Property Grunt

Wednesday, December 23, 2009

And sometimes they come back.

Instead of the powerful landlord evicting the immigrants, the immigrants evicted the powerful landlord

This was a quote from an article regarding the sale of a very large portfolio of buildings back in 2007. The sellers had a reputation of following the substandard low income housing model much to the chagrin of their tenants. The sellers deny this of course and place the blame on their tenants.

When I read that quote, I shook my head because it was just another example of the differences between the thinking of the rich and poor.

Real estate is an illiquid asset, which is why real estate investors, particularly landlords always leave their options open whether it is to sell or to file bankruptcy. As long as that option leads to maximum profitability.

When that landlord sold his portfolio, it wasn't because his tenants ran him out of town it was because of the market. He realized this was the best time to cash out because everything was overpriced and there was very little inventory to go around. Which is why he sold.

And whatever victory these tenants proclaimed was Pyrrhic at best because they realized the new owners were worse.

"It is hard to believe, but the new owners are worse," said Juan Haro, leader of the Movement for Justice in El Barrio, a community organization that for over two years has battled abusive landlords in East Harlem.

Now here's where it gets interesting.

Tenants Struggle as a British Landlord Goes Bust

December 22, 2009
Tenants Struggle as a British Landlord Goes Bust

Foreign investors were a major force in New York’s real estate boom of the last decade, with families and companies from Dubai to Australia swallowing weekend apartments and Midtown office towers. In 2007, the roster of international investors came to include a British firm, Dawnay Day, whose executives had a splashy reputation for spending millions on fine art and yachts.

It was then, after a meeting with a New York landlord at an art show in Miami, that the British firm plunked down $225 million for 47 rental buildings, most of them in East Harlem.

The plan, in a gentrifying neighborhood, was to repeat the success its executives once found in the transformation of the south London neighborhood of Brixton. Dawnay Day would ease out its mainly lower-income residents, rehabilitate the apartments and charge a new generation of younger, more affluent tenants substantially steeper rents.

The efforts, though, didn’t get far before the recession spread across the globe and Dawnay Day went bust. Now, as part of one of the United Kingdom’s largest real estate insolvencies of the recession, the firm’s yachts are up for auction, and their expensive art has been stripped from the walls of its former London headquarters.

And in the 47 buildings, anger, uncertainty and a degree of misery have set in. At tenant meetings, renters complain of gaping holes in their ceilings and walls that allow rats to freely roam. The properties face foreclosure, and it is very possible that the buildings may fall back into the hands of the landlord some tenants say neglected them long before they attracted a foreign buyer.

“They were a multinational corporation guided by greed,” Juan Haro, director of the housing rights group Movement for Justice in El Barrio, who has worked with tenants in the buildings, said of Dawnay Day. “They failed miserably. They crumbled financially and they were a victim of their own devices.”

Saying the federal government has not adequately responded to the broader real estate crisis, a group of tenants are planning a demonstration for Tuesday at the Bank of New York Mellon, which holds the mortgage on the Dawnay Day properties.

Big surprise.

Now I am focusing on this situation from a real estate perspective not a moral one so please excuse me if I my tone sounds callous even admirable but I truly feel that there are many key points one can learn from this situation.'

The deal, which had been discussed for weeks, was completed during Art Basel, an annual art collectors’ gathering where Dawnay executives agreed to meet Mr. Kessner. Mr. Kessner recalls chatting with the company’s two head executives, Peter Klimt and Guy Naggar, about the final price and letting his son Michael stay and manage the buildings.

I don't hear any mention of any brokers representing involvement. Why? Because these guys already met and agreed on a price. The last thing they needed was an additional cost. I am sure Robert Knakal would have been smacking his lips over a deal of this size but it was not to be.

Besides the cost, it was the seller's advantage for the buyer to not be represented by a commercial because the broker would have been able to hammer out a better deal for the buyer.

Back in Harlem, where Dawnay Day had hired Michael Kessner to manage the buildings for them, there was general confusion. Mr. Kessner said he stopped receiving guidance from Dawnay Day after the company folded and had little direction to go by.

“Their office basically just shut down,” he said.

Now this was a critical error on part of the buyers and shows their ignorance of how New York Real Estate works. In certain situations you want to keep certain people around and there are situations where you want to dump them. What Dawnay Day should have done was scoured the entire building staff of any influence of the previous owners and recruited an outside property management company to take over.

However each situation is different and I am sure that loyal inside man made every effort to preserve the profitably for the new owners and did not contribute in anyway to the current state of foreclosure. And I am sure the inside man was not feeding information real time information to the former owner of the deteriorating conditions of the building and plotting a strategy to retake their portfolio at rock bottom prices.

Which brings me to this quote.

Mr. Kessner said he would bid on the foreclosed properties “at the right price.”

The right price will definitely be at the fraction of the original selling price. Banks are not in the business of managing real estate only loaning money for real estate. And with the commercial market on the verge of imploding, they will be more than happy to dump this onto someone else's lap.

It is so brilliant in its simplicity because technically the original owners never even left. They were just sitting on the sidelines waiting for the next opportunity. These original owners weren't even on the hunt for new properties since they probably knew that the buyers were way over their head and it was only a matter of time that they would be in the driver's seat. And now the cycle begins anew.

As I said before, in real estate investing, you always keep your options open and exercise the one that leads to the most profitability. Whether it means stepping forward, backward, around or just waiting it all comes down to what will bring you the most money.

Why? Because at the end of the day real estate is a business and the objective of a business to make a profit.