Brokers out of luck when developments get converted
December 04, 2008 02:29PM By Candace Taylor
Shaun Osher, Core Group Marketing CEO
The Jasper condominium's upcoming conversion into a hotel may be disappointing to the 43 buyers of units in the building, but it's devastating to the brokers who sold them. They recently learned they will not receive their commissions from sales at the Murray Hill building.
Developer Harry Jeremias, founder of the Harch Group, confirmed that buyers will receive their money back, plus interest, but that the contracts signed by the building's brokers -- like most brokerage contracts -- stipulated that brokers would not be paid unless the units closed.
The loft-style homes at Jasper, at 114 East 32nd Street, ranged from $810,000 for a 591-square-foot studio to $2.9 million for a three-bedroom penthouse, according to Streeteasy.com. That means brokers, who generally make a commission of 3 percent on a sale, stand to lose anywhere between $24,300 and $87,000 per unit, now that the sales have fallen through.
The news about Jasper has drawn attention to one of the major occupational hazards of being a real estate salesperson: In most cases, brokers do not receive their commissions until a unit closes. That means that if the deal falls through for any reason after a contract is signed, the broker is out a significant chunk of change. It's a risk that brokers take nearly every time they do a deal, but one that looms much larger as more and more signed contracts fail to close in the current real estate market. New developments, especially, have become much scarier propositions than they were in the not-so distant past.
"I've heard brokers saying, 'I will never sell in a new development again,'" said broker Leonard Steinberg, a vice president at Prudential Douglas Elliman. He estimated that over the course of his career, he's lost nearly $1 million on contracts that did not close. "It's happened so many times, it's absolutely disgraceful," he said.
Jasper, a converted pre-war loft boasting a swimming pool and a lobby fireplace, is known for hosting a week-long open house this spring with free meals from neighborhood restaurants. Sales were handled by marketing and sales firm Core Group Marketing. Core CEO Shaun Osher said not only is he now dealing with a bevy of upset brokers (buyers' brokers also will not be paid, he said), he is now losing commissions himself, for apartments he personally sold in the building.
"I'm never going to see those commissions," he said. "It's very disheartening when a broker works very diligently and the deal falls through and the broker doesn't get compensated."
Still, it's a risk every broker takes, and will likely continue to take, he said.
"You don't get paid a commission unless a unit closes," he said. "That's part of every real estate brokers' agreement. [When a deal falls through], it's an unfortunate set of circumstances for the brokers involved, but it goes with the territory. It's part of the business."
Most brokerage contracts explicitly state that a broker will not be paid until a unit is closed, said Andrew Gerringer, managing director of Prudential Douglas Elliman's development marketing group. The reasoning is simple, he explained: "If the developer isn't getting any money, where does the money come from to pay a broker?"
Even in a strong economy, deals can fall through for any number of reasons after a contract is signed, including a buyer or seller changing his or her mind.
Elliman's Steinberg said many of his deals over the years have failed to close when construction delays on a new development cause the buyer to pull out. "Not only do you lose the sale and the income -- you lose the client," he said. "There's nothing in the legal system to protect you."
Sales in a new development face more obstacles to closing than resales, especially if the project is struggling. Units in a new development cannot close until at least 15 percent of building is sold and the plan is declared effective by the attorney general. Moreover, if the developer decides to alter the project midway through, as in the case of the Jasper, he can refund buyers' deposits and not close on the units.
"It is quite painful when a broker focuses on selling in a building and then the sponsor changes his course," said industry veteran Elaine Clayman, a senior vice president at Brown Harris Stevens. "I recall a broker who lost 17 deals years ago at a condo that never converted."
But until now, such changes of direction were rare. In the booming real estate market of recent years, new condos were selling faster than developers could pump them out. Now, however, a growing number of condo projects are being forced to reconsider their plans in the aftermath of the Wall Street meltdown.
A wholesale project turnaround, and its accompanying loss of commissions, "hasn't been something that's happened much," said real estate broker Richard Hamilton, a senior vice president at Halstead Property. "But I think it's something that could be a concern in the future."
Elliman's Gerringer said the last high-profile project to turn into a hotel was Tommy Hilfiger's former headquarters at 485 Fifth Avenue, across from the New York Public Library. Originally envisioned as a 104-unit condominium with interiors by clothing designer Peter Som, developers Belfonti Capital Partners and the Carlyle Group sold the project in 2006 to an affiliate of Global Hyatt Corporation. The building is slated to become the 144-room Andaz Fifth Avenue, the fourth property in Hyatt's Andaz collection, in late 2009.
According to Streeteasy.com, roughly 60 of the building's units were sold when the building changed course. Corcoran Sunshine Marketing Group handled sales in the building, but was able to come to an agreement with the developer to pay brokers their full commissions.
The developers were not contractually obligated to pay brokers' commissions, said Beth Fisher, a senior managing director at Corcoran Sunshine Marketing Group who worked on the project. But they chose to do so as a show of good faith. "They wanted to set a precedent for brokers dealing with them," Fisher said. "If they brought us a buyer, we would pay them a commission. It's about having respect for the work that someone else does."
But in today's troubled times, not all developers have the financial wherewithal to do that.
"If it was up to me, I would close all these units and get everybody compensated," Jasper's Jeremias said. "But if there was enough money to compensate brokers, that would mean the project could continue as a condo. Unfortunately, continuing as a condo is not financially feasible. There are lenders involved. This is not a one-man decision."
The one saving grace for brokers in conversion situations may be condo projects that go, partially, rental. Once 15 percent of the units are sold, Gerringer said, those units can close even if the rest of the building is rented out, though the developer can also choose to make the building entirely rental. If less than 15 percent of the units are sold, though, the sales will be abandoned and the brokers likely will lose their commissions.
But as more and more condominiums face increasing difficulty from the credit crisis, the fate of each development is highly individual.
"We really don't know what the developer's situations are," Gerringer said. "This is all uncharted territory."
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Comments
Anonymous
Broker's really arent "out of a signifcant sum of money". That is the main reason for this credit cresis right now. America runs of credit and forgets that "you dont spend for what you dont have". If a broker is expecting a commission check, its not in the bank yet, so dont buy that expensive item just yet!!
Comment #1 Posted By: Anonymous 12/04/08
Anonymous
I feel that there needs to be protection insurance for brokers...... So that their commisions are protected.... This is soooo sad...!
Comment #2 Posted By: Anonymous 12/04/08
Anonymous
Selling in condo developments in good times is one of the easiest sales...and rewards and with such rewards come risks....no more easy money cest la vie
Comment #3 Posted By: Anonymous 12/04/08
Anonymous
This is part of the real estate game. When things are good the brokers make TONS of money per deal. This is just to balance that out. Sorry brokers, go get real jobs.
Comment #4 Posted By: Anonymous 12/04/08
Anonymous
WHEN THE CHECK IS CLEAR IN THE BANK THEN YOU CAN SAY DONE DEAL DONE DEAL DONE DEAL
Comment #5 Posted By: Anonymous 12/04/08
Anonymous
brokers need to understand they dont invest a penny in this process, so developers are fully exposed, i have heard of projects that go bankrupt and buyers dont even get their money back like in Miami,,but! these are the times we live in,,,lets all hang in there!
Comment #6 Posted By: Anonymous 12/04/08
Anonymous
That is sooooo true....#5
Comment #7 Posted By: Anonymous 12/04/08
Anonymous
i have had some bad experience with brokers in the past, they are selfish all they care is how to spend more money and live the high life! well guess what this time they lost out!!
Comment #8 Posted By: Anonymous 12/04/08
Anonymous
Developers must have spent lots of money, time and effort to create this project and people are tyring to throw a pity party for brokers? I agree with #4. Time to get real jobs!
Comment #9 Posted By: Anonymous 12/04/08
Anonymous
Clearly there are a lot of developers on this board. I am a broker and its not true that we don't invest in the process. In fact, all of the running around we do, finding customers for developers and not getting a penny until we close something, is work. And if we don't close then we don't get paid, fine. But damn it, if we close, you better pay up, as you would to any other vendor or service.
Comment #10 Posted By: Anonymous 12/04/08
Anonymous
What does Massey's contract provide for?
Comment #11 Posted By: Anonymous 12/04/08
Anonymous
eat it number 10.
Comment #12 Posted By: Anonymous 12/04/08
Anonymous
Am I wrong to blame the original sellers of development sites? Yes, I know its a free market, but still... The owners of vacant buildings,parking lots,assembleges, etc would only sell for astrinomical prices, which if your a developer and you want to actually develop you had to pay and hope the market continued upward.. developers take all the risk - and these sellers (both old timers and flippers) walked away rich.
Comment #13 Posted By: Anonymous 12/04/08
Anonymous
First off- most of these "brokers" are not even brokers. They are real estate agents. Another thing- selling real estate in this city is more difficult than any other job in the city. BELIEVE ME! Yes, we should not work on 100% commission but that is how it is across the country. I cannot speak for other countries bc I have never sold in other countries only the USA. And #1, the reason for the lack of sales- Have you been to this building? Didn't think so, if you have you would know why it is not or did not sell. Please be kind. Don't judge bc remember- what comes around goes around. Peace. MRM
Comment #14 Posted By: Anonymous 12/04/08
Anonymous
#9 your statement that brokers do nothing and so they deserve to basically lose.... Very misinformed.... Being a real estate sales person is a service business...and takes loads of effort, time money and creativity.....Not every unit is a show case and sells itself or else there would be no one paying for broker services..... In this particular scenario....I can really feel for the broker....all the time money and effort has earned them NADA....
Comment #15 Posted By: Anonymous 12/04/08
Anonymous
I strongly feel that there should be commission paid to the agent/brokers so that their..work..effort and advertising cost are protected... Something like a commission insurance policy!
Comment #16 Posted By: Anonymous 12/04/08
Real Deal Junkie
To me it sounds like we're just looking for a scapegoat here. Obviuosly being a real estate agent is hard work (as with many other professions). I'm not one myself, but I work in the real estate industry and understand this. NYC real estate is in a bubble right now compared to the rest of the country. And it is only now that projects like this and others (such as Swig's Sheffield 57 and 25 Bond) illustrate that NYC is not immune to the credit crisis. It will be the companies that adapt to this changing market which will come out of this surviving. Obviously if Core Marketing Group doens't change...they won't be in business for much longer. It's that simple!
Comment #17 Posted By: Real Deal Junkie 12/05/08
Anonymous
Brokers entered into a contract to sell the building. They couldn't do it! So the developer was forced to change plans. It sucks, but those people should have saved all the easy money that they made in good times. I'm not saying brokering is easy, but it is not the hardest job in the city by any stretch of the imagination.
Comment #18 Posted By: Anonymous 12/05/08
Anonymous
This development is going to leave a big smoking crater. It's incredible that they think it is better to give back condo buyers' money, then spend a bunch more in construction costs, furniture, fixtures and equipment to try to convert this shleppy old building into a hotel. It ain't gonna happen, this is a slow motion train wreck. The brokers should be praised for being able to sell 43 units in a building this pedestrian.
Comment #19 Posted By: Anonymous 12/05/08
Anonymous
It's always interesting how people who aren't brokers are quick to say how easy it is. It's no different than any other industry. There are good brokers and bad brokers. The best brokers work very hard and no one is guaranteed a paycheck. The law stipulates whenever a willing buyer and a willing seller have a "meeting of the minds" the broker is due the commission. The time and effort spent to sell the 43 units cannot be recovered. How would you feel if you worked all year at your current job and then they turn around and tell you "sorry...we're selling the company so we need all the salary you received all year to be paid back to us". The fact is 485 Fifth Avenue also was a condo that was sold to Hyatt and they did in fact pay all the brokers who had sold a unit up to that point. The difference between being ethical and moral and being a sleaze.
Comment #20 Posted By: Anonymous 12/05/08
Anonymous
Given the fact that the location of the Jasper was mediocre at best, the brokers that sold units there deserve at least a free Dinner at a nice restaurant.
Comment #21 Posted By: Anonymous 12/07/08
Anonymous
#20 is dead wrong. All sales agents agreements provide that a commission is only payable IF AS AND WHEN TITLE UNCONDITIONALLY PASSES FROM SELLER TO BUYER. The "meeting of the minds" crap is OLD common law that has since been overturned (most recently by the Corcoron case a few weeks ago). If a condo sale goes through, the commission is paid. If it does not, for ANY reason, no commission is due, earned or payable. There is not a court in the State that will tell you differently.
Comment #22 Posted By: Anonymous 12/12/08