Tag Archives: luxury real estate

Condo Project Borrows From Its Future Residents

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By AramilFeraxa – Own work, CC BY 4.0

The Wall Street Journal quoted me in The Luxury Beverly Hills Condo Project Borrowing Money From Its Future Residents (behind a paywall). It opens,

The developer behind one of the country’s most expensive real-estate projects has an unusual request for its condo buyers: Lend us money.

Purchasers of the site’s roughly 150 condo units are also providing debt to help Cain, an investment firm based in London, fund its $10 billion project, known as One Beverly Hills.

The 17.5-acre site, set to be completed in 2029, will include high-end retail such as Dolce & Gabbana, upscale dining, 78 new hotel suites and acres of botanical gardens. The ultraluxury condos will be operated by Aman, one of the world’s leading high-end hotel operators.

The condo owners’ debt takes the form of a bond—the developers call them Founder Bonds—and buyers will receive a return of 5%, according to a person familiar with the matter.

No condo buyers are forced to participate in the bond program. Founder Bonds offer a financial return and the opportunity to assist in the construction of their future home, Cain has told condo buyers.

When the Founder Bond program was launched early last year, 10-year Treasury debt offered less than 5% returns. In recent weeks, however, the 10-year yield has exceeded that level, rising above 5.3% at one point this month. That means Founder Bond holders are now earning less than the yield on Treasurys, which are commonly considered the “risk-free” rate.

But some say this rarely seen financing tool sticks condo buyers with a risk.

The bonds are junior to other debt on the project, which includes a $2.8 billion senior loan led by J.P. Morgan and a $1.5 billion mezzanine loan from VICI Properties. Parts of both loans are conditional on Cain hitting certain sales milestones.

That means that if the condo towers were to fall short of completion—in a city where most luxury buyers are focused on single-family homes and estates—bondholders could be left not only without the penthouse they were expecting, but also without the extra money lent to the developers.

“Even though these are luxury buyers, I would guess they’re going to face more exposure if the project goes bust than they may realize,” said David Reiss, a professor at Cornell Law School, who researches real-estate finance. “They’re getting paid a small amount to take a large amount of risk…but because they’re luxury, they may be able to tolerate the risk better.”

Luxury Real Estate and Transparency

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photo by tpsdave

Law360 quoted me in Atty-Client Privilege At Stake In Real Estate Bill (behind a paywall). It opens,

The push to reveal the individuals involved in anonymous real estate deals has moved from title insurers to attorneys and real estate agents, but lawyers say requiring them to reveal the names of clients they help set up limited liability companies and other vehicles could weaken attorney-client privilege.

Reps. Carolyn Maloney, D-N.Y., and Peter King, R-N.Y., plan to reintroduce legislation this week that would require states to collect the beneficial ownership information for limited liability companies and other vehicles used in real estate transactions, or to have the U.S. Department of the Treasury step in if states are unable to meet the requirement, in order to prevent criminals, corrupt government officials and terrorists from using real estate purchases to launder funds.

Doing so would close a loophole that allows attorneys to advise clients without meeting the same reporting requirements as banks and would help prevent potentially illicit funds from making their way into real estate markets, Maloney said. But it also has the potential for putting attorneys in the uncomfortable position of reporting clients to the government in cases where there may not be a criminal violation, said Marc Landis, the managing partner of Phillips Nizer LLP.

“This will certainly be an area where client confidentiality and attorney-client privilege will be weakened in ways that they have not been previously,” he said.

Lawyers in real estate transactions came under renewed attention after the transparency advocacy group Global Witness and the CBS News program “60 Minutes” released a blockbuster report Sunday night that showed several New York law firms providing information to an individual posing as an adviser to a minister from an African government who was looking to buy a Gulfstream jet, a yacht and a New York brownstone without the money being detected.

According to the report, which used hidden cameras, 12 of 13 lawyers provided assistance when asked how to set up shell companies and other vehicles to avoid attaching a name to the purchases. One of those 12 later said he wouldn’t participate in the transactions.

The Global Witness report found that the attorneys — none of whom signed the group’s investigator as a client — broke no laws in providing the advice they did. And that’s a problem that Maloney wants to address.

“This is unacceptable, criminal, scandalous, and it has to stop,” she said on a conference call with reporters.

The New York Democrat’s solution to the problem is to require states to force attorneys, real estate agents and other advisers on a transaction to include the name of the beneficial owner of an LLC or trust on forms submitted to the state. If the state will not or cannot implement such a system, the Treasury Department, through the Financial Crimes Enforcement Network, would require that disclosure.

In a similar move, FinCEN last month announced that title insurers would temporarily be required to provide the names of beneficial owners of LLCs that high-net-worth individuals use to purchase luxury real estate in Miami and Manhattan without mortgages.

Maloney’s bill, which she is introducing for a third time, will expand such reporting and make it permanent.

“We’re going after the loophole. We’re going after the real estate transactions. We’re going after the realtors and some lawyers that are setting these things up,” she said.

According to Brooklyn Law School professor David Reiss, Maloney’s bill, the Incorporation Transparency and Law Enforcement Assistance Act, has struck a good balance between giving law enforcement the power to root out illicit funds in high-end real estate and not infringing too much on attorney-client privilege.

“The attorney-client privilege is one of the oldest of the privileges recognized by courts, and in the aggregate it provides great benefits to society because it promotes open communications between clients and their lawyers. The privilege is not a shield for illegal behavior, though,” he said.