Brokers out of luck when developments get converted

TRD New York /
Dec.December 04, 2008 02:31 PM

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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