New rules of the game

Stuart Elliott

In real estate, fortune favors the bold. As a result, the bold often make fortunes.

Given this, it’s interesting how many successful real estate players are now aggressively stretching the rules to gain the upper hand.

The weakened market, followed by a nascent rebound, has created a climate where there are finally opportunities for some investors, like REITs. And for some building owners (not all of them, of course), there is finally latitude to chart a course toward profitability, rather just tread water trying to stay afloat.

In this new environment, assumed codes of conduct have gone out the window and new rules are emerging, as many of the stories in this issue of The Real Deal explore.

Isn’t paying your mortgage sacrosanct, bundled up with ideals about the American dream and being a good citizen?

Not for some New York City building owners. Our story by David Jones looks at how many big players — Silverstein and Kushner among them — have held off on paying their mortgages and intentionally gone into technical default.

It’s a means to improve their negotiating hand with lenders in tight times, and to drive down their mortgage payments. While some landlords still don’t have a lot of cash on hand, they have enough to make decisions — and sometimes they decide that it makes more sense to spend money renovating their property and building out new spaces for tenants than being current on their mortgage. And it’s likely we’ll see more of this going forward.

(These landlords seem to be following in the footsteps of the American homeowner. Four in 10 U.S. homeowners would now consider walking away from their mortgage if it were to go underwater, according to a recent survey.)

Elsewhere, the big guys have been pushing the normal boundaries when it comes to picking up troubled assets. SL Green, the largest commercial property owner in Manhattan, has apparently done at least two “loan-to-own” deals to pick up properties. It’s part of an acquisitions push that has seen the REIT do $1 billion in deals since the end of 2009. (One billion is a lot in 2010 dollars, if not a lot in 2007 dollars.)

“Loaning to own” involves swooping in to finance a project while hoping for a default. Generally, no company wants to be known as a lender that anticipates their loans will fail so they can gain ownership of the property. SL Green denies loan-to-own tactics, but it certainly seems to me like it’s an approach that could prove advantageous in this market. See Adam Piore’s excellent story about all this here.

Lawyer Adam Leitman Bailey is another colorful character who has pushed the boundaries and profited from it, becoming a controversial figure in the real estate community. He created a cottage industry spearheading many buyers’ efforts to back out of new condo contracts as the market went south, using obscure legal arguments, and becoming a nightmare for many of the city’s biggest developers in the process. See Candace Taylor’s profile of the high-energy attorney.

Finally, there is Gary Barnett of Extell Development. What do you say about a guy who, in the same month, announces plans to build the tallest residential building in the city and also takes the audacious step of suing Attorney General Andrew Cuomo over an order that Extell refund money to buyers at its Rushmore condo project?

So maybe, at least with the right game plan, it’s getting to be a good time to push the bounds and take risks again in New York City real estate.

Just don’t tell that to investors like, say, Harry Macklowe, Kent Swig or Yair Levy, prominent risk-takers who obviously didn’t fare so well.

Pushing the limits by leveraging oneself to the hilt — borrowing $7 billion and putting down $50 million of your own money, like Macklowe did –is the kind of ill-conceived risk-taking that characterized some boom-time deals and won’t be tried again for a while. Or at least one would hope.

 Stuart Elliott