Residential Realities January 2012
January 30, 2012-- The Special Risk Index: What the Disclosure Says and What it Really Means…
Offering plan disclosure is a topic of great interest in this blog. Specifically, there is a treasure trove of information about the development located in the “Special Risk” section at the front of the book. Those disclosures present the risk, but rarely quantify the significance of the information being disclosed. Some disclosures are required by the Attorney General’s office in every plan and some risks are unique to a particular situation. To help translate the information and quantify the level of concern, I am introducing my Special Risk Index. The Index will explain the real meaning behind the disclosure and rate the risk to the purchaser. The list will increase as time permits and as new risks come my way. Here we go…
The Performance Bond Disclosure
The Offering Plan for a new construction condominium contains a Special Risk disclosing that the Sponsor does not have a bond for the performance of the sponsor’s obligations. Should a purchaser be concerned?
It depends. I give this Special Risk a “5” on the Special Risk Index (10 being the most risky and 1 representing a risk of minimal concern).
Under Part 22 of the Regulations promulgated by the AG for offering plans that cover new construction, the sponsor is obligated to disclose whether there is a bond for performance of the sponsor’s “obligations”. Those obligations include the completion of construction and the sponsor’s other financial obligations as set forth in the plan. What exactly is a performance bond? When buildings are under development, it’s possible to insure that there will be funds available from a surety company if the sponsor runs out of money. This “insurance policy” is known in the trade as a “completion bond” or “performance bond”. The AG’s regulations require disclosure of whether the sponsor is obtaining such a bond to insure the sponsor’s performance under the plan. This requirement is somewhat comical, as I have never seen a sponsor obtain a performance bond, probably because of the significant cost. The disclosure in the plan usually reads along the following lines:
“No bond or other security has been furnished to secure the performance of the Sponsor’s obligations. Although at the time the Offering Plan is accepted for filing the Sponsor will be financially capable of performing Sponsor’s obligations, the subsequent ability of the Sponsor to perform it obligations will depend upon the Sponsor’s financial condition at the time”.
If for any reason, the sponsor runs out of money, it’s the purchaser’s problem, as the sponsor has no bond or other security for completion of the project. Although most projects do get completed, when a project does run into trouble during construction or after the sponsor has begun selling units, there is no regulatory requirement that the sponsor perform its financial obligations and the chips just fall all over the place. One has to wonder why a sponsor with no track record and no demonstrated financial ability can go ahead and start selling units to the public without securing the obligation to complete the project in some fashion. Disclosing that the sponsor might not be able to perform may educate the purchaser, but it does not protect the purchaser.
Residential Reality: Know Thy Sponsor
In the world we live in today, where purchasers rarely buy apartments in buildings that have not been completed, the significance of this risk has been minimized, but not eliminated. As the recession has demonstrated, developers can run into trouble when the real estate market softens as it did after Lehman’s demise. Purchasers are well advised to research the backgrounds and track records of the individuals involved in the offering as well as the current status of the project. Even if the building has been completed, financial problems can occur long after construction is over. As the expression goes, past performance is no indication of future performance, but it certainly says a lot about the folks you’re dealing with and the likelihood of their ability to perform their obligations under the plan.
January 19, 2012--High Anxiety: Lending Vertigo Continues…
At a recent presentation I gave on the perils of lending guidelines and the possibility for deals getting derailed when co-ops and condos can’t or won’t satisfy the required regulations, an agitated upstate attendee interrupted my introduction to school me on the beauty of the free market. Apparently, if co-ops and condos fail to satisfy the bank's underwriting standards, and buyers can’t get financing, then the value of the apartments should adjust downward to reflect the co-op or condo’s financial inadequacies and all will be right with the world. This hardball approach works best in a town similar to the one in which my counterpointer resides, where there are only two co-ops. A solution without a problem. For the rest of us, the battle is ongoing...
And Then There’s MetLife…
One of the active participants in the residential lending space over the last few years has been Metlife. The loan officers and underwriters exhibited a flexibility and willingness to work to get deals done. In a number of cases, I was able to get loans funded with this bank that proved impossible with others. Ironically, Metlife now abruptly exits the marketplace, citing excess regulation among other things. In other words, residential loans are too much of a hassle, so 4,300 people are now looking for the next work station to occupy.
This development speaks volumes about the current difficulties in the residential lending environment. Buyers are left with few choices for obtaining loans and face headwinds when it comes to clearing loan conditions. Yes, there is money available for mortgage financing, but simultaneously, there is an increasing hesitancy to make those dollars available unless both the consumer and his or her proposed residence are squeaky clean from an underwriting perspective. Even private banking customers are feeling the pain, as they are often forced to jump through lending guideline hoops, usually reserved for regular folks.
Residential Reality: Don’t Take “No” for an Answer
I’ll share my own anecdotal research from several recent transactions involving initially uncooperative lenders. Borrowers and their counsel are well advised to keep hammering away at their loan officers and underwriters to find solutions to the removal of loan conditions. In a number of cases where lenders initially refused to accept an alternative for removing a condition relating to the borrower’s finances or to the co-op or condo, I was able to find a solution or an exception was made and the condition was omitted. Expect frustrating delays for removal of troublesome conditions, but it can be done…
January 12, 2012--The Truth Factory: Where buyers face facts…
Recently, fellow blogger and friend, Sandy Mattingly, queried me on whether attorneys use “the Google” (a phrase of his coinage) as a part of due diligence. The answer should be, but isn’t always, “yes”. Irrespective of what attorneys may or may not be doing to complete due diligence in connection with the purchase of an apartment, the consumer appears to be way ahead on using the Internet for real estate research.
As We Know, Buyer Beware
It’s axiomatic that the buyer must investigate all aspects of a property before agreeing to go ahead with the purchase. In New York City, that due diligence must be completed before the contract is signed. Once the contract is signed, unless covered by the seller’s representations and covenants, the property is sold to the buyer in “as is” condition. So the buyer must take all the necessary investigative steps soon after the offer is accepted.
Co-op and Condo Caution
With apartment purchases, as readers of this blog know, due diligence includes review of the offering documents, minutes of the Board, discussion with the property manager and a variety of other inquiries and procedures, including inspections, that may be appropriate under the circumstances. As the world continues its speedy digital evolution and revolution right before our eyes, using the Internet as a research tool is now front and center as a key component of co-op and condo knowledge. Information on the Internet is like a roach motel, facts check in, but they never check out. If there is anything of any significance about a particular building, it will find its way into the cloud and stay there. But the savvy consumer knows this quite well. Anxious buyers spend hours staring at their laptops and iPads tracking down whatever they can about building histories and problems. Buyers are often more knowledgeable about properties than the brokers who represent those properties. Brokers who adopt a see no evil, hear no evil, speak no evil philosophy about a property are usually in for a big surprise.
It’s Not Perfect
Whenever information has no filter, there is always the possibility that the information is not accurate, no longer relevant or its truth exaggerated. Relying solely on the Internet, however, is not a great idea. That being said, it can be a valuable source of background information, and attorneys and buyers should be hitting the search button as early in the deal as possible.
January 1, 2012: A Real Estate Rave--Notes on an Industry Happening...
Barcamp Bumps it up a Notch…
It doesn’t take much convincing in the world of residential real estate, that the way business is transacted has been transformed from a personality driven analog model to a technology dominated digital environment. Many in the residential brokerage business struggle with how to incorporate these new internet and social media tools into the everyday grind of getting deals done. On January 9th, the mysteries of those technologies get a little easier to understand.
The annual New York City version of Real Estate Barcamp will take place on that date at Simple Studios in Manhattan. It is a day-long event in which a group of very smart real estate professionals gather to discuss technology, marketing, trends and a myriad of other issues that will impact the real estate business in ‘12 and in the years ahead. A movable feast of ideas that evolves as the day goes on, it is part seminar, part tutorial, part support group and just part party.
Mark Your Calendars
There are a few tickets left, so consider attending an event that might transform your business.