[Previous Months In Review here: Aug 09, Jul 09, Jun 09, May 09, Apl 09, Mar 09, Feb 09, Jan 09]

By: David A. Smith

Continuing our review of September’s posts, technology changes interpersonal dynamics and in so doing reveals aspects of human nature, in particular that what matters in crime prevention is not the phenomenon of seeing but that of knowing one is being seen, in The robocop on the beat: Part 1, seen being seen:

Are you clicking on images you shouldn’t?

Some years back I formulated a more general version of this as the law of the observant herd:

The herd observes how sinners are dealt with.  In this case, sinners are noticed.  Not arrested, mind you; curiously, not even threatened.  Just noticed.

Crime doesn’t like being noticed.  So crime relocates.

Hopefully, with as little swag as possible

The occupants moved out soon thereafter.

The armadillo does what the residents can’t: it observes, it witnesses.  And in a metallic Christian way, it turns the other cheek and it takes punishment.

and Part 2, seen as one seeing:

In yesterday’s post, innovative police chief Steven Settingsgaard parked a retired police car conspicuously in front of a suspected drug dealer’s house.  Overnight it was demolished, but then something striking happened:

The dealer left the neighborhood soon after the incident –

Flush a predator from cover and the animal becomes unsettled and nervous; easier to capture.

– he was later arrested and convicted on a gun charge.

Evidently the emotional disruption played a powerful role in the physical disruption.

Find me worrisome?

With the disoriented giddiness of one who has staggered off the rollercoaster without losing wallet, lunch, or life –

That’s a lovely bridge to jump off, isn’t it?

– I examined, with more sympathy than its authors did, our retrospective on how we got through the financial precipice of last, 2008, in The mad experimenters: Part 1, being still breathing is winning and Part 2, I must have known it all along:

Despite Chairman Bernanke’s brave words a while back – in this selfsame Wall Street Journal – we may talk about exit strategy all we want, but there will be no substantial exit any time soon.

President Barack Obama goes to Wall Street Monday [September 14, 2009 – Ed.], the anniversary of Lehman Brothers’ collapse, to deliver a cautious victory speech. 

With Wall Street executives, as well as government officials, in attendance, the president also will admonish “to avoid a return to the practices on Wall Street that led us to the financial crisis and to recognize their obligation to help produce a wider recovery on behalf of the American people.”

Sounds good, I suppose.

If you don’t like “admonish,” how about “chastise”?

With a modicum of hindsight now available, do governments and central banks deserve credit for preventing catastrophe? The early verdict from most scholars, executives and government insiders is yes.  [What are bloggers, chopped liver? – Ed.]

How about bloggers?  I said yes at each stage:

March 24, 2008, the shotgun marriage of Bear Stearns to JP Morgan Chase: Banking on value.

April 22, 2008, explanation: Banking on value: the explanation.

April 28, 2008, how the Bear Stearns transaction went down: Anatomy of a coup

September 22, 2008, explaining the Paulson Doctrine(s): Part 1, prevent the second great depression

September 29, 2008, explaining TARP: Bailout or bonanza?

October 20, 2008, converting TARP into preferred-stock injections: Paying your rescuer: Part 1, you *will* do it

January 21, 2009: The GSE’s future: Part 1, we need the eggs

March 23, 2009: The AIG Hearings: Part 1, “Now that we’ve killed all the bomb-makers …”

What, you think that counts as evidence?

On the question of which of dozens of extraordinary interventions — rock-bottom interest rates, surging government spending, billions of taxpayer dollars injected into banks, sweeping government guarantees — made the biggest difference, there’s less agreement.

Sometimes the answer is, All of them.

An impromptu discussion at AHI led me to write down Three key questions to give your ecosystem a physical: Part 1, follow the critters, Part 2, follow the ownership, and Part 3, follow the money:

In the same way, when we consider a housing finance ecosystem, the blood plasma is money, and its tracing is a time-honored investigative technique.

“Follow the money”

When it comes to housing, the money moves in three dimensions: homes, people, and money:

1. Homes.  Providers and consumers finding each other.

2. People.  Sellers and buyers exchanging money for consumption and use rights.

3. Money.  Capital providers and capital consumers financing a home purchase.

Understand these three dimensions and you go a great ways toward placing an ecosystem in its space.

Thus, if you come new to a housing finance ecosystem, either because you’re visiting a country and want to buy or rent a home, or as a student, researcher, or consultant tasked with designing a new program intervention, you can learn a lot about the ecosystem if you follow the money through each of its three dimensions.

These questions are valuable for two reasons:

They are worth inspecting

1. They are discoverable.  Since everyone who might be an investigator can imagine the sequence of finding an apartment, buying a house, or finding a loan, they create a natural and surprisingly comprehensive line of inquiry for investigators.  More particularly, the questions are non-judgmental – they just ask about what is, rather than what should be or what might be or isn’t.

Question 1: Owner-consumer value chain

If you have housing (to rent or sell) and I need housing (to occupy or buy), how do we find each other and what kind of tenure relationships could we establish?

You’re new in town, and you need a place to live.  Think of all the sub-questions you’ll have.

1.       Can I find plenty of places, or are they scarce?

2.       How much space can I afford?

3.       Can I buy or do I have to rent?

4.       If I want to buy, how far out of downtown do I have to be?

5.       Is there enough good-quality rental?

6.       Is the government in the business of providing housing?

7.       Is the government in the business of subsidizing the supply side (helping create more homes)?

Now I’m going to ask you a simple question – do you feel … lucky?

2. They are measurable.  The results can be quantified – search costs, occupancy costs, closing costs.  Those costs make comparisons possible across ecosystems, and also make possible measuring the ecosystem’s evolution over time.

Question 3: Financing a home purchase

If I need to get a lot of money to buy a home, where do I get the money, and what does it cost (up front and over time)?

In every society, owning urban housing costs many multiples of a normal persona’s disposable housing income; indeed, among my rules of thumb for gauging a housing ecosystem (yes, that’s a blog post to come) is the better the housing ecosystem, the longer the period of time over which a buyer must obligate himself or herself to acquire property ownership. 

How long do I have to keep paying for this house?

Seldom is a month complete without some tale from the cradle of US apartment living, and our second-most-formal city, New York, which despite its reputation puts up with a shocking degree of informal settlements in Temporary permanence?:

You elected me temporarily, but maybe I could be permanent?

In New York City, formalization of sheds is literally just around the corner:

But others have higher ambitions: They want an all-new sidewalk shed — airy and elegant. The talk among architects, in fact, is that the city is about to launch a competition to design one.

Given time, New York’s sheds may become formal arcades – if not rivaling Bologna’s, then maybe New Orleans‘ French Quarter.

Formalizing the pedestrian shed: New Orleans arcades

In this post, I came bury sheds, not to praise them – but when you think about it, making sheds permanent by arcading them solves everyone’s problem.  It claims more city space for pedestrians, and more air space for additional structures.  The city becomes more dense, yet more livable.  The informal leads the formal, and in that lead, it changes the city.

The future of New York City’s sheds?  Torino’s arcades

If you leave them there for fifty years, they’ll be historic and then you can’t tear them down.

They claimed this was historic and had to be preserved

Send post as PDF to

By: David A. Smith

During September, I published a two-part post so depressing and sober it had taken me a year to take it out of inventory, about Winston Smith’s nightmare: The ultimate future city: 1984, Part 1, the poverty of slums and Part 2, the slums of poverty:

Perhaps the most famous year in fiction begins in the most tactile not-present:

It was a bright cold day in April, and the clocks were striking thirteen.  Winston Smith, his chin nuzzled into his breast in an effort to escape the vile wind, slipped quickly through the glass doors of Victory Mansions, though not quickly enough to prevent a swirl of gritty dust from entering along with him.

In previous posts, I’ve profiled visions of ultimate future cities.  Some of these visions are nightmares – and yet, nightmares that can see around us if we know where to look, in the slums inside.

Victory mansions? Soviet flats

The hallway smelt of boiled cabbage and old rag mats.  At one end of it a colored poster, too large for indoor display, had been tacked to the wall.  It depicted simply an enormous face, more than a meter wide: the face of a man of about forty-five, with a heavy black mustache and ruggedly handsome features. 

Big Brother is checking your mouse clicks

Only slightly more cheerful, albeit substantially closer at hand, was this grim multi-part story of Los Angeles public housing, in Distrust me just this once? Part 1, the need for trust, Part 2, the enemies of trust, and Part 3, how to build trust:

Slums persist in part because they have defenders.  Among those defenders are many slum residents themselves, for whom a lifetime’s experience has taught them, Trust no one, especially any well-dressed or well-spoken newcomer who claims, “I’m from the government and I’m here to help you.”  That makes any slum upgrading program a hard sell, as illustrated by this Los Angeles Times article about the obsolescent and miserable public housing property Jordan Downs:

Fred Smith, left, 37, has lived in the Jordan Downs public housing project in Watts most of his life.

Ronald Perkins and his neighbors were nearly outnumbered by the consultants and architects who showed up at the Jordan Downs community center.

Planning session for Jordan Downs

Resident participation is a cornerstone of HOPE VI, as slumdweller control is a cornerstone of Slum Dwellers International’s Urban Poor Fund.  But as Yogi Berra said, if people don’t wanna come to the ballpark, nobody’s gonna stop ‘em.

“Which is worse, apathy or ignorance?”

“I don’t know and I don’t care.”

– High school joke

The public housing system is structured around dependency.  Just as public housing’s financial schema makes housing authorities dependent on an autocratic HUD and behind that a fickle Congress, its residency policies – in particular, totally mean-tested rents and an allergy to evicting miscreants – promote resident dependency.  It is poverty trap and also an initiative trap, and it engenders passivity:

As mental palate-cleaners after such tough pieces were two bits of fluff.  I had a little fun with a Massachusetts state senator who assured us that in no way was he being at all hypocritical by buying his liquor in no-state New Hampshire rather than in new-tax Massachusetts, even though he had by purest coincidence traveled across the entire state, in Borderline behavior:

The absurdity of this is brought home when those who make the laws they expect others to observe flout their own handiwork, as did unlucky Massachusetts state representative Michael J. Rodrigues, who discovered the damning evidentiary power of a cell phone camera, and didn’t like it.  As gleefully reported by the populist Boston Herald:

State Rep. Michael Rodrigues, inset, a Westport pol, was spotted over the [September 1, 2009 – Ed.] weekend piling booze into his car – emblazoned with his ‘House 29’ Mass. license plate – at a tax-free N.H. liquor store.

A Westport lawmaker who voted to hike the state sales and alcohol taxes was spotted brazenly piling booze in his car – adorned with his State House license plate – in the parking lot of a tax-free New Hampshire liquor store, the Herald has learned.

This is not Michael Rodrigues’ car, and any inference to the contrary is unjustified

Savor the scene: a guardian of the public trust smuggling booze into his home state, caught red-handed violating a law he personally helped make more onerous:

Rodrigues, who was loading booze into his car, snapped “mind your own business,” the witness said.

“Rich, you’re giving smugglers like me a bad name.”

The witness’ account was also posted yesterday on Citizens for Limited Taxation’s Web site.

And it’s a doozy:

As my family and I were driving back from York Beach my wife asked me to pull off at the NH liquor store on 95 south at the Mass border. When I pulled around to get a parking space you can imagine my surprise to see what I could only assume to be a Mass state rep’s car. He also had a Deval Patrick/Tim Murray sticker on his back window – so I assume he’s a Democrat who voted in favor of the recent sales tax hike.

Our citizen journalist is right on both counts.  Mr. Rodrigues is a Democrat, and he voted yes on the tax hike.

The increase pushed the sales tax to 6.25% and slapped that same levy on booze – the first time alcohol has been subject to retail sales tax.

So the guy comes out with a couple of cases of booze in his carriage and loads them into his car. I asked him if this was “official” business or personal. He was surprised by my questioning and asked what business is it of mine as to what he’s doing. I told him I was a Mass citizen. He said it was personal – I pointed out the state car with official plates and he said it was “his”.

“That car is mine, not the state’s”

A far cry from Harry Truman, who smacked a stamp onto any personal correspondence he wrote when he was President.

I didn’t ask him why he was in NH purchasing alcohol instead of supporting Mass businesses and the 6.25% tax they just levied on us common folk…

Observe that Mr. Rodrigues’s district is about as far from New Hampshire as it’s possible to be in Massachusetts.

Place-based taxation is predicated on the assumption that consumers cannot flee the law’s grasping hand.

“Thank you, Thing!”

Later I floated some unmoored speculations in All at sea: waterworlds of the future:

We all live in a yellow submarine
Yellow submarine, yellow submarine

– Richard Starkey

Every one of us has all we need?

Perhaps it’s because, as city dwellers, we seek green space and crave privacy, but few destinations capture our imagination more than the idyllic deserted island.

Societal conventions optional

Yet we’re rational enough to realize that a tiny island will lack creature comforts – unless, that is, we build them, which seems the premise behind The Seasteading Institute, whose press release explains that a few months back:

The Seasteading Instiitute crowned the winners in its first Seasteading Architectural Design Contest to design the floating city of their dreams.

‘Floating city’ inevitably reminds me of Gulliver’s Island of Laputa, which Swift envisioned so he could satirize royal and aristocratic disengagement.

Wobbling along the cost of Balnibarbi

Seasteads are permanent, stationary structures specifically designed for long-term ocean living.

Which sounds good, until you realize that very few if any of these structures exist.

Maximizing our use of space!

Still, they make interesting speculations, so let’s take a look:

Serious sums can swing on metaphysical questions only a lawyer can love, as uncovered in You can check out any time you like:

At one end of the money-store continuum is physical property, which as I’ve often observed, is immovable, and as earth, it abides.  At another is financial property, which is just as ethereal.  Money is paper (or worse, just electronic bits) which have value only if we all believe it does.  Because we cannot physically relocate property, we are forced to use intellectual forms – title deeds, mortgages, loans, P&S’s – to convey ownership, which is a pure intangible.  Beyond the immutable of physical property and the intangible of ownership, we further slice ownership by adding new dimensions:

Two dimensions = land and real property.

Three dimensions (add verticality) = condominium, co-operative

Four dimensions (add time) = rental, time share

Each added dimension slices the occupancy/ use rights into a more discrete bundle, which on the one hand tends to add value (because you buy only as much as you need) and on the other complicates the contractual and financial relationships.  Indeed, by multiply slicing the ownership, an unscrupulous developer could tunnel through zoning regulations via a portable hole:

Nobody can pull a comb over my eyes!

In more serious news, we explored whether the third government housing pipeline, the FHA, will need substantial taxpayer equity like its two siblings, Fannie Mae and Freddie Mac, in Liberally prudent or imprudently liberal? Part 1, how we got here, and Part 2, how we’ll get out of it:

Will these folks …

… follow these folks?

An additional 2.4% delinquency on a $627 billion portfolio represents $15 billion more in delinquencies. 

The [FHA capital] ratio last year was around 3%, down from 6.4% in 2007.

An additional 2.4% delinquency is not the same as losses.  Loss = Default Rates x Principal-Writedown Given Default.

Let’s do some simple arithmetic.  How much of a writedown can FHA afford on those delinquencies?  40% losses on 2.4% delinquency represents 0.96% lost portfolio value.  In short, FHA had better recover 60 cents on the dollar.  Or else what?

If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market.

The Journal is mightily pumping its bellows; ’spark commotion’ is a far cry from ‘go bankrupt.’ 

Keep reading, we’re sure you’ll get fired up

A senior official at HUD, which oversees the FHA, said there is “no risk” that the FHA would require money from Congress if the ratio falls below 2%.

The Journal knows full well that FHA is the Treasury – it will keep going indefinitely, losses be damned, as long as Congress keeps giving its authority.

[Continued tomorrow in Part 2.]

Send post as PDF to

Bring your alibis

Resolving such legal-metaphysical questions controls what recourse a buyer may have against a seller, and when the disputes involve thousands of buyers, the outcome can run to centimillions if not billions of dollars, as illustrated by this Wall Street Journal article:

Condo-Hotel Buyers Head to the Courts

Some Argue That Developers Violated Securities Laws; Looking for a ‘Smoking Gun’

Desperate to recoup money paid to acquire condominiums in hotels, buyers from California to Florida are trying to use the courts to get their money back, arguing that condo-hotel developers violated securities laws when selling the units.

In I was dumb so give me my money back¸ I posted unsympathetically about people who bought condos and have been litigiously searching for evidence to turn their I-overpaid situation into a consumer-protection case, by finding material facts in the disclosure their were provided:

Any time of year (Any time of year)
You can find it here

There’s no defense unless the buyer can find some flaw in the disclosure or legal contract:

This is why lawyers have been known to use lasers to measure square footage to within a millimeter and to debate descriptions of views and amenities.

One is allowed to change one’s mind.  One is also allowed to read the contract, as W. C. Fields said when rapt in contemplation of the Bible, “looking for loopholes.”

Go Lord, give me chastity, but not yet

At one end of the money-store continuum is physical property, which as I’ve often observed, is immovable, and as earth, it abides.  At another is financial property, which is just as ethereal.  Money is paper (or worse, just electronic bits) which have value only if we all believe it does.  Because we cannot physically relocate property, we are forced to use intellectual forms – title deeds, mortgages, loans, P&S’s – to convey ownership, which is a pure intangible.  Beyond the immutable of physical property and the intangible of ownership, we further slice ownership by adding new dimensions:

Two dimensions = land and real property.

Three dimensions (add verticality) = condominium, co-operative

Four dimensions (add time) = rental, time share

Each added dimension slices the occupancy/ use rights into a more discrete bundle, which on the one hand tends to add value (because you buy only as much as you need) and on the other complicates the contractual and financial relationships.  Indeed, by multiply slicing the ownership, an unscrupulous developer could tunnel through zoning regulations via a portable hole:

Nobody can pull a comb over my eyes!

That chicanery ensnared the condo-hotel buyers by transferring the zoning risk to them through their declaration of non-use:

After the Trump SoHo is built, it will be occupied full-time by people who signed the restrictive declaration and then ignored it.  The critics are right — the declaration will prove unenforceable in practice.  The new residents will want to be in the city year-round (except when they’re jetting off somewhere), and they’ll be earning money, spending money, paying sales taxes, paying property taxes, and voting.  Not only will the city have no incentive to enforce, it will have many financial and political incentives — votes and city revenue — to waive it or grandfather it in as a proper condo.

So there I was, livin’ happily in my own condo!

But the city council’s gonna bail me out!

Mr. Trump is shrewdly betting that this will happen, and that buyers will be so able to see that it’s inevitable, they’ll ignore the restrictive covenant in their pricing evaluations.

“They’ll tell you not to live there full time, got it, bub?”

Mr. Trump is right.

“Hey, what’s up, Donald?”

Such flim-flammery That works great when demand and prices are rising.  Pre-selling condo-hotel rooms thus hard equity from the buyers (their down payments) and lowered the developer’s cost of hard debt (by lowering the takeout risk). 

A few years ago, condo-hotels seemed like a great idea. Hotel developers could offset construction costs by selling rooms to individual buyers, then share the rental income with the owners every time a room was booked.

That was the theory, anyway.

However, instead of the lucrative venture some buyers claim they were promised by developers, condo-hotels have turned out to be one of the worst investments in decades.

Trump Grande Miami

And she said ‘We are all just prisoners here, of our own device’

Which raises the next question: was the purchase real property or a security?  One shorthand indicator would be, was the purchaser buying the room for use, or for investment?

The industry is getting hit on two fronts: The condo crash has wiped out the value of many units, and the hotel bust means the rooms are being rented only infrequently and at much lower rates than anticipated.

As the room-investors have now discovered, their risks do not counterbalance, they correlate.

Conrad Hilton Condo Hotel Miami

And I was thinking to myself,
‘This could be Heaven or this could be Hell’

Now, some buyers are arguing in court that purchasing a unit in a condo-hotel is similar to buying a stock, where the buyer is entirely reliant on the operational skills of management for any return.

I’m surprised the Journal would be so inaccurate about the distinction between a security and property; it has very little to do with whether the investor relies on the operator, and much more to do with what the buyer actually owns – is it a thing in itself, or a fractional interest in another thing?

Therefore, they contend, the purchases should have been regulated by the Securities and Exchange Commission, which would force companies to issue a detailed prospectus and have agents licensed to sell both real estate and securities, a rare combination.

‘Should have been regulated’?  If that’s the best the buyers can do, they have a long row to hoe.  How good is their argument?  Consider the pieces:

[1] “These were not simple real-estate purchases,” said Jared Beck, an attorney in Miami who is working on dozens of suits against condo-hotel developers.

Trump Grand International, Miami

Last thing I remember, I was
Running for the door

No argument there, but complexity by itself does not make property into a security.

[2] “A hotel is a profit-making enterprise, and by purchasing a condo unit you are giving investment capital and you expect a return.”

So is buying a whole loan, or a rental apartment, or for that matter a single condo that you plan to rent.

[3] “When you look through these marketing materials, there’s no question that in the mind of a reasonable consumer you’re going to think it’s an investment.”

Perhaps true — we haven’t seen the materials – but tangential.  The essential distinction is not whether the buyer anticipated using it for an investment – that’s true of most sales of income-producing real estate property – but whether the investment is a fractional financial interest.

Which, I hasten to add, it might be.

But attorneys for developers say such cases represent little more than buyer’s remorse.

They would, wouldn’t they?

The Miami Condo Hotels

‘Relax,’ said the night man,
‘We are programmed to receive.

“What we’re seeing across this entire country are buyers who have signed contracts and now want to take the position that [the] contract doesn’t exist. From a legal perspective, I find that highly problematic,” said Alan Garten, assistant general counsel for the Trump Organization, a defendant in several such cases.

I would not wish to be Mr. Garten, for as I posted in I-do-declare, the legal documentation in Mr. Trump’s cases, all quoted at length in the post, are eyebrow-raising. 

Dozens of cases are in lower courts. A wave of decisions over the next few years could determine whether the condo-hotel business model survives.

This will decide it

Actually, I expect the condo-hotel business will collapse under its dubious economics without needing decisions as a coup de grace.  The condo-hotel business has always seemed to me an ugly stepchild of the time-share-resort business, itself a sector at which I’ve always looked askance.

Attorneys said that if the courts decide that condo-hotel purchases should be regulated, the condo-hotel model won’t be viable.

Foolish argument.  Any time someone says that regulation will ipso facto destroy a business, we’re entitled to ask whether the business has any business existing.

Plaintiffs may have an uphill battle, however. Lower courts have shown little sympathy for buyers of regular condos who alleged similar violations of securities laws, blasting them for not reading purchase contracts closely enough.

As I previously posted, “I was dumb so give me my money back” tends to do poorly in court.

“Does poorly in court”

But Mr. Beck and other lawyers are undeterred. They argue that the revenue structure of condo-hotels clearly separates them from plain vanilla condos.

Yes, they are different.  Does that make them a security?

In 1973, the SEC released guidelines related to the purchase of condos that specified when such purchases are subject to securities law.  If developers:

[1] Made claims about rental income

[2] Marketed a rental program without prompting or

[3] Placed any limitations on occupying units

the purchase could be considered a security.

The “smoking gun” is often a newspaper ad or marketing brochure, said Rob Webb, senior hospitality partner in the law firm Baker & Hostetler LLP in Orlando, Fla. “Quite frankly, the main exhibit to the complaint and the single piece of evidence that’s most damaging is the developer’s own sales brochures,” Mr. Webb said.

No smoking gun here

By the way, Mr. Trump’s condo-hotels explicitly did the third of these, for instance:

The Unit Owner. The Unit Owner’s obligations are extremely straightforward:

Section 2.02(a). No Unit may be occupied by its Unit Owner or by any other individual (i) for a continuous period of more than 29 days in any 36 day period, or (ii) for a total of more than 120 days in any calendar year.

Any time the fractional interest becomes complex, potential arises for hanky-panky:

Nothing magic about it

In at least one case, a buyer charges that a developer and lender hid the fact that condo-hotel units were being purchased as investments by changing the wording on loan documents.

Laurie McNulty, a 40-year-old pharmacist in Charleston, S.C., who is suing over her purchase of a nearly $700,000 unit in a condo-hotel in Clearwater, Fla., said that when she applied for a mortgage at First National Bank of Cape Coral, Fla., in 2004, she indicated that the condo was for an investment. However, the loan documents were changed to show that the loan was for a second home, a change she said she only discovered once she had hired an attorney.

Almost certainly fraud by somebody – but by whom?

The lawsuit was filed in federal court in Florida against the bank; Cay Clubs, the developers of the condo-hotel; and others.

Some of whom are no longer in business, and as for the individual broker, wonder where or she is?

Cay Clubs, which left multiple properties unfinished in Florida and Nevada, has closed down and couldn’t be reached to comment. Fifth Third Bancorp, which acquired First National Bank, wouldn’t comment.

That’s the big problem; the sponsors have already checked out.

You can litigate any time you like, but can you ever leave?

Shelburne South Beach

You can check-out any time you like,
But you can never leave.’

Send post as PDF to

Okay, there’s more to these condo-buyers’ claims than simply that … but not much more. 

Insolvency being the mother of creative litigating, as shown in this New York Times article, numerous buyers’ attorneys (who, one presumes, are not being paid contingently) have been concocting interesting theories to justify not merely escaping from a purchase contract, but in fact having a collectible claim to recover the down payment:

Could the days of the iron-clad contract be numbered?

No, but that won’t stop the Times from speculating!

It used to be that once a buyer went to contract on an apartment, the terms of the deal were all but set in stone. Sales prices never budged, and if the buyer balked, the down payment went bye-bye.

Legally, it does – unless you can find a loophole.

If in financial panic, press here

But double-digit price declines and the lending drought have started to threaten this once near-inviolable pillar of New York real estate.

Block that metaphor – how does a drought violate a pillar?

Violating a pillar?

Buyers are demanding concessions from developers on apartments that they say have lost up to 30% in value.

Like Joshua, I can demand that the sun stop in the heavens. 

Now that you’ve stopped the sun, Lord, can I get my condo deposit back?

Unlike Joshua, I’m not likely to succeed.

Others are hoping to back out of their contracts entirely, while keeping their down payments in the process.

The sudden demand has sent lawyers scurrying to uncover avant-garde legal tactics for ducking out of a deal.

[From the NYT]: With apartment values going south and loans in limbo, buyers’ regret is on the rise. Some are trying to wiggle out of signed contracts with tales of financial woe. Others are pinning their hopes on an obscure law.

Downtown conversions like 75 Wall Street and new developments like One Hunters Point in Long Island City are facing suits from buyers seeking to break contracts on the basis of a once-obscure consumer protection law.

Straw.  Grasp.

If it’s straws or jail bars, I’ll grasp at straws, wouldn’t you?

It remains unclear whether these efforts will be convincing, whether at the negotiating table or in a court of law.

It’s not unclear at all – either you have a developer breach, or you lose.  How hard is that?

On the developer’s side is the legal strength of a signed contract and the financial leverage of a buyer’s deposit.

I’ve got two aces.  What have you got? 

You got two better cards than these?

And while developers would pocket the down payment, they might be stuck with a unit that eventually sells for much less — or even worse, just sits. This new math may put some developers in a negotiating mood.

Aside from the hopeful-conditional (a journalistic shortcut for I-need-the-”on-the-other-hand”-so-I’ll-just-invent-it), the logical argument has just shifted from one of legal claim (the buyer is entitled to the deposit back) to economic practicality (the seller might wish to reduce the price so as to induce this particular buyer to complete the sale).

“Behind this, the big elephant in the room is the price,” said Adam Leitman Bailey [Web site motto – We get results. – Ed.], a real estate lawyer who says he is representing unhappy buyers from nearly 50 buildings.

I presume Mr. Bailey wouldn’t be representing happy buyers …

I wanna sue somebody

The traditional method for a buyer to break a contract is to prove that some element of the completed unit differs from the developer’s offering plan.

‘Traditional’ is here journalistic code for there’s-no-evidence-against-it-but-I-need-the-”on-the-other-hand,” the technique whereby one hypothesizes a controversy by piling one supposition on another.  Indeed, let’s jump to the end of the Times story and put in the opposing-views-of-responsible-spokesmen right now, so they are not lost:

Of course, not everyone in the industry has sympathy for the buyer who wants concessions or money back.

“I think it is the height of audacity,” said Stuart Saft, a partner in the real estate division of Dewey & Leboeuf, which represents several large developers in contract disputes.

Saft is unsympathetic

“The buyer calls and says, ‘The apartment is not worth as much as when we signed for it.’ My response for that is, if the market went up 20%, would you have given us 20% more because the market improved?”

Mr. Saft is right, of course.  There’s no defense unless the buyer can find some flaw in the disclosure or legal contract:

This is why lawyers have been known to use lasers to measure square footage to within a millimeter and to debate descriptions of views and amenities.

One is allowed to change one’s mind.  One is also allowed to read the contract, as W. C. Fields said when rapt in contemplation of the Bible, “looking for loopholes.”

Go Lord, give me chastity, but not yet

It’s not the spirit of the transaction, but since the alternative is admitting one is dumb and has no leg to stand on, why not try?

I’ve got a legal leg to stand on

Now, if you’ve changed your mind, you are allowed to be razor-sharp in construing

But if the issue is more financial than material, buyers may be forced to “in essence, throw themselves at the mercy of the developer,” said Peter Graubard, a real estate lawyer.

Again, this is a variation of the economic argument.

“They are saying, ‘Hey, listen, I’m in a financial hardship and the loss of this 10 or 15% deposit is going to be devastating to me right now,’ ” said Mr. Graubard, explaining that every one of his clients who went to contract before October 2008 — about 30 in all — is trying to renegotiate or abandon a deal.

But these arguments may not fly.

They generally don’t.

Okay, let’s try another membrane

Unless a contract includes a mortgage contingency, nothing in the law allows for a change in financial circumstances or the lending market to constitute a “right of rescission.”

Some lawyers are looking beyond the traditional methods of arguing breach of contract.

Some lawyers are hungry.

A Web site called No-Condo.com opened in December and immediately received nearly 100 queries from New York residents who want their deposits back. It is the brainchild of Lawrence Weiner, a lawyer at Wilentz, Goldman & Spitzer in Woodbridge, N.J., whose arsenal includes the Interstate Land Sales Full Disclosure Act, a 41-year-old consumer protection law rarely applied in the city.

From 1968: Rarely applied in the city, dad

It doesn’t matter if the law is obscure; if it’s on the books, and it gives buyers rescission rights, they should try to use it.

Created to protect against speculators selling uninhabitable plots, the act requires developers of condominiums or conversions with more than 100 units to provide buyers with a particular type of property report containing information like proof of ownership and the availability of public utilities.

“I wouldn’t categorize it as a technicality,” Mr. Weiner said.

He wouldn’t, but we will. 

“A lot of developers, in a rush to bring things to market, chose not to comply, or maybe they didn’t even realize they needed to comply.”

I think these high-rise condos in Midtown Manhattan had public utilities, and I think they had proof of ownership.  Plus, the statute is entitled the Land Sales disclosure act, meaning it was contemplated to cover developments of vacant land.

Again, none of these points invalidate the law.  They merely suggest it’s a big reach.

Nothing’s beyond the reach of a lawyer

The law has its limits as a negotiation device: a developer is exempt from the act if he or she has pledged to complete the unit within two years.

Okay, so Mr. Weiner is suing under an act for which developers are exempt if they simply pledged to complete the homes within two years.  Sounds less and less like a condo-protection statute and more and more like a subdivision statute.

Less try one more argument:

At the Brompton, with its “Stylishly Proper” slogan, luxe location on East 85th Street and prices to match, several buyers said they were in financial straits. A group of nearly 30 buyers recently organized over the Internet and held a meeting to discuss their options.

Marc Rossell, 54, went to contract with his wife in August 2007 for a 3,600-square-foot spread, combining three ninth-floor apartments.

He said he was told by the developer that his southern view would clear an adjacent building, but on a walk-through inspection, he found “a water tank right there outside of our windows, and an ugly rooftop.” Mr. Rossell did not think the view matched the description in the offering plan, and believed the discrepancy could help him get free of his contract.

This is demonstrable or not – if the facts are right, and if the developer’s statements are in writing, I think Mr. Rossell has a case.

“It didn’t seem to be of the same quality that they basically represented in the showroom,” he said. “We definitely have the money. It’s not that at all.”

Of all the buyers cited in the story, Mr. Rossell sounds believable and credible.

That’s a whale of a tale

Send post as PDF to