President Donald Trump once described New York as a ghost town amidst the COVID-19 pandemic. While it’s not necessarily true, one can see that New York is no longer as densely populated as before.
New York is the ninth most densely populated states in the country. However, during the pandemic it didn’t seem that way anymore.
Many people work in New York because of the opportunities that abound. Some of the people who work in New York don’t necessarily live there. It makes for a viable region for condominium investment.
With COVID-19, though, almost every segment of the society was affected. People’s health is under threat, thousands of people lost their jobs, hundreds of businesses had to fold.
Such economic turmoil resulted in many distressed condominiums. Homeowners who lost their jobs or business could no longer afford paying for their mortgage or other real property-related dues. They might have to give up their homes.
Not only that, real estate developers who have already erected their condominium buildings need to consider another strategy. With families financially affected by the economic effects of COVID-19, the target for the condominium units will surely be reduced.
For people with money, though, this is a good opportunity to make even more money in the future. Real estate investors can surely take stock with distressed condominiums.
One investment opportunity is to buy multiple distressed condominium units in a bulk sale. In numbers, it can be considered a bulk sale when it is a minimum of 10 units or 20% of the units in a condominium building.
Another investment opportunity is putting money in the recapitalization of a project.
There were some condominium buildings that failed to finish due to the fallout from COVID-19. These buildings could be refinanced with new investors coming in. The process is referred to as purchasing an equity interest in a developer-sponsor program.
This means that the investor will be a part owner of the condominium building or all the unsold units but in an indirect capacity.
When it comes to bulk sale, it should be noted in the offering plan that the investor is the successor-sponsor. This means that they are afforded the rights and liabilities, plus obligations, of a sponsor related to the units sold.
Also indicated in the offering plan is the closing date of the bulk sale. It also states that the original sponsor still has rights over the properties until the closing date.
Usually, there is more than one investor to a bulk sale. If this is the case, a principal among the successor-sponsors should be elected. The principal is the director and shareholder. They will be directly involved in planning the offering.
It is also the principal that signs a certification on the accuracy and honesty of inputs in the offering plan.
On the other hand, the recapitalization process already holds a document detailing the transaction. If the group wants to have a principal, then that will be part of the amendment.
The principal has an important role in bulk sale or even in recapitalization. It is important that the successor-sponsors find someone they trust and someone who knows the trade.
Making future decisions
Does an investor even have a hand in making decisions? In the case of bulk sale, the investor will acquire the rights of the sponsor as well as have the authority to control the offering.
This means that the investor will have the power to modify prices and dictate the market release of the units. They will also have the authority to transform the layout of the units or even resize them. Of course, these would be subject to the regulations of the building and zoning body.
For recapitalization, the investor’s power over the subject property or properties will be subjected to a negotiation. The investor’s rights or obligations in this case are largely dependent on their role as operator or investor.
The rights and power are all stipulated in the transaction details. The rights could be related to setting prices or modifying condominium units.
New York Situation
When the bulk sale closes, there will be transfer taxes that need to be taken care of. The dues will be to both New York City and New York State. Since it’s a bulk sale, transfer tax rate is commercial in nature. This means it’s higher than if one pays for the transfer tax of just one unit.
The State also collects a Mansion Tax. This is a property tax levied upon the closing of residential properties that have a value of more than $1 million.
Taxes for recapitalization are indicated in the transaction document.
There is no right or wrong answer as to how one should invest in distressed condominiums. Should they do the bulk sale or recapitalization? It’s all a matter of preference. There is also no saying which one earns more. What is clear is that both are really great real estate investments.
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