For brokers, when the boss is the bank

<span style="font-style: italic;">As projects falter, more lenders cut out developers and hire real estate agents directly</span>

Some real estate agents in the city are working for a new kind of client. For the first time since the 1990s, banks are beginning to hire New York City real estate firms to handle troubled new development projects, according to brokers.

A regional bank, for example, recently hired Halstead Property Development Marketing to sell units at a new condo project where the developer is in default, said Halstead’s executive director of development marketing, Stephen Kliegerman, who declined to name the project.

Meanwhile, the sales team at Forte, a 30-story residential tower in Fort Greene, will now be working for the project’s construction lender, Eurohypo Bank. And at new development marketing firm Core, CEO Shaun Osher said he speaks to lenders on a daily basis.

“In a lot of circumstances, the lenders are becoming the client,” Osher said. “They’re controlling some of the deals now.”

Experts said these relationships are just the beginning of a wave of partnerships being forged between banks and brokers in New York as lenders intervene to salvage ailing projects or prepare for foreclosure proceedings.

“Based on what we’ve seen in every other market, it’s inevitable that you’re going to start seeing senior debt [lenders] get involved in the real estate market in New York City,” said Jon Gollinger, the CEO and co-founder of Accelerated Marketing Partners, which conducts real estate auctions. While direct relationships between brokers and banks are still rare in New York, he predicted they will become far more common by January of 2010.

While developers were the middlemen during the boom, there is some historical precedent for the direct lender-broker relationship.

During the real estate slump of the early 1990s, many agents stayed afloat by selling bank-owned units as lenders foreclosed on failed residential projects.

Andrew Gerringer, managing director of the Prudential Douglas Elliman Development Marketing Group, recalled selling blocks of bank-owned condos to investors between 1991 and 1993.

“I did a ton of work for banks in the last go-round,” Gerringer said. “The Milstein family had just purchased Douglas Elliman in 1990 and I joined them specifically to go after work from the banks, since the banks were taking back all the residential condo towers at that time. As they say, there is no sense in fishing in a dry lake — you have to go where the fish are biting.”

These days, Elliman is working for the banks again, although not yet in a sales capacity. Gerringer said he is consulting for a number of lenders, helping them determine the value of the often-troubled properties on their books.

The brunt of the bank work for brokers has not even hit yet. That’s because at this point, many lenders on New York City projects aren’t yet ready to take ownership of distressed properties, though they’re preparing for that possibility, and are already working with brokerages to help determine how much their properties are worth in a declining market.

“They’re looking for reports, insight,” Gerringer said. “Right now they’re in an information-gathering phase.”

While foreclosures are on the rise here, there are still far fewer in the five boroughs than there are in other cities around the country. New York City saw 892 new foreclosures in the second quarter of 2009, with only 23 of those in Manhattan, according to data provider PropertyShark. That’s far less than the13,654 foreclosures in Los Angeles and 2,556 in Miami during the same period.

Gollinger explained that many borrowers here still have cash reserves on hand to pay interest on their loans to the bank, so developers can stay current on their payments even if their projects languish on the market. Meanwhile, lenders may be hoping the market will turn around before they have to begin the long and onerous process of foreclosure proceedings.

“They’re extending their loans out a bit and hoping the market comes back,” Gerringer said.

But some lenders aren’t waiting to foreclose before taking control of faltering condo projects. Instead, they are hiring marketing and sales firms now to help them sell units as they ramp up efforts to prevent foreclosure and try to avoid taking the project back onto their books.

Kliegerman said in Halstead’s new contract with the regional bank, the developer hasn’t yet missed a payment, but is technically in default for violating other aspects of the loan agreement. The bank hasn’t yet foreclosed, but has executed its right to take the reins of the project.

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Kliegerman said the lender interviewed three or four other brokerages before choosing Halstead to take over sales at the project. The bank has also hired new contractors to fix construction mistakes made by the development team.

“The developer is not getting things done,” Kliegerman said. “The bank is just exercising its right to protect its investment.”

This kind of micro-management won’t be an option for all banks, he said, since many don’t have the resources or infrastructure to oversee a residential development. Sometimes there is more than one bank or mezzanine lender involved, making the situation even more complicated.

Still, he said, more lenders may soon take similar steps in hopes of warding off foreclosure.

“Banks don’t want to foreclose on their clients, so if they have the resources to step in and do something other than foreclose, they will,” Kliegerman said.

Last month, Crain’s reported that the Clarett Group, the developer of Forte, would cede control of the project to the construction lender, Germany’s Eurohypo Bank, and its asset manager, the Witkoff Group.

In March, Clarett had hired residential brokerage the Developers Group to market the project. The sales team will stay in place and continue to sell apartments, said Daniel Baum, the CEO of TDG/TREGNY (the Real Estate Group New York recently merged with the Developers Group). Baum declined to comment further.

Lenders also may want to avoid foreclosure because it could trigger a right of rescission for buyers in contract, meaning they’ll have the option of backing out of their deals and getting their money back. That’s what happened at condo conversion 45 John Street, where buyers were told they could rescind their contracts after the lender, Bayerische Landesbank, filed suit in June to foreclose on $51.7 million in defaulted loans at the condo conversion.

No units there are currently for sale, said a spokesperson for Corcoran Sunshine, which had been marketing the project.

There’s a similar situation at Jasper in Murray Hill, where Osher’s Core had been handling sales before suing Harry Jeremias for unpaid fees. Osher said no one is selling units at Jasper now, and it could take several years before the project is marketed again.

Another reason banks are intervening, Kliegerman said, is that the recent boom attracted a large number of newbie developers who weren’t prepared for the suddenly difficult market conditions.

“There are so many non-developer developers, people who five years ago were in a different business,” he said. “They really need someone to help guide them in this.”

Lenders may soon have no choice but to begin taking the keys to more struggling properties, as interest reserves begin to run out this fall and winter, Gollinger said.

“In virtually every market in the country, and I would include New York, there has been a drop in value of at least 25 percent,” he said. By the time the price has dropped that far from peak values, the developer, equity and mezzanine lenders are often out of the deal, he noted, leaving only the senior debt lender left to recoup its investment.

Right now, he noted, his company is mostly still working with the equity partner and mezzanine lender in New York, but “it’s going to move very quickly to the senior debt [lenders].”

The process of transferring control from the sponsor to the lender is often fraught with tension, since developers are often emotionally involved in their projects.

“When you’re dealing with a developer, you’re dealing with someone who’s put their heart, soul and creativity into a project,” Gollinger said. “A developer might [also] be saying, ‘In the next cycle, how am I going to look?'”

But once the transfer is completed, it’s sometimes easier for agents to work for lenders. Lenders are dispassionate, brokers said, and often have more authority to make price changes when necessary.

The bank “has the power to make it happen,” Gerringer said.