Industry's attorneys in time of transition.
New York City real estate attorneys have been through a year in which many found their practices in transition.
The attorneys have had to adapt, not only for their survival, but for their clients. Co-op attorneys are finding their focus change from being antagonistic towards the sponsors to keeping them financially viable. Litigation is no longer over who gets the deposit, but who gets the building. Bankruptcy has gone from a back room to the way to get a bank's attention, and, at the same time, has also become a major revenue generating area for the firms. Real estate taxes are continuing to be burdensome even though values are dropping. Brokers, who work on deals involving buyers, sellers, lenders and properties in different states, could be facing multi-state licensing if they expect to collect on fees.
James G. Samson, partner with Haas, Greenstein, Samson, Cohen & Gerstein, P.C., noted for its co-op practice, said the biggest issues have been workouts, the lack of money from banks and coping with client's financial problems.
"We have financially viable co-ops and cannot find mortgage money," he said. "You may be working with the sponsor's insolvency lawyers as well as the banks insolvency lawyers, as well as the RTC."
In particular he added the RTC does not "see a sense of urgency" over matters it is involved with.
Over the last, year, Samson said, the firm has represented several banks and quite a few co-ops in workouts. "Years ago," he said, "it was your job to beat up on the sponsors. Now it's your job to keep them alive. You're out there selling his apartments to keep him financially viable."
Kenneth M. Block, a partner with LePatner, Block, Pawa, & Rivelis, said most of the litigation in the courts today is a result of the inability of the owners to meet their mortgages. "Three or four years ago I was litigating over contracts of sale," Block said. "Now the question is who gets the building and not who gets the deposit. It's a much great life threatening issue." Block said some of the banks have realized they have to approach the workouts sensibly and not push the developers into filing bankruptcies as some institutions have done recently.
"Never before in my 20 years of practice have we seen as much litigation brought by banks against developers," Block said. The challenge, he explained, is from the business standpoint. "How do you reconcile the interest of the bank with the interest of the developer where the developers do not have a lot of assets to satisfy the banks?"
Even if the banks succeed in recovering money judgments, Block said, they will not be able to collect any money. "The banks which do not understand this result in the filing of bankruptcy petitions," he said. The bankruptcy is the last recourse, Block added.
"If they are being foreclosed on by the bank, the response is the filing of the bankruptcy but," he warned, "there are mechanisms to have the bank get around the stay."
Block said they are also participating in a lot of pre-packaged bankruptcies and go into court on consent with the lenders. "With some, the banks have been lowering interest rates because they recognize it's necessary to lower the interest for the property to be viable," he said.
While Block believes prices are close to the bottom, he warns: "as major tenants are vacating buildings, you may have more defaults."
Zoning and planning attorney Steven D. Kowaloff said the "City Planning Commission should re-evaluate its basic zoning and planning policies and practices in order to be more responsive to a shifting business, employment and tax revenue climate."
Kowaloff said the city does not give enough weight to the business side of things. When a decision is made to rezone, Kowaloff noted, the city looks at many issues including those regarding the environment, traffic, and affects on neighborhood. "One factor they do not emphasize enough is the enhancing of land values and fostering the direction of building development," he said. "These are pro real estate considerations. The economy is changing fundamentally and the city should give greater weight to the business side of things. There's not enough of an appreciation of the developer's risk."
More Documentation Required
Paul Korngold, a partner in Tuchman, Katz, Schwartz, Gellis & Korngold said, "In the real estate tax field, while values are declining, it is also harder to get cuts in assessments because the city is demanding more and more documentation.
"I foresee that there will be longer delays [in obtaining relief] because more people are concerned about their real estate taxes, there are more protests, more cases are being put on the court calendar, and there are fewer personnel in both the city and court system. There will be longer and longer delays until people obtain their relief."
On rent increases, Korngold said, "the good news" is that the DHCR is processing MCI applications faster.
"So the owners get the rent increases, but the bad news is they can't collect the rent increases because the rents are above the market," he said.
Ruben Klein, president of Bronx Realty Advisory Board and a parter in Klein & Keenan, said an important challenge to rent regulation is going on in California with regard to mobile parks and is scheduled to be heard in the U.S. Supreme Court on Jan. 22, 1992.
During a similar recent Supreme Court hearing, Klein said, Justice Sandra Day O'Connor said she did not see why one group of people should support another with rental subsidies. No decision was reached because the plaintiff did not pursue the claim.
Land owners in Escondido, California charge rents for the space to park the mobile homes, which can be bought and sold by the mobile home owners. The town rolled back rents and basically froze them at 1986 levels. "But when owners began to sell the old mobile homes they were making triple because the rent was fixed," Klein said. The lower the rent for the park, the greater the amount the owners of the mobile homes were able to get when they wanted to move away. So although the intention was to protect the affordability of housing, buying into the housing is still costly while rents are cheap and the mobile home sellers are benefiting to the detriment of the landowner. Klein said the case could prove to be important to owners of rent-regulated apartments in New York City.
Courts Come Down on Brokers
The courts in New York, however, are not playing fair with brokers right now, said Jay J. Gurfein, a partner in Gurfein & Graubard, which represents brokers in litigation matters. Gurfein said the courts are making it more difficult for brokers to collect fees, particularly when it comes to inter-state deals.
It used to be, he said, that the broker needed only to be licensed in New York. Now cases are coming down from the courts that may be a precursor to multi-state licensing.
While New Jersey has a broker reciprocity agreement with New York, Gurfein noted a recent case in which a mortgage broker stepped into New Jersey to show a property, sued in New Jersey to collect a fee, and was told he was unlicensed and could not collect. Unfortunately, the New York court agreed and would not let him sue in New York either. The decision is being appealed.
"The New York courts have taken that New Jersey law and used it," Gurfein said. "We can envision a situation where a broker may be licensed in three or four states if he has to go to the other states."
Gurfein believes the New York legislature will have to get involved and a law passed so that a licensed New York broker who innocently violates a "foreign" statue would not be barred from suing for the fee in New York.
In another case, Gurfein said, a broker in New York collected a commission in New York but was not licensed. A New York statute, which Gurfein said was designed as a consumer protection law, reads that the payor of the commission can sue for four times the amount of the commission. "Thereafter, the seller sued for recovery of four times the brokerage commission and the judge gave him somewhat more than what he paid." The caveat here should be broker beware.
Howard S. Karasik, a partner in Sherman Citron & Karasik who are bankruptcy specialists, said the number of real estate bank bankruptcies has exploded. A key issue in the ordinary bankruptcy, he said, is the cash collateral--whether the debtor has the right to use the rents which are collected, "which becomes a fight between the banks and the debtors." Another issue is the ability of the debtor to "cram down" the mortgages.
"This is a way of forcing the recapitalization and restructuring of the mortgage without the consent of the bank," he said. "When you cannot negotiate and cannot get them to consent you can cram them to consent you can cram them down," which hed said is not without its problems and difficulties.
Karasik said, "The banks have been obstinate but are beginning to realize that negotiation is preferable to litigation."
He has also noted a change in the bankruptcy practitioners which he said is a result of a lack of regular real estate business. "They are looking for other areas in which to practice," Karasik said. "I am amazed at the number of lawyers who have had absolutely no bankruptcy experience, filing real estate Chapter 11's. I've been doing this for 30 years, and I know all the players, and suddenly there are lawyers I've never head of representing real estate owners."
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|Title Annotation:||Legal Review Section; real estate industry|
|Publication:||Real Estate Weekly|
|Article Type:||Industry Overview|
|Date:||Dec 18, 1991|
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