be on the market for 30 months,” Horn said. “And who’s to say what could happen in 30 months? You would think the recession would be over, because if that weren’t the case, it would be a 40-month recession, which is almost unheard of.”

Horn said the developers closed on the bank loan for the $120 million deal in August.

The 150,000- to 160,000-square-foot building will be built at the site of the former Sony Studios, on 10th Avenue between 53rd and 54th streets.

“We’re in the ground,” Horn said as of mid-December. “We should be out of the ground in eight weeks, and finished by the third quarter of 2010.

“If we weren’t optimistic, we’d land-bank it,” he said. “But we’re optimistic.”

Even with increased spreads on loans and bank demands that developers put 40 to 45 percent equity into a deal, Horn said he believes now is the time to acquire land.

“It’s very hard now to make a development deal make sense, because you’re putting in 40 to 45 percent equity,” he said. “That being said, I do believe that now is the time to buy.

“People are saying, ‘Is the bottom hit?’” he continued. “No one’s ever going to know when the bottom’s hit. But when everyone universally believes the bottom has hit, that means it’s on its way up.”

Other real estate practitioners agree that now may be the time to develop. Adam Kushner, principal of Kushner Studios Architecture + Design, has been an architect-contractor for 25 years and has decided the time is ripe to enter the development field.

Looking at the costs and revenues of a pro forma tailored to the current market, “I still think it definitely pays to develop,” Kushner said. “But I can’t speak for the general market. We’re looking at very unique pieces.”

They include a parcel in Brooklyn.

“I think the going rate of a prime piece of Brooklyn property before was $150 to $200 a square foot developable, and this one is going to be like $85 to $90 a square foot developable,” Kushner said.

“That’s a really good deal, but perhaps it’s offset by the fact that unless we come to the table with cash, the savings will be squandered on the extra money we need to put down — instead of 20 percent, we may have to put down 40 percent,” he said.

In negotiations for another Brooklyn parcel, a 25-foot by 100-foot piece of land on Myrtle Avenue, the seller and Kushner have not seen eye to eye. When the seller was asking $960,000 about six months ago and wouldn’t go below $850,000, Kushner offered $750,000, tops.

Recently, the seller called Kushner willing to let the land go for $750,000, but now Kushner is offering $650,000. The seller, meanwhile, isn’t willing to go that low. “I said, ‘Okay, call me back,’” Kushner said. “Suddenly, the chasee has become the chaser.”

Like many other developers, Kushner is also pursuing some of the halted projects that are growing in number. While Horn was skeptical that those projects would remain bargains with so many developers chasing them, Kushner said he believes the number of abandoned projects is so large — and developers are being conservative enough — that prices aren’t going up wildly.

“I haven’t seen a lot of competition over sites, even these ones that seem to be super bargains, that are 50 percent-off sales,” he said.

“We’ve identified a couple of properties where they’ve been abandoned midstream, and it makes sense on many levels,” he added. “The returns will be good, if not equal to what they were during the highest and best boom. And, yes, we are looking at rentals as a fallback.”

The sideliners

For their part, other developers said they couldn’t be so certain about returns.

“To build a project with 50 percent equity, there’s a whole redefining of the pro forma that needs to take place,” said the boutique developer who asked not to be identified. “No one knows what the residential market is right now, because no one’s buying apartments.”

Though there is a strong historical precedent for being countercyclical and developing at the market’s bottom, “the counter-argument to that is that, depending on how deep the recession is, it’s going to take you a lot longer than two years to get out of it,” Hackett said. “And this is one of the deepest ones we’ve had.”

Eric Brody, principal of the Brody Group, another boutique developer, said he didn’t believe he’d break ground on a project, even if he had cash in his pocket.

“When it comes to the pro forma, a lot of your assumptions may be incorrect at this point, because the markets haven’t settled,” he said. “As developers, we speculate on a year or two out if it’s a major capital improvement or new construction, and most of your theories that have worked in the past are no longer applicable to take risk on such types of projects.”

Brody also pointed out that though land acquisition costs may be falling, even a 10 percent reduction is not enough to make rental apartments financially feasible.

However, before they lend, lenders are requiring that projects work as rentals.

One real estate lawyer who works for some of the city’s biggest developers, but who asked not to be identified, said he was reticent to recommend any developer launch a new residential project with condominium prices remaining unknown at the same time that rents are falling by as much as 20 percent.

“I’m optimistic, but no one knows what will happen in two years,” the lawyer said.

It is the first time in 15 years that the two market segments have experienced falling prices at the same time, making a serious dent in developers’ revenues, Levine said.

Cheaper materials …

However, partially offsetting those revenue losses are reductions on the hard-costs side.

“Steel is coming down,” said one Brooklyn developer who also does some construction. “There’s no doubt about it — there’s an oversupply. Same with odd lots of materials.”

Levine, who also does his own construction, said he has seen the price of some construction materials fall as well.

“Just like oil prices — copper prices, cement prices, gypsum prices and timber prices have fallen,” he said. “The lack of development throughout the country, and the global slowdown, have obviously caused a burst in the commodities bubble, and yes, there is some reflection of that.”

But in New York City, the cost of construction materials is typically dwarfed by the cost of labor, Levine said.

“New York City is a union town, and therefore, a high-cost labor town,” he said. “And the commodity prices are not as significant to our overall development costs as they would be in some other places.”

However, Levine said that for the first time in years, the trade unions “have become cognizant of the lack of financing, because jobs are not starting.

“As a result of that, the trade unions are happy to have discussions about work rules and possible wage and fringe concessions,” he said. “These are all on the table now.”

Kushner, the architect-contractor, said he hasn’t reduced his bids because he hasn’t yet seen construction materials come down much in price. However, he said he does have signed contracts to do work for a certain fee where clients are asking him to cut out certain items, ultimately reducing his fee.

“Even though my contract doesn’t allow that, because everything is interrelated, I’m finding myself saying, ‘I don’t want to piss off the client,’ and [I'm] reducing the scopes of my jobs,” he said.

… Higher taxes

On the other side, most developers agreed there would be few reductions in soft costs, such as professional fees, marketing, and real estate taxes and permit fees, among other costs.

“Insurance, I assure you, is not going down, especially on the development site,” Horn said. “If anything, it’s going up. And Mayor Bloomberg’s most likely going to raise taxes, so your soft-cost line items are most likely going to remain consistent.”

Levine agreed that real estate taxes will likely be increased, and added that marketing costs may also grow. “When the market is tough, you almost have to spend more on marketing in order to secure your share,” he said.

Levine also said he believes that architects and engineers are indirectly lowering their fees.

“Architects and engineers are, for the first time in my recollection, willing to provide preliminary services on projects without compensation just to keep themselves busy until these projects come on board,” he said.

Brody, whose father is an architect in Brooklyn, said architects are more likely to contract their offices than lower fees. Kushner, the architect-contractor, said he hasn’t lowered his architectural fees, but he is casting a wider net for projects.

“I’m looking at projects I wouldn’t have pursued before,” he said. “They’re not glamorous; they’re the meat and potatoes.”

Hotel developer Sam Patel sees East New York — historically one of the poorest, roughest, most crime-prone neighborhoods in the city — as an up-and-coming community. Patel is so confident that despite the recession, he’s building his second hotel in the neighborhood, and it’s creating buzz for both its unlikely location and for its unique design.

The 38-room boutique hotel, which broke ground in November, will run up construction costs of close to $4 million, which Patel estimates is at least $1.5 million more than what it would cost to build a more conventional, limited service hotel in the eastern Brooklyn neighborhood.

Patel expects the hotel to attract travelers flying in or out of nearby John F. Kennedy Airport; rooms will go for about $150 a night.

While the development was pre-approved for financing, Patel, who noted that he has “good relationships” with his banks, added he could end up financing part of the project out of his own pocket as a result of the tight credit environment. “The banks are pretty tough,” he said. “They want to look at everything.”

A spokesperson for the Community Board that includes East New York expressed skepticism when told of Patel’s plan.

Instead of hotels, the area could use more housing for senior citizens, said Walter Campbell, manager of Community Board 5.

“They just built two new hotels in the last couple of years,” Campbell said. “I really don’t see a demand … there are enough hotels in the district as it is.”

Patel said he intends to build a hotel that will stand out from the pack. A typical nondescript brick box was exactly what he did not want; he drove New York architect Drew Lang around the neighborhood to point out other hotels as examples of what he was not interested in building.

“I want to be different,” said Patel, a native of India who comes from a family of hotel and motel developers. “I wanted something unique. That was my dream, to build a hotel and build it nice.”

The project is rising on a relatively small 100-by-100-foot parcel in a mostly industrial area on Linden Boulevard at Essex Street.

From the outside, the hotel will look like a three-story building, but it’s actually on four and a half floors. Lang designed it with one and a half floors below ground to make up for the limited space.

Inside, a central atrium with skylights will extend through the building. The atrium will make the space feel larger and add interest to the design, Lang said. Outside, interlocking polycarbonate panels, stucco, clear glass and metal mesh will make up the façade, creating a contemporary look. Guest rooms will be appointed with flat-screen TVs, and an area for serving continental breakfast will be included on the lowest level.

The project is Lang’s first hotel, and first project in East New York.

“I had never heard of East New York,” said Lang, whose firm specializes in residential and office renovation projects in Manhattan and Brooklyn.

Patel was familiar with the area from his work developing a hotel not far from the one under construction. East New York has come a long way in recent years, he said.

“I’ve been in the area since 1989,” said Patel, who has developed hotels in Brooklyn, Queens and Connecticut. “Before 1989, it was bad. In the last five years, I’ve seen tremendous change. There’s new commercial construction. The whole area you see on Linden Boulevard has changed dramatically. There’s much less crime than before.”

While the crime rate is still higher in East New York than in other city neighborhoods, the number of violent crimes has declined significantly. Since at least 1990, the number of murders, rapes, robberies and felony assaults has fallen steadily in the 75th Precinct, which includes East New York, according to Police Department statistics.

For 2008, there were 16 murders reported in the 75th Precinct as of mid-December, representing an 86 percent drop in the area’s murder rate over the last 15 years, according to NYPD data.

Along with the drop in crime, in recent years, the neighborhood has seen home values and the rate of home ownership increase. A building boom has taken place, adding new housing projects and shopping centers.

MeadowWood at Gateway, billed as the largest affordable condominium development in Brooklyn, has attracted hundreds of buyers to its relatively low-priced homes. Over the past year, 150 condos have been sold, and over 85 are in contract, said Jean-Paul Ho, a vice president at Fillmore Real Estate.

A studio on the market was listed for $120,000 on Fillmore’s Web site.

“People are looking for good deals,” Ho said.

Every gray cloud has a silver lining, and the current downturn in the New York real estate market is no exception.

Experts predict the current conditions could ultimately lead to a new era of affordable housing, driven by the market rather than government incentives.

Developers are already slashing prices and, in the case of the Decora and Northside Piers in Williamsburg, offering rent-to-own options that, if priced right, could be attractive to first-time buyers otherwise unable to scrape together a down payment.

Countless condominium projects across the city are facing foreclosure, putting banks in the driver’s seat. Experts said lending institutions would be even more aggressive than developers in moving these units, expanding affordable housing options.

And some recent reconfigurations indicate the possibility for creative solutions besides the typical rent or rent-to-own scenario. Lotta Condominiums in Harlem has become a successful youth hostel; 10 West 65th Street on the Upper West Side was sold to Touro College for student housing; and in Bay Ridge, the developer of the controversial Green Church site may unload his land to the city to create a much-needed elementary school.

Jon Gollinger, co-founder of Accelerated Marketing Partners, which specializes in marketing campaigns for distressed properties across the country, said one of the advantages of New York City is it entered the downturn later than the rest of the country.

“New York is going to look at what’s going on throughout the country and use the best solutions, and be creative about it. That’s been my experience in New York,” he said. “Developers and banks and equity will be very quick to take their lumps and capitulate.”

Increasingly, as developers struggle to pay their debtors on projects that aren’t selling or have yet to begin construction, banks will begin forcing solutions.

“Banks are looking to get out without too much pain but are still willing to accept some pain. And by pain, I mean selling [the project in bulk] for less than a dollar on the dollar,” said Justin Stern, managing member of Manatus Development Group, an affordable housing developer.

“Unfortunately for many, these are some of the harsh realities of the development business. Poor timing equals the shirt off your back,” he said. “Hopefully we’ll be able to turn these negative situations for some into positive access to affordable housing for many working-class citizens of New York City.”

Stern said apartments in projects his firm could take over would be priced low rather than depend on government incentives for affordability. “There are currently no government programs in place to provide bailouts for those untimely developments that went into the ground a year ago, or rushed into the ground to beat the June 30 421-a deadline, in fringe neighborhoods where the backup rental scenarios are now unachievable,” he said.

Even without bank intervention, experts said prices will continue to plunge.

“You are going to see prices decline dramatically as you get further from the core,” said Gollinger. Particularly in oversaturated areas like Williamsburg and Long Island City, prices could drop in the 30 percent range, he said. “It’s gotta find a bottom somewhere where it’s pretty unacceptable to everyone … but eventually it will get to a price level where it’s just too compelling not to buy.”

That goes for rents, too.

Tatiana Harris, head of business development for Harlem Lofts, said that after her firm introduced the rent-to-own option at Harlem’s 764 Saint Nicholas Avenue, it reduced rents up to 20 percent before all the units were occupied. “Everybody who is renting right now is on a rent-to-own option,” she said. As for developers, she said, “All my clients are looking for a rent-to-own option.”

David Maundrell, president of aptsandlofts.com, said that without much push, his firm has been seeing two or three rent-to-own contracts a month.

The scenario only works with buildings that have closed sales and immediate occupancy, he said, and it is more successful when developers keep renters’ needs in mind. For example, he said some brokerage firms put a premium on monthly rents — say, a $4,000 monthly apartment priced at $5,300 — which isn’t attractive to renters.

One 14-unit building Maundrell is marketing, the Decora at 165 North 10th Street in Williamsburg, is offering a one-bedroom, $530,000 apartment for $2,850 per month, with the option to put that money toward a down payment. He said he’s signed two other rent-to-own deals in the building so far.

Given the sheer volume of condominiums that were planned or entered the market during the boom years, it’s not surprising that they are not all successful now that the market has turned.

In Harlem, Harris said she views youth hostels, like the new L-Hostel that replaced Lotta Condominiums, as “the next big thing to make money.” Profits are maximized because several beds crammed into a single room rent at $40 per night, and there’s always demand for cheap accommodations in New York.

A Manhattan broker, who asked not to be named, said he’s seeing more apartments converted into nightly and extended-stay hotel rooms, however unpleasant that may be for the few condo owners there.

He pointed to the new Web site for M127, a luxury condominium in Midtown South that sold just two units but now boasts five-star accommodations starting at $385 per night.

“It’s kind of a shady subject because sometimes in the offering plan there are rules [against] this,” he said. For the two people who own in the building, “I’m sure it’s not pleasant for somebody to be using their building as a hotel.”

Although a deal between a Brooklyn Cohousing group and the developer of Carlton Mews, a planned condo and townhouse project in Fort Greene, fell apart at the last minute, one of the group’s founders, Alex Marshall, said its only challenge now is “sorting through all the opportunities to find the ones that are right for us.”

This summer, The Real Deal featured Marshall’s group — which aspires to build a community of private homes that have shared common spaces and decision-making, similar to a condo or co-op but more intimate — when it was having greater difficulty negotiating with developers. Now, the market is on the group’s side.

“We are looking at projects that are completely finished but are sitting empty or near empty; projects that are half built; and projects that have not begun construction. There is a lot out there,” he said, adding that his group is focusing its attention on the Prospect Park area.

Not all “creative solutions” have proved successful.

Horizon Global had difficulty selling its six-unit, 12-story project on the West Side Highway, Hudson Blue, so the developer converted it into one huge, glassy mansion with a $22 million asking price. The property has not sold, and a lis pendens was filed against the developer in August.

A roundup of canceled and reconfigured projects around New York City [more]

While it may seem counterintuitive in a city that has become a sea
of glass luxury condos, several small walk-up buildings are quietly
being built from the ground up, while others are being renovated.

The idea of building a walk-up in today’s ultra-luxe (albeit
economically tanking) market may seem quaint — down-at-heel New York
City tenements come to mind. But the walk-ups being built and renovated
today are a different breed than their older counterparts, and some
developers say the interest in them is a sign that buyers are tired of
big, cookie-cutter condos.

“There may be increased attraction to small buildings as people
get disillusioned by larger developments, which are big and impersonal
at times, and can seem all the same,” said Lindsay Barrett, a vice
president at Corcoran.

Brokers say it’s unusual for a new structure, even a small one, to
be built today without an elevator. However, it is still happening in
some cases. The majority of the walk-up buildings on the market today
are actually conversions, likely to have both original detail and new
additions, such as custom kitchens and finished roof decks meant to
attract buyers who don’t mind a few flights of stairs.

“You might lose some people who don’t want to walk up the stairs,
but others will be committed to buying a unit because it’s unique,”
said Matthew Blesso, the president of Blesso Properties.

Brokers and developers noted that walk-ups can also be a
relatively affordable alternative for condo buyers — a selling point in
a down market like this one.

Trevor Stahelski, a partner with Cardinal Investments, recently
developed 212 East 70th Street, a four-story walk-up. He said the
building sits in a neighborhood of doorman co-ops and single-family
brownstones that are not options for first-time apartment buyers.

“We saw it as an opportunity to make starter apartments with
charm. There’s no product like it in the neighborhood,” Stahelski said,
adding that 90 percent of the building’s 16 units were sold in the
first two weeks, at $1,000 per square foot for 600-square-foot
one-bedrooms.

Unlocking walk-up funding

Getting financing in this credit-crunched market is tough for any
project, and can be even more challenging for smaller developers who
don’t have the same kind of access to capital as some of the big
players in the city. However, the perception that small buildings carry
less risk is, in some cases, helping to spur interest from investors.

“If you have the means, you’ll go for the bigger project, but you
can still make good money on smaller projects by finding your niche,”
said Stahelski.

Stahelski developed another walk-up conversion, the five-story 245 West 115th Street, which also had a quick buyout period.

“We took 15 units and turned them into eight one-bedrooms. We sold
those for $650,000 to $750,000, and sold 20 studios for under $400,000
apiece,” he said. “People said no one would buy up there, but it sold
out within weeks.”

The cost of building or converting a walk-up tends to be more
straightforward than that of financing a larger building, where common
charges tend to be significantly higher because residents pay for
amenities such as gyms or doormen.

Common charges in larger buildings can run around $500 to $1,000 a
month, while small buildings charge around $200, said Cecilia Mackie of
Mackie Developments. She added that although adding an elevator in a
small building increases the common charges, the sales prices for
apartments in small buildings are about the same regardless of
elevators.

Developers say that the average cost of installing an elevator is
about $120,000 to $140,000, but the decision to put one in a small
building is largely about space, not cost.

Mackie, who is building two four-story, eight-unit walk-up
buildings from the ground up in Williamsburg, decided against elevators
to conserve space. “Trying to put two one-bedroom apartments per floor
in a 25-by-55-foot area with an elevator would make the apartments very
small,” said Mackie. By skipping elevator installation, the apartments
will be 620 square feet.

Keeping the climb

Some developers specialize in restoring existing walk-ups.
Architect and developer Alex Barrett of Barrett Design and Development
works primarily in Carroll Gardens, Brooklyn, and his projects are all
conversions of existing brownstone buildings, including one four-story
walk-up on Union Street and another on President Street.

Corcoran’s Lindsay Barrett — Alex’s wife and the buildings’ broker
— said including elevators in these buildings is often impractical, and
that instead they focus on “maintaining the integrity” of the
structures.

The Barretts said that clients who move to this part of Brooklyn
are not counting on living in an elevator building. “There’s no
resistance to walk-ups here,” said Alex Barrett.

His wife argued that walk-ups don’t attract or shut out a specific
type of buyer. “You can’t generalize; we had a couple with kids who
bought the top duplex at our building on 240 Carroll Street, and
they’re very happy,” said Lindsay Barrett. “And another couple with
children bought the fourth-floor apartment at 321 Union Street.”

For his part, Stahelski said that the buyers for 212 East 70th
Street included “young urban professionals, people looking for a
pied-à-terre and foreigners who wanted an investment property.”

And while some say that the top floors of walk-ups sell for less
because of the higher climb, Mackie has had success with her
development.

“The top floors still go without difficulty,” she said. “Selling
them is no problem because of the views and lack of noise. And, the
rule of thumb is to add about $10 per square foot for each floor you go
up.”

However, other market players say that walk-ups shut out some
buyers. “Walk-ups are very difficult in that they limit your base to
people who are single and have no kids,” says Richard Shiu, developer
at New York Real Estate Partners.

Not saving headaches

David Kramer, a principal with the Hudson Companies, whose company
is building nine four-story walk-up townhouses at Third and Bond
streets in Carroll Gardens, said that the margin for error is no
different than that for larger buildings.

“We’re still faced with excavation, underpinning, construction and
marketing challenges consistent with all of our projects. We’re not
saving ourselves any headaches by pursuing this housing type,” said
Kramer.

Some developers say the small size of a walk-up building can help
with making a project that’s already been started in this market
financially feasible. That’s because there are fewer units to worry
about selling as buyers become more hesitant.

“Developers with 100-unit buildings are sitting with 70 units
still vacant, and they’re freaking out,” said Stahelski, the Manhattan
developer. “I have a building with seven units, and I can turn it into
a rental project if need be. It’s much easier to rent seven units than
70.”

Lindsay Barrett said that previous projects had sold relatively
quickly, in some cases off the floorplans. However, she noted that a
recent renovation, the four-story, five-unit 277 President Street in
Carroll Gardens, still has two unsold units. “We are feeling the impact
of the economic downturn,” she said, though she noted that showings
have been very active for both units.

Some developers have their doubts about betting on walk-ups in
such a fragile real estate market. “This type of building isn’t
necessarily better right now. In this economy, you’d want to open it up
to as many people as you could, instead of limiting yourself,” said
Shiu.

But Susan Singer, senior vice president at Corcoran, had a more
optimistic view. “I think that probably in a small building, there is
much less to contend with, fewer people to satisfy, and a shorter
selling time,” she said. “You can close and move on.”

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Redevelopment in Melrose Commons, the Lower Grand Concourse and the Bronx Civic Center — three adjacent areas of the South Bronx that the Bloomberg administration is looking to rezone — has taken a turn for the worse in the last few months.

While other parts of the South Bronx have seen small-scale investors pull out, these neighborhoods are seeing something slightly different because of both the souring economy and the growing uncertainty about the rezoning there. [more]

It’s a neighborhood that hardly needs to be identified, thanks to its turn-of-the-century brownstones, sprawling Frederick Law Olmstead-designed park, and tree-lined streets. With two restaurant rows, some of the top-rated public and private schools in the city, and baby carriages aplenty, Park Slope’s reputation precedes it.

The neighborhood, which is bounded to the east by Prospect Park, has long been considered one of the most desirable in Brooklyn. And, despite the economic downturn and chilly real estate climate, brokers say the limited stock of townhouses, co-ops and condos on North Park Slope’s toniest stretches means its real estate values are holding their own.

Late last year, a mansion on Prospect Park West sold for $8.45 million, making it the most expensive residential deal ever in the Brooklyn neighborhood.

“It’s kind of a broker’s dream,” said Debbie Korb, a senior vice president with Sotheby’s who was the listing agent for 17 Prospect Park West. “You can’t ask for more in terms of location.”

Korb said the house, which was owned by the movie stars Jennifer Connelly and Paul Bettany, sold to buyers who viewed it on the first day it was shown, and that she received interest in the mansion from people in Dubai who were willing to buy it sight unseen.

“We priced it rather aggressively,” said Korb. “We knew it was more than anything had sold for in the neighborhood, but one-of-a-kind things are always a good value.”

The property is on what is generally considered Park Slope’s gold coast, the northern stretch of Prospect Park West. In addition to the avenue overlooking the park, the “name” blocks south of Flatbush Avenue — including Carroll Street, Montgomery Place and Garfield Place — as well as 1st through 3rd streets are typically considered Park Slope’s priciest and most attractive. In general, the grander, more expensive homes are bounded east and west between Eighth Avenue and the park.

While 17 Prospect Park West is arguably one of the most mint residences in the neighborhood, brokers say the sale is indicative of unflagging interest in high-end North Slope homes, despite the economic downturn.

“Is there more inventory? Yes. Are people being more cautious? Yes. But the serious buyers are still buying,” said Marc Wisotsky, a broker with Prudential Douglas Elliman.

Wisotsky, who has lived in the neighborhood since the ’70s and worked in the Park Slope market for more than 15 years, said that his firm helped broker the sale of nine “very big number” townhouses in Park Slope last year and already had three contracts signed for properties — including a $2 million-plus co-op — within the first couple of weeks of the year.

“The unique thing about Park Slope is that it has the best stock of untouched brownstones probably anywhere in the country,” he said. “People have been waiting for the shoe to drop, but I think in this neighborhood they’re realizing that’s not going to happen. I’ve never had a person I sold a house to walk away on the minus side when they resold.”

Still, while most brokers acknowledge that the neighborhood’s real estate values are holding their own, they also point out that prices on the high-end have stopped rising as both buyers and sellers have become a bit more gun-shy.

“There was that period of [price] escalation that was really over the top,” said Roslyn Huebener, principal of Aguayo & Huebener Realty. “That has disappeared.”

Huebener said “the aggressive extra fluff on the price” disappeared in mid-2007 with the credit crunch, and, like nearly everywhere else in the city, “things have hit the fan since September,” resulting in more circumspect buyers and sellers.

“Nonetheless, we’re still getting good prices,” she said. “There is a market and you just have to strike the right price for the property.”

Demand for townhouses on the Slope’s best blocks, for example, is holding up, because there’s never a great deal of for-sale inventory at any given moment.

“I think there’s always a good demand for townhouses in Park Slope, because there are rarely that many on the market,” said Isabelle Reboh, a senior vice president with Brown Harris Stevens who has been selling homes in the neighborhood for more than a decade. “If there are 10 for sale, that’s considered a lot, but objectively speaking, it’s only 10. It’s never a lot.”

Reboh and her partner, Joan Goldberg, a vice president at Brown Harris Stevens, have an $8.5 million listing for a 6,800-square-foot brownstone mansion on Garfield Place designed in the late 19th century by noted architect C. P. H. Gilbert. If the house sells for its asking price, it will beat out 17 Prospect Park West as the most expensive sale ever in the neighborhood.

Like others who specialize in pricey Park Slope sales, Goldberg is sanguine about the neighborhood’s relative strength amid the troubled market.

“From mid-September through December, the high-end market was about the same,” said Goldberg. “If you have a prime property and it’s presented well, and it’s in good shape, you’re OK. If you have a property that’s not prime, but it’s on the park or [on another] prime block, we can sell it for you.”

While the limited number of townhouses has helped prop up values in Park Slope, there is also a dearth of new condo construction in the northern section of the neighborhood.

One of the few new condos in the North Slope is the 22-unit Vermeil, on Sterling Place. The building, which is half sold since hitting the market in early 2007, had three-bedroom listings ranging from $1.15 to $1.5 million as of last month.

Mordy Werde, a senior associate at Corcoran who heads sales for the building, said demand for units at the building had been slow but steady, though he noted that offers have been slower to materialize since September’s market turmoil.

“It’s still a very sought-after neighborhood. It hasn’t lost its appeal,” said Werde. “Buyers are just waiting to see if they can get a better deal.”

Werde said that open-house attendance has continued to be decent, which he said reflects not only the neighborhood’s draw but also the fact that the Vermeil boasts units larger than are typically found in the Slope.

“There’s not much in terms of higher-end three-bedrooms available, which is why my demand has been stronger than other people’s,” he said.

Reboh also noted that “there is never more than a handful of family-size apartments for sale on the prime blocks,” ensuring continued demand for such properties.

Nevertheless, most brokers acknowledged that continued demand for co-ops and condos on the best blocks hasn’t been translating to as many deals these days.

“For a seller to attract qualified buyers, they cannot push the market for record prices, and they may need to be negotiable, depending on their time frame,” said Goldberg. “Buyers who can get a mortgage have the luxury of compromising less and holding out for more.”

Goldberg and Reboh said that while the neighborhood attracts people from all over the city, Manhattanites keen on the Slope tend to compare it to the Upper West Side.

“The people who come from Manhattan want Park Slope because it’s what the Upper West Side used to be,” said Goldberg. “What I hear all the time is that they want to get away from noise and congestion [in Manhattan].”

This summer’s credit crisis and the subsequent housing implosion haven’t been good for anyone. But they’ve been especially hard on East New York, one of the city’s poorest neighborhoods.

Like the rest of the city, up until a couple of years ago, East New York was undergoing something of a building boom. The Bloomberg administration emphasized affordable housing and supported developers interested in revitalizing the area. Suddenly two-family houses began cropping up in infill spaces. Other developers became comfortable with the idea of investing in the area and so began buying up land and converting rentals to condos, and residents leapt at opportunities to buy.

The Seaview Estates in the area, for example, sold out in two years with 10 price increases, according to Fillmore Real Estate’s Jean-Paul Ho.

The problem was that unlike the rest of the city, much of this new housing stock was made available to residents via predatory lending. Thus, when the defaulting began, it hit East New York like a tidal wave.

“There were a lot of foreclosures because there was a lot of predatory lending,” says Ho. “People who bought put as low as no money down; prior to this market they had these ridiculous loans where you needed no job, no assets, no income.”

According to New York University’s Furman Center for Real Estate and Urban Policy, East New York witnessed the highest number of foreclosures in all of Brooklyn with 715 lis pendens filed in the first three quarters of 2008. Further, it had the second highest number in the five boroughs, following only Jamaica/Hollis in Queens.

The fallout has been the disappearance of mortgages.

“Right now the numbers in East New York compared to 2007 are down over 50 percent in volume of sales,” says Sam Heskel, executive vice president of HMS Associates, a Brooklyn-based real estate consulting and appraisal firm. “You can attribute that to a lack of financing; these were subprime areas where people literally couldn’t get financing.”

The wave of foreclosures combined with an inability for buyers to get money has everyone wary. Banks are pulling construction financing. Even the government has put holds on certain projects. Almost everything has effectively ground to a halt. (There’s an exception: a boutique hotel is coming to East New York. See Enticing travelers to eastern Brooklyn.)

“No one is putting shovels in the ground until we get rid of this mess,” says John Reinhardt, the president and CEO of Fillmore Real Estate. “Everyone is in a holding pattern.”

Not good for a neighborhood on the rise.

“We’re seeing more boarded-up, abandoned and for-sale buildings all over our neighborhood than we’ve seen since the ’80s,” says Betsy MacLean, division director of Cypress Hills Local Development Corporation.

Cypress Hills had a number of projects in the works when the credit crisis went down. The 12-unit Glenmore Grove began construction in August 2008 and is still on track for completion around this time next year. But Cypress Village, a 23-unit project, is suddenly uncertain.

“Our funding from Cornerstone [a part of the mayor's New Housing Marketplace Plan, which creates new middle-income and market-rate, multi-family housing on vacant city-owned land] got pulled,” says MacLean. “The city doesn’t want to invest in homeownership projects and low-income neighborhoods because of high foreclosure rates; they see it as a bad investment. But I think the opposite is true — we need stable, supported home ownership more than anyone.”

Thus, MacLean is continuing to move forward in any way she can.

“The status of our [Housing Preservation and Development] money has been in doubt,” says MacLean. “But we’re plugging ahead and assembling other sources and then we’re going to make the case that we’ve done everything else; we just need HPD to kick in this amount.”

“It’s tricky,” says MacLean. “Banks we’ve been talking to about this project for a year don’t even want to look at updated budgets; they don’t even want to talk to us.”

HPD did not return calls for comment.

Dawanna Williams, founder and principal of Dabar Development Properties, feels this acutely. She was set to develop 22 townhouses with New York’s New Foundations program, but her subsidies have been halted as well.

“They’re on hold because of the amount of supply on the market right now,” says Williams, who explains that it is her understanding that once some of the supply in the area is absorbed, funds will open back up. She estimates her project will cost $9 million, of which she expected HPD to kick in 15 percent.

“Under normal circumstances we could go to another source, but because of the credit crisis … ” she trails off. Williams hopes to be able to proceed this summer.

But it isn’t all doom and gloom in East New York. In 2005, the Nehemiah Development Corporation began work on the Nehemiah Spring Creek Houses at Gateway Estates, a five-phase development due in 2014.

“We’re comfortable with our subsidy. The city has not indicated that they would not come through; they have cooperated from the beginning,” says Ron Waters, general manager and director at the Nehemiah Development Corporation.

At Spring Creek Houses, the 117 homes that make up phase one — the project will ultimately encompass 1,500 affordable homes — have been completed and fully sold out. The first 19 families moved in just before Christmas. The second phase of the project is nearly 30 percent constructed and Nehemiah Development is “starting to put together the numbers” on phase three right now.

MeadowWood at Gateway is another highly successful development. Since January 2008, 160 units have sold; 283, since sales started in September 2007. The project, a conversion of a former Mitchell-Lama rental complex, has 11 towers, 48 townhouses and 1,183 units, 700 of which the sponsor has left to sell.

“We’ve raised the price three times since January 2008 … even with the bad market, we’re selling,” says Ho, who is selling the project. “With the economy the way it is today, it’s just like Wal-Mart stock and Spam. People are looking for deals and affordability and bargains.”

In order to not add to the mortgage mess, MeadowWood has worked hard to educate its buyers on home ownership. They offer seminars — on grants, first-time buyer programs, closing cost assistance and more — twice a month to the public.

“Financing is the challenge,” says Reinhardt, who has two offices in the vicinity. “But with SONYMA [State of New York Mortgage Agency] and HPD, we get many more qualified buyers … we have had zero foreclosures on homes we have sold.”

Which is a plus, since the need cannot be denied.

“We had thousands of applications for nine houses,” says Jared Della Valle, an architect with Della Valle Bernheimer, who completed Glenmore Gardens, a New Foundations project in East New York, in late 2006. “We stopped at 1,600 or 1,700. So unless the number of people who qualify has deteriorated significantly, I don’t think there’s any mystery. There is unending demand.”

Go to chart: Upper Manhattan bears brunt of down market

Compiled by Linden Lim

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During the last major real estate downturn, in the early 1990s, New York developers frequently used bankruptcy filings to shield troubled assets from foreclosure. This time around, however, that haven may not be available.

Changes to federal bankruptcy laws and a recent court ruling in New Jersey could have a major impact on how the collapses of the commercial and multi-family real estate markets play out in 2009.

Mark Fawer, a partner in the real estate group of law firm Dickstein Shapiro, said developers have often used bankruptcy filings to delay the repayment of delinquent loans or to extract more favorable terms from a lender to prevent a property from going into foreclosure.

“There are those borrowers who would use bankruptcy as just another delaying technique, as a last resort before a foreclosure sale takes place,” said Fawer. “There are others that would look to it as a tool to reorganize.”

Under federal bankruptcy reform legislation passed in 2005, large commercial buildings are now subject to rules that require single-asset real estate companies to submit a reasonable repayment plan or begin paying interest to lenders within 90 days of the commencement of a bankruptcy filing.

In 2006, Kara Homes, an East Brunswick-based homebuilder, filed for bankruptcy protection. A year later, a U.S. bankruptcy court judge held that Kara would be treated as a single-asset real estate case, even though the firm developed condos and planned communities through 22 limited liability companies.

“Generally, other jurisdictions look to New York courts for guidance, especially in the Southern District,” said David Schechtman, a real estate attorney and senior director of the turnaround and distressed group at Eastern Consolidated. “In this instance, the decision in Kara Homes … will likely have some impact in New York.”

Even though the Kara case was not appealed to the Second Circuit, which would have made it legally binding in other jurisdictions, including New York, lawyers say it may serve to guide New York bankruptcy court judges.

The legal uncertainty comes as New York is experiencing the beginning of a wave of commercial and multi-family defaults that could lead to an increase in bankruptcy filings.

A December report by Real Capital Analytics identified 32 distressed properties worth $3.4 billion in the New York area, plus an additional 236 potentially troubled properties valued at $8.6 billion. The report identifies distressed assets as those in default, foreclosure or bankruptcy and potentially troubled assets as those where the owners are known to be in financial distress, but not directly in connection with the individual properties. In Manhattan, it estimated the combined value of distressed and troubled properties at $7 billion.

Experts say the methods used to deal with troubled real estate projects, either bankruptcy, negotiated repayment or some other type of workout, will depend on a few factors, including the ownership structure of a building, the financial conditions of the lender and developer, and whether the property is still under construction or actively generating income.

Dan Fasulo, managing director of research at Real Capital Analytics, said developers who can generate rental income from their properties will be in a stronger negotiating position with their lenders than developers with unfinished construction sites.

Among local firms with distressed assets, New York-based Broadway Partners is being closely watched. The Wall Street Journal reported that the privately held firm defaulted on $700 million in loans tied to Boston’s John Hancock Tower and other buildings, and Real Capital Analytics put the company’s 450 West 33rd Street building on its list of potentially troubled assets

Various lenders involved with Broadway Partners’ properties are wrangling over who will be paid back first. If the lenders can’t resolve the dispute among themselves, sources said, a court may need to resolve it. But, sources familiar with the talks said there is no indication that Broadway Partners as a company is at risk of filing for bankruptcy because the default involves only one of its individual funds.

Meanwhile, in the multi-family market, many condo projects have stalled because they have failed to pre-sell enough units to meet Fannie Mae loan-guarantee requirements, which will rise from 51 to 70 percent in April. If the projects fail to produce income, developers will be hard pressed to stay current on their construction loans and could risk defaulting, which could give them reason to file for bankruptcy protection. That’s because many of these buildings cannot cover the debt service with rental income alone.

At the 583-unit Manhattan House at 200 East 66th Street, fewer than 150 apartments have been sold. Moreover, less than one-third of those deals have closed, as some buyers have been unable to obtain financing and others may walk away from deposits. Manhattan House officials were not immediately available for comment.

O’Connor Capital, which owns the building, originally structured the project into a series of limited liability companies, including MH Residential and MH Commercial, which owned the ground-floor retail space that was sold in October for $86 million.

The limited liability structure would, therefore, protect O’Connor Capital’s other businesses from claims against Manhattan House.

There is no indication that bankruptcy is being considered at the project, but sources say it will be nearly impossible for O’Connor Capital to complete the conversion because of the large number of unsold apartments. Sources say that senior lender HSH Nordbank is looking for a new developer to take over the project.

With other troubled properties, lenders like Manhattan-based iStar Financial have used the courts to protect their financial interests. In December, iStar filed suit against developers Yitzchak Tessler and Meyer and Jacob Chetrit after they allegedly defaulted on a $103 million loan for a mixed-use tower at 855 Sixth Avenue near Herald Square.

The proposed 632,000-square-foot building was set to become a major retail, office and condo building, but the developers allegedly defaulted in October after obtaining a six-month extension on the loan. The loan was part of a huge commercial portfolio that iStar purchased from Fremont General Corp. for $1.9 billion in 2007.

Sources said that iStar would have little incentive to work out a deal, because the site does not currently have any rent-producing space.

Lawyers and financial analysts are closely watching several other projects that appear to be in trouble, including Tishman Speyer’s Stuyvesant Town and Peter Cooper Village, an 11,200-apartment rental community that is quickly running out of cash, according to Fitch Ratings. The agency said the developer is paying the property’s massive debt from a reserve fund, which has only six months of cash remaining.

When so many new buildings draw clamorous attention to their ever more
brazen shapes, the team at Flank Architects, which designed 520 West 27th Street for architect-turned-developer Peter Moore, has
gone in precisely the opposite direction: They almost embrace dullness
with austerely flat, uninflected walls that form a stolid rectangular
slab rising over, and set back from, an equally rectangular base.
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If you’d love to purchase a new house but you’re sitting on the fence, what exactly would it take to get you to buy?

Mortgage rates lower than today’s 5 percent range? Smaller down payments? Below-market value pricing? Special amenity packages? Or a big tax credit?

What’s the magic mix that will get you motivated? Or is it unlikely you’ll get off the fence as long as you’re worried about the economy and further drops in real estate values?

Questions like these are at the core of the housing industry’s dilemma: Builders are stuck with bulging inventories of homes — most of them priced lower than six months or a year ago — that are still not selling. Strategies to bring buyers back into the market dominated the recent weeklong annual convention of the National Association of Home Builders in Las Vegas. It was also the key subject of an eye-opening new consumer opinion survey conducted by the association’s research subsidiary.

The study, conducted in early January, polled more than 700 self-described “on-the-fence” buyers, segmented to represent consumers in all areas of the country at varying price levels. Asked why they hadn’t yet committed to a purchase, 44 percent said they’re holding out for lower mortgage rates, 41 percent said they weren’t sure they could qualify for financing and 38 percent said they expect to see lower house prices.

Concerns about falling property values were most prevalent among consumers in the Western region, while buyers in the Northeastern and Midwestern states were more likely to be waiting for lower interest rates.

Buyers in the South tended to be more concerned about their ability to qualify for a new mortgage.

Researchers asked what individual enticements — financial or otherwise — would motivate them most to get past their worries and buy. Some of the results were surprising to builders at the convention session where the study was debuted. A few of the findings even appeared to conflict with the builders association’s policy positions.

For example, although the association is vigorously lobbying the Obama administration and Congress for a 10 percent federal tax credit with a cap of $22,000 in the most expensive markets, the survey results suggested that a tax credit alone is not sufficient to motivate buyers to sign purchase contracts.

The study examined the effectiveness of a credit roughly the size the association is seeking from Congress, but it ranked sixth on a list of 10 features that would pull buyers off the fence — well behind mortgage and price concessions.

The mortgage rate that consumers said would be most effective in convincing them to buy now: a 30-year loan with a fixed 3 percent interest rate. Whether by coincidence or design, one of the country’s largest homebuilders for high-end buyers, Toll Brothers, announced a 3.99 percent 30-year fixed rate on new houses nationwide during the convention, through January 25.

A 30-year fixed-rate loan at 3 percent was ranked twice as effective an enticement as a 3 percent loan fixed for five years, with an adjustment to 5 1/4 percent, fixed for the remainder of the loan term. Not surprisingly at a time when Fannie Mae and Freddie Mac require substantial down payments for the best interest rates, the study found that a zero-down option would be highly attractive to potential buyers — more than twice as effective as 10 percent down.

Guarantees by builders that loan applications will be accepted if buyers verify their income and have a “fair” credit score ranked high in the survey. Such a guarantee was rated six times more effective than standard application procedures, where applicants can be rejected at the underwriting, appraisal review or other stages.

Price concessions also are compelling to would-be buyers. Most effective of all: a 10 percent discount below true market value — in other words, instant equity for the purchaser up front.

Among other findings in the study that some builders found sobering: Their traditional approach of offering “incentive packages” of free upgrades and amenities may not be all that effective. The same may be true for heavily marketed “green” features — energy-efficiency certifications and environmentally sensitive designs. If a new house comes with a green certification but costs $2,000 more than a standard model, this doesn’t motivate shoppers to buy, researchers found. Even if the house is green certified and costs the same as a standard house, that alone won’t do the trick.

Bottom line: Look for builders to offer combination packages of special financing, price concessions, lower down payments and perhaps application guarantees. They’ll still push for tax credits on Capitol Hill, but financing concessions appear to have more clout with their potential customers.

Ken Harney is a real estate columnist with the Washington Post.

The largest commercial banks in the U.S. and Europe are basically out of business when it comes to providing financing for commercial real estate. Unfortunately, the Troubled Asset Relief Program (TARP), which was supposed to provide low-cost capital to the banking system that eventually would have been utilized for commercial mortgage financing, is a total lie.

The stated goal of the program, according to the U.S. government, was to purchase assets and equity from financial institutions to strengthen the financial sector and encourage banks to resume lending at levels seen before the crisis, both to each other and to consumers and businesses. But it hasn’t exactly worked out that way.

Many believed that if the TARP could stabilize bank capital ratios, it would allow them to increase lending instead of hoarding cash as a cushion against future losses from troubled assets. The government hoped this “loosening” of credit would improve investor confidence in financial institutions and the markets.

But instead, as each day brings news that Bank of America, Merrill Lynch (which owns commercial banks), Citibank and Wachovia have lost billions and billions of dollars, we find these institutions have no desire whatsoever to provide any source of funding for commercial real estate.

William McCahill, a partner at AREA Property Partners (formerly known as Apollo Real Estate Advisors), who previously served as the head of commercial real estate for Bank of America, said, “With the total shutdown of a securitization and syndication market, the banks have no place to go to move their paper. Until TARP or the marketplace changes, the outlook is rather gloomy. Rising defaults on commercial real estate debt are also making lenders cautious about adding to their balance sheet exposure.

“A ‘drip of dollars’ will be available, but at a very high price. This will be a very tough market for the next two years,” he added.

The chairman of the board of one of New York’s leading residential and commercial development companies, whose firm has been in business for more than a century and who prefers not to be named, said, “The banks who have received the TARP funds are hoarding their money. No one is putting out money to anyone. Everyone thought they would provide money to needy companies to stimulate the real estate market.”

Sam Chandan, the president and CEO at Real Estate Economics, said, “In spite of infusions into the banking system, lenders are drawing down their exposures to the commercial real estate sector. Regulatory pressure, as well as pressures from investors, is limiting banks’ willingness and ability to extend credit.

“While banks’ borrowing costs are falling, concerns about deteriorating fundamentals and falling property prices are driving risk premiums for commercial real estate lending,” he said.

A senior vice president at one of the largest commercial banks in the nation who continues to lend to established real estate owners and investors and prefers to remain anonymous said, “The investment of the TARP funds to banks is no panacea for the banks, nor particularly effective in re-starting lending. TARP only improves Tier 1 capital. It does not improve tangible common equity, [which] supports both loan and securities losses.

“The TARP was effective in preventing an immediate collapse of some of our largest financial institutions this fall, and has somewhat cushioned the blow of sharply declining asset values, but it cannot be effective in returning underwriting standards or debt availability to 2006 or 2007 levels,” he added. “Nor should it. The economy will continue with a painful de-leveraging and eventually work its way out, but only over time and after continued declines in asset valuations make it irresistible for investors currently sitting on the sidelines to commit capital to real estate.”

David McLain, a principal at Palisades Financial, said, “There is a tremendous amount of fear and uncertainty as to how far the commercial real estate market will continue to fall. Bankers traditionally only want to make a sure bet, thus there is little incentive for them to put money out in this unstable environment. As a result, you have many lenders now focused on using the TARP monies to shore up their capital base versus providing more loans. Most major lenders that I have spoken to said they do not have any allocation for new loans in 2009.

“Conversely, this vacuum of loan supply has allowed those few groups who are making loans to pretty much dictate the terms and conditions to even the most qualified of borrowers,” he added.

“We plan to continue to provide close to $5 billion in mortgage financing in 2009,” said James Carpenter, senior executive vice president and chief lending officer at New York Community Bank. “We have tightened our underwriting standards [and are] concentrating on existing cash flow and increasing our spreads. We are worried about the fringe neighborhoods, where prices tend to decline. The majority of our lending in the New Year will be for multi-family, rent-stabilized apartments.”

George Klett, the executive vice president at Signature Bank, which provided close to $1.3 billion in mortgage financing in 2008, said, “We will continue to lend to the multi-family, yet we are very cautious of providing financing for office and retail. We believe that with initial and future layoffs, office and retail will get hurt in the New Year.”

Chris Lama, a principal at NY Urban, said, “Most life insurance companies are lending, offering rates equivalent to corporate bond yields of 7.25 to 7.75 percent while others are completely out of the market. Many borrowers who have near-term maturities who have always been life company borrowers are now forced to borrow from the limited number of commercial banks who offer shorter maturities with amortization and personal recourse. Today, those banks providing lending are holding the cards even if the deal makes economic sense.”

With the lack of strength of the economy, the limited number of alleged credit tenants, rising unemployment, retail and other corporate bankruptcies, in most cases real estate lenders will remain on the sidelines instead of providing financing. At this time in the cycle, I must concur with Chris Lama when he says it is probably “one of the worse times we have seen in financing for commercial real estate, yet the most important goal is survival, which is a difficult task in these conditions.”

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” on CUNY TV and “The Michael Stoler Real Estate Report” on 1010 WINS. He is a director at Madison Realty Capital and an adjunct professor at the NYU Real Estate Institute.

The article “Developers’ best-laid plans stymied by recession” in the February issue cited the wrong month for when foreclosure proceedings began against the developer of 25 Broad Street. The article should have noted foreclosure proceedings were initiated in January.

An earlier version of the article included Muss Development’s Sky View Parc project in Flushing, Queens with an inaccurate description of the project’s status. The article should have noted that a lender’s strike recently threatened to halt construction. A representative of the developer said construction has continued uninterrupted and Muss development is in discussion with lenders to avoid any stoppage.

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As real estate loses some of its luster, many have lost their zeal for working in the industry, although for a good number who have left it is not by choice. In the last several months, an increasing number of firms and offices throughout the city have been shutting down as deals slow to a trickle.

For example, one of the two largest and most successful sales firms in the city, the Corcoran Group, announced late last month that it would close its Harlem office. Our feature story by Candace Taylor puts some of those closures in perspective and shines a light on what’s happening at powerhouse Corcoran, which could be in a challenging spot. That’s because Corcoran is owned by heavily leveraged NRT, a subsidiary of the Realogy Corporation, which was taken private last year by Apollo Management in an $8.8 billion leveraged buyout and has serious exposure to the national housing crisis. While things are going to be tough for its parent company, I don’t doubt that the firm and its nimble CEO, Pam Liebman, will land on its feet, as you’ll learn from Parent trap trips Corcoran.

When it comes to residential units, the expected dynamic between sales and rentals has been turned on its head in this recession. More New Yorkers are turning to rentals — perhaps the one bright spot in the market. Sales agents who never would have touched rentals before are embracing them, encouraged by landlords who are picking up commissions and offering months of free rent and other incentives. But there’s a painful flip side: Despite this burst of rental activity, rents and commissions are falling, making it hard for brokers to make a living. For all of the details, check out our rental report.

In each issue for the past year, we’ve brought you stories profiling the
giants of our industry who are facing immense challenges, such as our features on Kent Swig and Harry Macklowe. Similarly, this month we take a close look at Lev Leviev, Israel’s richest man. After investing billions of dollars in New York real estate at the top of the market, Leviev is now in a race to cash out before his lenders catch up to him. Our story looks at what’s ahead for Leviev and whether his bets will pay off.

We also take a look at another group of investors who are finding themselves in trouble. Just like investors in condo conversions and development sites, those who bought large, mostly rent-regulated multi-family buildings at the height of the market are threatened with foreclosures and bankruptcies. A wave of multi-family portfolios is likely to hit the market at a discount soon, since many of their owners are not cash-rich enough to sustain these properties. Check out Adam Pincus’ story.

Finally, every year our editors gather the best data available on New York City commercial and residential real estate for our annual Data Book. The book’s most popular feature, which maps out condo development throughout the city, can tell you what’s available, where there will be a glut and where there are few projects in the works. If you are a subscriber, you received the Data Book with this issue. If you didn’t, that means you should become a subscriber. In the meantime, you can buy the Data Book 2009 on our Web site.

Enjoy the issue,

Amir Korangy

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