Developers turn to running other people’s properties

<span style="font-style: italic;">With development largely dried up, many turn to asset management</span>

With construction on hold at many New York projects, a growing number of developers and brokers are getting into the business of running properties for someone else.

The growth of the so-called “asset management business” comes as an increased number of properties have turned into virtual zombies — either unable to complete condominium sales or, in the case of commercial buildings, unable to retain or even find tenants.

Unlike receivers, which are appointed by the court during foreclosure proceedings and are often lawyers, asset managers can be hired by a wide range of players — from lenders to institutional owners to the court-appointed receivers themselves — at any time. And, while receivers are charged with overseeing finances and administrative duties, sometimes they farm out those jobs to asset managers who, as real estate professionals, will handle property maintenance, construction, rent collection and accounting.

In one of the most high-profile asset management cases in New York, the Related Companies was selected as the new managing agent at Rector Square, a troubled condo project that was foreclosed on by Anglo Irish Bank.

The company was hired by the Battery Park City building’s court-appointed receiver, attorney Michael Miller, to handle the renovation of common areas at the property, to deal with administrative functions like collecting rents and common charges, and to find new rental tenants until the court allows the building to renew sales activity.

In addition to Rector Square, another high-profile case involves 1330 Avenue of the Americas, where Jones Lang LaSalle is managing a former Macklowe Properties office tower that was acquired by Otera Capital in a foreclosure auction. Meanwhile, the number of asset managers is expected to increase in the coming months.

Compensation varies widely depending on the level of services provided by the asset management company. Related, for example, is being paid a flat-project fee of $100,000 to manage Rector Square, not including fees to oversee construction and to rent out units, according to sources familiar with that situation. But pay often hinges on what kind of expertise the asset manager has. Some are professional property managers; others are developers or commercial brokerage firms with asset management divisions.

On the precipice

According to first-quarter data from the Mortgage Bankers Association, the number of multifamily and commercial delinquencies has risen to levels not seen since the 2001 recession.

As many lenders (including the Petra Fund, Guggenheim Structured Real Estate, iStar Financial and others) face rising delinquencies in the New York area, there will be increased pressure to not only foreclose on properties, but to find professional property managers to keep income flowing and prepare the assets for the eventual thaw in the real estate markets.

“We’re on the precipice where you’re going to see a huge demand for this expertise,” said Steve Herman, a partner at Cadwalader, Wickersham and Taft, a Manhattan-based law firm.

Rosen Associates Management Corp., a Jericho, N.Y.-based real estate firm, is seeing a big increase in requests for asset management services, mainly in commercial real estate.

“We’re seeing a huge rise in the variety of firms looking for professsional management,” said David Rosen, executive vice president of the firm. “When the economy was good, everybody looked like a rock star.”

The company is managing a shopping mall for a pension fund in Queens and recently managed another mall anchored by Kmart on the Bruckner Expressway in the Bronx.

Firms are already beginning to expand into asset managing because the rest of the market is so dead. Blesso Properties, a Manhattan-based developer of boutique residential loft buildings, is attempting to do so as the slowdown in construction and condominium financing has impacted its core business.

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“The traditional model of development where you buy a piece of land, redevelop it and sell it, that’s not something that’s going to happen for a minimum of three years, and maybe longer,” said Matthew Blesso, president of the company. “That leaves companies like mine to find new things to do or go out of business.”

Blesso has approached several lenders about taking over management of distressed condos and operating them as rentals. He has not, however, finalized any new business because he has not yet come to any agreements on compensation.

“A lot of lenders have not fully accepted the gravity of their situations on some of their loans,” said Blesso. “Someone was offering us the equivalent of a typical property management fee, where we would have to do something well beyond [the normal duties].”

Unraveling a mess

Bob Billingsley, vice chairman at Colliers ABR, says the requirements of asset managers are far more complicated in the current market than they were in the past, as many boom-era property owners intended to flip their acquisitions to a new buyer, and therefore made few provisions for long-term management of these buildings.

“A lot of people bought buildings and figured they would sell it in two years, so they would say, ‘I don’t have to worry about that boiler,'” he said. “Now the chickens have come home to roost.”

At Rector Square, Related has to unravel one of the city’s most complicated foreclosures. The property includes a mix of first-time unit owners, affordable housing tenants and millions of dollars in unpaid construction contracts. Since it sits on land held by the Battery Park City Authority, the condo sponsor must pay monthly rent to Battery Park, which makes the monthly common charges more expensive and less predictable than for a building that owns its land and does not have a ground lease.

In March, meanwhile, Short Hills, N.J.-based Roseland Property Co. launched a new consulting unit to help property owners and financial institutions manage assets.

Roseland’s primary business is the development and management of luxury apartment communities and boutique shopping centers in the city, New Jersey, and other Northeast locations.

The new division provides everything from management and leasing of commercial properties to completing construction at unfinished project sites.

“We’re seeing very complicated, sophisticated assets with a series of issues that are impairing their value,” said Carl Goldberg, co-founder and principal of Roseland.

Goldberg said the company is looking at a variety of properties up and down the Eastern Seaboard, ranging from residential rental buildings to mixed-use projects.

The business is not entirely new for Roseland. It managed more than $2 billion worth of non-performing real estate assets during the last real estate downturn, from the late 1980s to the early 1990s, Goldberg said.

Meanwhile, in May, Centerline Holdings, a Manhattan-based lender for multifamily and affordable housing developments, launched a new asset management unit called Centerline Real Estate Solutions. Centerline, a long-time affiliate of Related, made millions of dollars in bad loans over the past two years, and was one of the nation’s hardest hit commercial lenders at the height of the subprime crisis.

The new asset management unit will help lenders and third-party property owners manage their real estate portfolios, dealing with everything from construction to property administration.