Interviews Jonathan Adelsberg, Partner and Co-Chair Real Estate Practice, Herrick Feinstein LLP

0:00 Speaker 1 Good morning. This is Mike Stola for the Stolar Real Estate Report on the Cats round Table today. I have one of the pre eminent attorneys in New York City, Jonathan Adelsberg, who is a partner and the co chair of the real estate practice at Herrock Feinstein. Thanks for being here, my pleasure. So what’s really happening over there

0:20 in the market. They’re a good cause of fiction. There’s a four eighty five X. You know, there are other actions taking place. What’s happening with the market today.

0:30 Speaker 2 So, Mike, the exciting thing about real estate in New York is it’s never stagnant in any way at all.

0:38 Speaker 1 And I think what.

0:40 Speaker 2 We’re seeing is, you know, whatever I say, I’m going to have a colleague or somebody in the industry who’s going to point to facts that are completely different as to what I’m saying. And so who do I trust.

0:53 It’s not a question of who you trust, it’s a question of where you are at a particular moment in time. You have a market where people see opportunities that they haven’t seen before. You have people who are some of the most significant players in town who are giving properties back to the bank in a way that we’ve never

1:09 seen before. You have a changing dynamic in the market with office space that is which you were still living in the post COVID environment, and you have resurgence in areas that we haven’t seen in a number of years.

1:23 Speaker 1 Now, what we spoke the other day, you mentioned this thing called the hot potato. So let’s talk about what the hot potato means in the real estate business. So I hope.

1:36 Speaker 2 I don’t think I’m the only one who’s coined that phrase, but we’re giving you the credit for it.

1:40 Speaker 1 I appreciate that.

1:43 Speaker 2 What we’ve seen that’s unique in this market, that’s been much different in the past is traditionally, you borrow money, you can’t pay back your loan. You either fight with a bank to restructure your debt or you give that back the keys, and you know everyone goes them every way. Today, what we’re seeing, which is inherently unique from I mean,

2:05 it’s happened before, but it’s really happening in much different ways today. I’m not fighting with you, mister banker. I know I can’t pay my debt service. I know I can’t pay the loan off at maturity. Here are my keys, take it back? You know, maybe do transactions together in the future. What I’m encountering are a number of transactions

2:28 where the bank is saying, wait a minute, we don’t want this property back, and the borrower is saying, well, what do you want me.

2:34 Speaker 1 To do with it?

2:35 Speaker 2 I can’t lease it, I can’t finance it, I can’t do anything with it. So if you did the underwriting the same way I did the underwriting a few years ago, we’re at this point in time where I really don’t know what to do with my asset and I’m willing to ask you what I should do with it, but

2:53 I can’t pay back the loan and I’m not going to fight you on a foreclosure. And then, as I said a second ago, the bank saying we don’t want it. So I think that dynamic is inherently new from what I’ve seen, you know, during a good part of my career.

3:09 Speaker 1 So you’re postponing the inevitable.

3:12 Speaker 2 Well what’s the inevitable giving back the property event? But it’s not postponing it and the bank doesn’t want it on their balance sheet. The bank doesn’t want it, I mean it does you know the banks.

3:23 Speaker 1 Councilor what do you advise your client.

3:25 Speaker 2 Well, what do we advise our client. It’s a little bit of a game of chicken to begin with. And the comment that you say, as well, we’re sort of in this together. We’re in this together. We can try to restructure the property, we can try to convert the property, we can do a whole host of these things. But

3:43 guess what, I’m not coming out of pocket one more second to sustain this property because it’s it’s it’s just not going to work. So we’re sort of I think at the earlier stage of what in fact is happening in that regard. But I will tell you know, historically, when things went bad and banks would foreclose, they would

4:05 they would they would establish a portfolio on their own, placing aside the bank regulatory issues and other issues relating to the way banks operate. And then you have people out there who are looking to buy this debt at a really really steep discount.

4:22 Speaker 1 And buildings are selling for like seventy percent discount in certain cases.

4:26 Speaker 2 Seventy percent discount. Could you imagine that, right? Seventy percent discount?

4:30 Speaker 1 Are we seeing what we had in Lower Manhattan years ago?

4:34 Speaker 2 Well, I think the jury is still out in terms of the way this is going to evolve, I think you know, there’s been you know, you have you have discussions and there’s been the city has passed, you know, regulations which permit the conversions of buildings in a way that they haven’t been able to be converted in the past.

4:55 And that’s going to present new opportunities, qualified, of course, with a number of limitations associated with that.

5:01 Speaker 1 Are we going to have the same type of conversions with tax benefits like we had before at.

5:06 Speaker 2 The four they’re starting? But the fact is, you you know, before you can talk about a tax incentive with a property, I’ll leave this to the developers and the architects to get into the detail. There needs to be a determination whether, in fact the building works for a residential conversion. Not all though office buildings are easily convertible, floor plates, light

5:27 and air, all of these factors go into an analysis as to whether or not a building could be converted. You know, there are not too many people out there that want to have a bedroom that doesn’t have windows, So you know, there are factors that are involved other than traditional regulatory or governmental incentives that would encourage these conversions.

5:48 But when you do have a property that is well positioned for a conversion, and whether by zoning or otherwise that wasn’t practical. Changes in the zoning code the zoning resolution can facilitate significant change.

6:04 Speaker 1 For example, what is the City of Yes program?

6:08 Speaker 2 The City of Yes program is basically making the city more friendly for development and alternative uses for property. I think the mayor, the mayor has, you know, knows exactly what it needs to take. I don’t want to get into a political discussion right now between the mayor and the city council.

6:28 Speaker 1 We’re not doing political discussion. We’re trying to get the answers to the question.

6:32 Speaker 2 Yes, is really facilitating and making it easier for my clients to build properties, to expand properties, to bring people into the city, to make things affordable, and to get a you know, reduced to bureaucracy along the way.

6:46 Speaker 1 To make it happen.

6:47 Speaker 2 I mean, you look at the difference between building a building in New York City compared to the other side of the river or farther north into Westchester. You can’t imagine the complexities when you compare New York to other places.

7:02 What about the four eighty five X, Well, there’s a lot of excitement about that. There’s a tremendous amount of excitement about that. The reality is that without a tax incentive, it is impossible to build in this city. It is too expensive to build, their risk is too high to build with the current tax base in the city. So,

7:25 you know, the four to twenty one A program without having an alternative in place place profound. I mean, it’s stopped development, you know, and it’s you know, everyone got stuck in the mud what to do. And then couple that with really high interest rates and a bunch of other factors is a perfect storm. So I think I

7:49 think the program has a lot of potential. It hasn’t been implemented yet. We are getting calls twenty four to seven us to the way in fact it’s going to work. It’s a step in the right direction. It’s a significant step in the right direction. Could it have been more generous, I think yes, But everything in life is a compromise.

8:11 Speaker 1 Let’s talk a little bit about the hospitality industry, the special permits that were required for building well.

8:19 Speaker 2 That you know, look, New York at the end of the day is you know, if you don’t mind me saying so, it is the capital of the world. And as the capital of the world, you need to have hotels and hospitality on every level of the economic spectrum to bring people in. You know, there were certain you know,

8:39 the special permits that were in place requiring construction and convergence of hotels. You know, I see, I see more hotel development. I mean, hotels are a much different animal.

8:52 Speaker 1 Than they’re operating businesses.

8:54 Speaker 2 They’re completely operating businesses, and you know, they have to they need faceless within a relatively short period of time because you know, something is is dated, people.

9:06 Speaker 1 Don’t want to stay there.

9:08 Speaker 2 So I think the hospitality industry is a really core, an essential component. I’m not saying anything that anybody else doesn’t know, but we have clients that are really taking a hard look on it. You know, obviously the migrant issue has impacted the use of a number of hotels in town. It’s actually given a you know where certain

9:30 hotels probably would have found their way to foreclosure if you didn’t you weren’t filling them with the migrant situation right now. But long range, I think hospitality is an area that’s going to grow and expand.

9:45 Speaker 1 In the city’s last question, let’s discuss the industrial especially the last mile.

9:52 Speaker 2 Well, that has been We’ve we’ve been personally, have spent more time on less mile industrial over the last few years.

9:59 Speaker 1 Than anything else else.

10:01 Speaker 2 Amazon and Amazon related companies are the wave of the future. They were on fire like nothing else we’ve seen before. Everybody who had an you know, whether it was a distribution business or anything else in the Attleboroughs thought that their property was prime for a Amazon warehouse.

10:21 Speaker 1 The small key foods, even the small key foods.

10:25 Speaker 2 You know, you have a guy who’s eighty some odd years old who had a you know, a plumbing supply business out in whether Long Island City, the Bronx or Brooklyn, thought that he was going to get top dollar for it because Amazon was going to knock on his door.

10:39 Then market is cooled down a bit, but you like everybody else, I buy toothpaste online, so and now you can get that toothpaste in fifteen minutes. So I think that they may have been a bit of a slowdown.

10:54 But e commerce is going to be in e commerce, and I’ve had clients that actually have are speaking to us very seriously about converting office buildings to last mile industrial within the city.

11:08 Speaker 1 And if you remember, allback’s on thirty fourth Street is basically a last mile industrial.

11:13 Speaker 2 Well, Michael, that that was your I just remember my grandmother talking about Orbax, so I.

11:18 Speaker 1 It was before my time, but I wanted to bring it in. So I’d like to thank Jonathan Adelsberg of Herrock Find’s theme for being here and I’ll see you next week. Take care, Thank you,