Neil Gronowetter Broker Multifamily Apartment Building Complex

Back in 1986, "L.A. Law" aired: its gimmick was entertaining but convoluted legal dilemmas in and out of the courtroom. The writers poured new wine into one old bottle: the attorney-client privilege. In that particular episode, an attorney successfully defended his client on murder charges. After he got his client acquitted, his client confessed to him that he indeed was a murderer. What to do? Attorney-client privilege bars counsel from divulging this to the universe. So, counsel confided the confession to another attorney -- a terminally ill attorney. This attorney then told the world that his friend's client was a killer. By this point, you are probably thinking: What does this have to do with real estate? In December 2007, Kent Wythe 9th Street paid $42.6 million for a development site at 421-431 Kent Avenue, and 464-474 Wythe Avenue in the Williamsburg section of Brooklyn, with plans to build several apartment buildings there. Alpha Capital, a firm controlled by Kalikow's Manchester Real Estate and Construction, entered an agreement in October 2007, to lend a $17 million second mortgage to Kent Wythe. Kent Wythe was a firm led by Issac Hager and Chaim Lax. At the time, Lax was suffering from terminal cancer, according to a lawsuit filed November 20, 2009 in New York State Supreme Court.

According to the complaint, Kalikow told Hager and his attorney, Irving Alter, that a personal guarantee by Lax was required for him to approve the loan. But, Lax did not attend any of the negotiations, and Kalikow said he was unaware of Lax's health condition and depended on Alter and Hager to assure him that Lax would be able to fulfill the terms of the loan, particularly the guarantee. "Hager knew that Lax's personal guarantee, and, thus anything that would render Lax unable to fulfill his role as guarantor, including Lax's health, was material to Alpha's decision to loan any monies to Kent," Herrick Feinstein attorney William Fried, who represented Kalikow, said in the court filing. "Hager failed to mention any reason why Lax would be unable to fulfill his duties." According to the complaint, Lax's personal guarantee was critical, because his business interests depended upon a "family financial empire" that only Lax could maintain. Lax was the president of Dynamic Diamond and a leading philanthropist in New York and Israel. Because of Lax's death, the complaint says, the only way to enforce the personal guarantee against Lax, would be to file suit against his estate. By August 2008, the developer went into default on the $17 million and Alpha accelerated the loan. Lax passed away Nov. 3, 2008. Following the default, the loan was later transferred to Beta Capital, another firm controlled by Kalikow.

Hat Tip: The Real Deal Use a dying attorney to bypass the attorney-client privilege. Use a dying partner to avoid a personal guarantee. Welcome to the wacky world of New York City commercial real estate.

The short answer is: Tenants are forced to make repairs on their own. The longer answer is: local and federal officials pass the buck over who should have to pay for such repairs. These tenants have no owners or managers to turn to. Today's Washington Post references the now legendary Ocelot Capital Group, which purchased and then abandoned about two dozen apartment buildings in the Bronx. The 25 buildings racked up thousands of Code C violations --the most serious kind -- from housing inspectors. How bleak have things gotten? Vandals stole the lock on the front door, giving squatters access to vacant apartments to sell drugs. (Might this be an indirect argument for drug legalization?) Plumbing in the building was disrupted after the squatters broke through the walls and stole pipes to sell as scrap metal. Not mentioned in the article is the bureaucratic tug-of-war behind the scenes. If a Fannie Mae-run auction had taken place as planned, a new buyer would ultimately be responsible for making the repairs. The City of New York, however, would have made the repairs in the interim, and charged the new owner accordingly. Sen. Chuck Schumer spearheaded the effort to shut down the auction, lest a new investor not timely make the repairs (read: New York City may have to foot the bill). If Fannie Mae stays on the hook, then Uncle Sam would foot the bill for the repairs.

One of the court-appointed receivers for Ocelot properties last month asked a state court to order Fannie Mae to pay him $20,000, saying the company had promised funds to fix life-threatening problems but failed to deliver. "My responsibilities are clear: collect rents, maintain the property and when it's dangerous, address it," said Marc A. Landis, the receiver, a real estate lawyer experienced in foreclosures. "When I don't have enough money to do that, the lender is supposed to step up to the plate." Brian Faith, a spokesman for Fannie Mae, wrote in an e-mail that the company is "concerned about welfare of the tenants," noting that it has spent $1.7 million to make repairs and provide oil, utilities and insurance, among other items. Other lenders maintain that tenants need not suffer, even if their buildings face foreclosure. "This is a business," said Jamie Woodwell, vice president of commercial real estate research for the Mortgage Bankers Association, a trade group. "The lender has every incentive to make sure . . . the property continues to operate, so that its value continues to be maintained."

In New York, housing analysts estimate that the number of apartment units in buildings at risk of default because of upside-down loans -- in which the property is worth less than is owed on the loan -- could range from 50,000 to 100,000.

Jamestown Properties, a German-backed investment firm located in Atlanta, purchased a mostly completed luxury high-rise condominium in downtown Brooklyn, New York, for an undisclosed sum. The 246-unit condo, named be@Schermerhorn, located at 189 Schermerhorn Street, was the fourth branded condominium project from SDS Procida Development Group, headed by Louis Greco and Mario Procida. SDS will continue to manage the property. Construction at the high-rise apartment complex in downtown Brooklyn has resumed. Perhaps surprisingly, Jamestown Properties said that he development will remain a condominium. Be@Schermerhorn is the latest development in the downtown Brooklyn area to go through a workout. A few months ago, 30-story luxury condo Forte was taken over by its lender Eurhypo Bank. Jamesport, which was already an equity investor in be@Schermerhorn, said it bought the mortgage at a deep discount, but declined to disclose specifics. A syndicate of four banks led by Wachovia Bank provided the $100 million loan for the project at 189 Schermerhorn St. SDS Procida, the developer of the property located, remains a partner. The sale makes sense in this market. Keeping the units as condos (in anything but name only, until the next cycle) may not be so prudent. About 1,500 luxury condo units are on the market in downtown Brooklyn alone, as rentals.

The percent of families in the region who owe more money than their single-family homes are worth decreased during the third quarter, according to a new industry report. In the New York metropolitan area, according to Crains, 12.2% of families in single-family homes were in so-called negative equity during the third quarter, down from 14.2% from the earlier quarter, according to the latest Zillow Real Estate Market Report. Some analysts estimate that about half of all homeowners nationwide will have mortgages that exceed the values of their homes. The New York metropolitan statistical area is another with positive month-over-month gains. The market reported 5.6% annualized depreciation, but was up 0.3% from August, and has now seen four months of positive monthly appreciation. Of course, the New York metro numbers mask the continued slump being experienced in Manhattan, where home values were down 17.4% from last year and dropped another one percent from August levels. These conclusions are as reliable as the data: Zillow estimates a 3-bedroom single-family home in the New York metro area to be a hair under $400,000. Anyone familiar with Manhattan residential real estate would think this was a bargain -- in 1963. Don Draper would prefer that to a long-term stay at the Pierre. New York may be better insulated than the rest of the country from falling real estate prices. It is not immune.

Stuyesant Town / Peter Cooper Village's $3 billion mortgage has been transferred to a special servicing firm. This is a likely indicator that the borrower, a consortium led by Tishman Speyer, has defaulted on the loan. In the world of commercial loans, this is the best and only way to get a lender to extend the term of the loan, modify the principal, or both. A big problem for the owners in this case is this: the new loan amount must be some percentage of the current value of the property. The property appraises now for about $2 billion, about 63% less than the $5.4 billion purchase price. The $3 billion senior mortgage was securitized into five commercial mortgage-backed security (CMBS) deals. Special servicers are the only ones who can modify troubled loans underlying CMBS. Since Tishman Speyer did not put much of its own money into the deal, it does not have great incentive to stay in the deal. Moreover, some speculate that Tishman and its partners will walk away from the loan, but continue to manage the property, collecting a 2 percent management fee of all the rent on the 11,227 units. So, what will happen next? Look to our politicians to push Fannie Mae to forgive a big portion of the debt (our taxpayer money) in return for insisting that the property remain heavily rent-regulated.