Developers Strive for Survival in Condo Market
An enormous number of new condominium projects developed in the last few years have led to a glut of units for sale throughout New York State, according to Gary Rosen, an attorney in Great Neck, N.Y. who specializes in real estate and condominium law.
As the real estate market remains sour, Mr. Rosen says lenders already leery of the condominium market have grown concerned about how they are going to recapture their loans when developers are unable to sell.
To address this problem, lenders are turning to forbearance agreements instead of foreclosing on properties to protect their interests in such properties. “Forbearance agreements enable lenders to secure the value of these properties and work with the developers while awaiting the market to improve to sell the condominium units,” Mr. Rosen tells Managing REO.
“To avoid foreclosure on the property, many developers are being required to enter into forbearance agreements. Under a forbearance agreement, the lender becomes a joint owner of the condominium with the developer." Unable to make payments and out of options, developers often have little choice. “Although these agreements have been used in the past, lenders are relying upon them more frequently as developers are unable to pay banks back,” he says.
To finance condominium projects, developers often rely upon construction loans, which typically have a two-year term. In a normal market, developers are able to sell enough units to pay off the construction loan within the two-year period. According to Mr. Rosen, this began to change in 2008. “After the bottom began to fall out of the real estate market, many developers were unable to sell condominium units prior to the loan’s expiration date." He says a forbearance agreement is a win-win solution for lenders and developers because it not only protects the developers from property foreclosure and allows them to rent some of the units rather than selling them, but it protects the lender’s interest in the property without having to resort to foreclosure.
Forbearance agreements buy the developer additional time to continue to market the condominium units in hopes of selling at least 15% of them, he described. New York State law requires that at least 15% of a condominium’s units be sold before its offering plan can be declared as an effective condominium in a filing to the New York State attorney general’s office. Until then, a developer cannot close on any of the condominium’s units.
From 2007 to 2009 there were 1,906 new condominium offering plans submitted and accepted for filing by the New York State Department of Law. "In many cases, lenders simply want a condominium to be declared effective so that the units can close title,” said Mr. Rosen, who prepares condominium offering plans for developers and works with banks regarding updating condominium offering plans for developers. “Lenders and developers will then own condominium units, which they can sell in the future. The end result is a higher value for the entire project.”
Once lenders and developers own the units they can rent them to generate income as they both ride out the current economic climate.