Deep-pocketed investors have clearly been a boon for New York City developers, who have banked on them to buy up units in their projects.
But those investors also pose a perplexing problem: No sponsor wants to turn away a serious buyer, but having too many investors is not good for a building, either.
Beyond the risk of rowdy tenants and wear and tear (if units are rented out), a high percentage of investors can make it hard for buyers to get mortgages.
In Long Island City, Stephen Kliegerman — president of Halstead Property Development Marketing and Brown Harris Stevens Development Marketing — said his team has helped developers screen buyers and has turned away some investors to maintain a preferred owner mix.
“It’s the developer’s responsibility to make sure they’re not negatively impacting the value of the building for others buying,” he said.
Alan Rosenbaum, founder and CEO of GuardHill Financial Corporation, said many banks won’t issue a loan unless more than 51 percent of a building’s units are owner-occupied. The assumption is that investors pose a greater financial risk to the lender.
“An investor is more likely to default on an apartment than someone who has their family, pets and belongings there,” he said. “There’s more skin in the game.”
Some buildings have more skin in the game than others. At 432 Park, 96 of the 114 units sold so far were bought by an LLC or other corporate entity, with only a handful of owners receiving the condo and co-op abatement that’s only available to primary residents.
At the Baccarat, which launched sales in 2013 and sold out of sponsor units, 46 out of 59 units were bought by a corporate structure, and only one unit is getting the abatement, according to TRD’s analysis.
To be sure, LLCs are used by all types of wealthy buyers — not just investors. But sources also singled out those towers (and a handful of others) as having relatively lower owner-occupancies.
The Baccarat’s developer, Tribeca Associates, did not respond to requests for comment, and the management company for the building declined to comment.
Buildings with a pulse
The rise in LLC ownership has — as TRD has extensively reported — coincided with growing concerns about money laundering in the U.S.
While most LLC purchases may be from aboveboard buyers looking to save on taxes or protect their assets, units purchased through shell companies with ill-gotten cash are also common.
“There isn’t a direct one-to-one correlation between LLCs and money laundering, but there is a high incidence of money laundering in real estate when LLCs are involved, because people doing illicit stuff don’t like to be identified,” said attorney Ross Delston, a former banking regulator and anti-money laundering specialist.
In addition to all of those issues, there’s a stigma of living in a partially empty tower, where investors or pied-à-terre owners pop in only on occasion.
“Local people say, ‘We need to know that real people are moving in here and it’s not money being parked,’” said Compass’ Vickey Barron. “They want to live in a building with a pulse and a heartbeat.”
Investors who rent out their units for short-term stays are another point of tension.
City inspectors recently raided the Atelier and issued 27 violations for illegal hotel use in one of the biggest crackdowns in New York to date on short-term stays.
“At best, the Board is grossly negligent and at worst complicit in the operation of an illegal hotel,” attorney Massimo D’Angelo said in a complaint to the board, which denied the allegation.
For all the abovementioned reasons, some developers go to great lengths to control the buyer mix.
At 220 Central Park South — where Ken Griffin’s purchase set off alarm bells among lawmakers — Vornado Realty Trust’s Steven Roth has also reportedly screened prospective buyers personally. “He’s basically hand-picking the buyers in his building,” Elliman’s Jacky Teplitzky told TRD a few years ago. Others have speculated that Vornado wanted to make sure the buyers — and their finances — were legitimate.