Developers sense prey, and circle

Feb.February 05, 2009 12:36 PM

Like sharks to chum, some of New York’s larger developers may be circling half-built residential projects with financing problems, eager to snap them up.

Even if examples are so far few, developers may pounce on these distressed assets in the upcoming weeks, according to brokers and developers.

“Every day there’s talk about this happening,” said Ilan Bracha, managing director of Prudential Douglas Elliman, adding that he recently met with a European developer who was specifically interested in stalled-construction properties. “Everybody’s looking to buy notes from banks.”

In many cases, these properties are tempting because their developers have no immediate chance of getting construction loans to finish them.

Typically, they were started in a rush before proper plans were drawn up, and paid for by bridge financing as a temporary measure until long-term construction loans could be secured.

But now the credit markets have seized up, developers are often stuck with a foundation in the ground and no way to pay back what they already owe, says Albert Laboz, a principal at United American Land, developer of the Soho Mews condominium.

While this quick-start strategy may have paid off a few years ago, when developers could depend on loans throughout the project’s stages without having to prove show pre-sales or pre-leases first, “now they’re stuck in a quagmire,” Laboz said.

Lenders, too, may be eager to get these foundation-only projects off their books, even if it means discounting the loan notes by 30 percent to do so, he added.

“If you’re a lender and have a piece of dirt that’s worthless to you, instead of being in litigation with your borrower, you take a loss and write it off,” Laboz said.

With that in mind, properties that are less built, and thus less complicated to continue, will usually fetch far more money than those with a few floors in place, since those can be more complicated to resume, says Jeff Levine, chairman of Douglaston Development, which is putting up the Edge condo complex in Williamsburg, Brooklyn.

“But a good developer should never begin a project without all the financing lined up first,” Levine said. “It’s like walking into a room that has no exits. What do you do in the event of a fire?”

What may have contributed to the pool of unfinished projects in New York in particular was last summer’s expiration of the 421-a tax-abatement program.

If developers were in the ground before July 1, they could pass on desirable property tax breaks to their buyers. But then the bottom fell out of the credit markets a few months later, throwing up a huge obstacle to ever getting these buildings completed, according to developers.

One developer who is taking a measurable step toward distressed-asset purchasing is the Durst Organization, which in March will unveil a $300 million fund for that purpose, said spokesman Jordan Barowitz.

In October, company co-president Douglas Durst told the New York Observer that “it just takes a while for these things to get to the level where they are available,” he said. “They have to go through legal procedures.”

So far, it’s anybody guess which properties will be snapped up, though any yawning hole is a possible target, developers and brokers suggested.

One project that some have wondered about out loud is 160 East 22nd Street, a 21-story, 71-unit condo from Kaish and Taub planned at Third Avenue, where some demolition has occurred, though permits on a former nail salon that was also supposed to be torn down are now expired.

Lenny Taub, a senior partner at Kaish and Taub, did not return a call for comment.

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