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31 Aug 2017
The New and Improved Jersey Shore

“Manasquan Inlet Jersey Shore” by Stinkie Pinkie, licensed under CC Attribution 2.0 Generic.

In 2012, Hurricane Sandy devastated the Jersey Shore.  With the help of federal aid, (which was distributed in the aftermath of the storm to facilitate the community’s redevelopment and make up for a loss of tax revenue), communities rebuilt infrastructure, parks, and beaches. Now, as federal aid is coming to an end, individuals are rebuilding houses and changing the landscape along the coast.

On Ortley Beach, only 60 houses out of 2,600 weathered the storm, giving the community the opportunity to rebuild itself. New York and New Jersey residents have been investing in rebuilding the Jersey Shore for their holiday homes, despite the risks posed during hurricane season. This clean slate has attracted wealthy investors to build their dream holiday homes right on the coast (helped along by the fact that it is significantly cheaper than tearing down and rebuilding multimillion dollar homes in the Hamptons). Tim O’Shea, a real estate broker for Keller Williams Shore Properties, told the New York Times that prior to Hurricane Sandy, Ortley Beach “was mostly a blue-collar community where houses were passed down from one generation to the next … We’ve got a whole different thing going on here now, with 3,000- to 4,000-square-foot houses going up.”

In Toms River, where 10,000 houses were impacted by Hurricane Sandy, 2,000 properties are being rebuilt and another 1,200 are being renovated and put onto platforms to avoid future flood damage. Due to the extensive damage from Hurricane Sandy, the New Jersey Department of Environmental Protection implemented regulations requiring all new developments and houses under renovation to be elevated one foot more than mandated by the Federal Emergency Management Agency. Many of these new elevated properties are ten feet above ground. Elevating homes in flood zones protects housing structures, and also significantly lowers costly insurance rates. For today’s buyers, mortgage lenders require owners to purchase flood insurance. However, houses that were passed on from generation to generation were not under the same scrutiny and left unprotected. Families who could not afford to rebuild their homes put the land up for sale. Real estate agencies subdivided the plots for buyers to rebuild on.

In Mantoloking, roughly 119 homes were destroyed. As of today, 115 have been rebuilt and almost 100 have been elevated. Buyers are changing the aesthetics and the market of this area as they build higher, larger, and more luxurious houses. Properties in Ocean Beach have traditionally been one-story. However, as owners rebuild their dream homes, they have had to seek approval from the homeowner’s association to build multiple story houses. While these homes are by no means inexpensive, they are still attracting young professionals from New York who are looking to buy large holiday homes for comparatively less than the cost of property in the Hamptons.



31 Aug 2017
Palin’s Lawsuit Tossed: Op-Ed Process Protected

“The New York Times Building” by JavierDo, licensed under CC Attribution Share Alike 3.0 Unported.


Today, SDNY Judge Jed S. Rakoff  dismissed a defamation lawsuit filed by the former vice-presidential candidate Sarah Palin against The New York Times, over an allegedly defamatory op-ed piece that Palin claimed inaccurately linked her to a mass shooting in 2011 that injured former congresswoman Gabby Giffords. The Times piece incorrectly drew a link between the shooter and a map circulated by the Palin PAC that showed certain congressional districts superimposed by crosshairs.

Rakoff’s dismissal was based largely on the ground that Palin’s complaint failed to show that the NY Times’ mistakes were made ” maliciously” instead of being the result of haste and even negligence.

Earlier this month, Judge Rakoff held an admittedly “unusual” hearing  to give what he called “context” to the Times‘ editorial processes as he weighed the motion by the NY Times to dismiss Palin’s  suit. Times editorial page editor and author of the controversial portions of the piece, James Bennet, had taken the court through a detailed dissection of the editorial that the former VP candidate claims was defamatory.

Bennet insisted he did not intend to imply a “causal link” between the 2011 mass shooting and the controversial  “crosshairs” map distributed by a Sarah Palin PAC.  Bennet said he in no way meant to suggest that shooter “was acting because of this map.” Judge Rakoff was apparently persuaded by the testimony as well as the paper’s subsequent corrections, finding: “Such behavior is much more plausibly consistent with making an unintended mistake and then correcting it than with acting with actual malice.”

The Judge’s opinion reinforces the protections that allow editorial authors leeway to write “rapidly” on immediate events of “importance,” even if such quick actions result in errors.


30 Aug 2017
Purchasing Condos and Co-ops Under an LLC

Is it possible to purchase an apartment in New York through a limited liability corporation (LLC)? Yes, if the condo or co-op board permits it. Over the past couple of years, boards have allowed individuals to buy their units under an LLC, and in some instances even as a corporation. Purchasing an apartment under an LLC protects the buyer’s privacy and assets, in addition to shielding the buyer against future liability claims, all of which are ideal for celebrities and other buyers who wish to remain anonymous. It is important for condo and co-op boards to amend the building’s by-laws and proprietary leases (in the case of co-ops) to include llc owners (see how to amend your building’s by-laws in our previous blog).

Buying apartments under an LLC, according to Habitat, has the added benefit of “reduc[ing] the risk of a residency audit.” New York’s residency audits check if property owners are either full-time residents, partial residents, or nonresidents to determine whether they have filled out their income tax returns correctly. Foreigners and non-state residents frequently purchase pieds- à -terre, and the audit ensures that the property holders are not evading payment of New York income taxes. Owners of pieds- à -terre who are nonresidents to New York State only have to pay property taxes, which are significantly lower.

Individuals who wish to purchase a condo under an LLC usually do not come across any problems unless the building’s by-laws prohibit such a purchase. Condo boards are notoriously less strict than co-op boards and typically do not deny a potentially buyer’s offer. Purchasing a co-op under an LLC is trickier. Siim Hanja, who works for Brown Harris Stevens (the luxury real estate firm), noted that only 20 percent of the co-ops he has sold are purchased by LLCs. These buyers are typically wealthy foreigners who are purchasing pieds- à -terre.

Why are co-ops strict about llc shareholders? Among other reasons, when an LLC is the shareholder and that unit is used as a pied-à-terre, it is more difficult for co-op boards to legally follow up, since the owner is a business entity and a separate legal entity from the resident, who is seldom in residence. Moreover, there is a lack of guarantee of payment of maintenance fees and other expenses.

How can issues such as these be avoided? Co-op boards are known for their invasive vetting process for new shareholders and strict regulations governing who may live in the unit. If the board permits an LLC to be the shareholder, there would need to be a supplemental agreement ensuring only the members of the LLC can reside in the unit and that they would need board approval before transferring the shares and proprietary lease. The agreement would also need to provide that family members of the LLC’s members do not have the right to live in the unit. An additional safeguard would be for the shareholder to sign an agreement that the individual behind the LLC will act as a guarantor, therefore accepting any and all responsibilities of the proprietary lease. 

25 Aug 2017
Second Circuit Court of Appeals Confirms Martoma Conviction

“Seal of the United States Court of Appeals for the Second Circuit” by U.S. Government with modifications made by Offnopt.

In May, the Second Circuit Court of Appeals reconsidered United States v. Martoma, No. 14-3599 (2d Cir. Aug. 23, 2017) in regards to whether there needs to be a meaningfully close relationship between the tipper and tippee in cases of insider trading. The Securities and Exchange Act of 1934 prohibits individuals from trading securities based on material non-public information, however, conflicting interpretations of the provisions have created inconsistencies in case law.

Martoma, who worked for Steven A. Cohen, a hedge fund manager of SAC Capital Advisors, was originally convicted in February 2014, and sentenced to nine years in prison. Martoma received material nonpublic information from Dr. Sidney Gilman regarding an Alzheimer’s drug.  This information led SAC to sell its $960 million stake in Elan Corporation and Wyeth Pharmaceuticals, and avoid over $276 million in losses. On appeal, Martoma argued that Dr. Gilman, the tippee, did not provide material information in exchange for a personal benefit, and the information could not be considered as a gift due to the lack of a close relationship between the two parties.

On August 23, 2017 a divided Second Circuit (2-1) upheld Martoma’s conviction based upon the Supreme Court’s decision this past December in Salman v. United States, which effectively overruled a prior Second Circuit decision, United States v. Newman. In Newman, (which was central to Martoma’s argument on appeal), the Second Circuit held that the SEC must illustrate “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature” (known as the personal benefit test). In Newman, because there was no close relationship between the tippees and tippers, the parties could not be found liable for insider trading.

However, in Salman v. United States, the Supreme Court found two brothers, with an obviously close relationship, liable for insider trading. The Court found that a gift of non-public material information to a relative or friend satisfies the personal benefit test of Newman. Judge Robert A. Katzmann explained in the majority opinion of Martoma that “Salman fundamentally altered the analysis underlying Newman’s ‘meaningfully close personal relationship’ requirement such that the ‘meaningfully close personal relationship’ requirement is no longer good law.”

In dissent, Judge Rosemary S. Pooler argued that this decision, affirming Salman, “radically alters insider-trading law for the worse”. The impact of this decision will expand the scope of how liability under insider trading is interpreted. Without the requirement of a close personal relationship between the tippee and tipper or a personal benefit, the U.S. Attorney’s Office for the Southern District of New York will have a longer leash to bring claims against individuals who even share information without an intention to receive a personal benefit. However, the parameters of insider trading have frequently fluctuated since the 1980s. As such, the Second Circuit may go back to the Newman test in the future, especially if this opens the floodgates of insider trading litigation.

25 Aug 2017
Pop-Ups Shops Changing New York’s Real Estate Market

Consumers are creating a seismic shift in the economy as they are choosing online shopping rather than visiting brick-and-mortar retail space, which is forcing retailers to adapt their behaviors and tactics to stay competitive in the market. In New York City, retailers are experiencing difficulty justifying exorbitant rents when greater traffic comes from the booming e-commerce industry.

The shift in the economy is specifically impacting New York’s Fifth Avenue, known for its string of high-end brands’ flagship stores. Ralph Lauren’s flagship on 55th Street and 5th Avenue announced in April that they were closing their store front (along with others) and restructuring their online operations, which is predicted to save about $140 million a year. High-end brands rent space on 5th Avenue as an advertisement scheme, but with drops in tourism and the increase in e-commerce it is difficult to justify the expense of sky-high rents.

So how is the retail market changing in the City? Businesses have found a way to escape high rents and lengthy lease agreements through licensing deals, which permit businesses to use a space, typically for a shorter period than a traditional lease. The outcome? Pop-up shops. These licensing deals provide greater flexibility for both the landlord and licensee. The Real Deal explains that “[s]table long-term retail tenants are hard to come by in Manhattan as the market continues to soften, and the real estate industry is adapting to short-term tenancies as much as much as long-term ones.”

Pop-ups have been great marketing tools for new businesses and for landlords, as multiple celebrities have garnered press opening pop-ups in the City. In March, Kanye Westopened The Life of Pablo, stocked with his new line of clothing. In April, Drake opened a pop-up for one day selling t-shirts to promote his new album Views From The 6. Even Gwenyth Paltrow’s online lifestyle brand, Goop, set up pop-ups in New York, Chicago, and San Francisco. These pop-ups are restructuring the retail industry.

The trend positively promotes brands and spaces, and gives both the licensee and landlord the flexibility to negotiate terms. It is also a saving grace for empty spaces as it minimizes overall loss until landlords find more permanent solutions. Licensing agreements are mostly beneficial for new store fronts that need to test the waters before making a long-term commitment. Pop-ups allow these businesses to get a sense of the market and whether sale growth can compensate rent and other expenses.

The popularity of licensing pop-up spaces has created a need for the new online platform Storefront that provides listings of available pop-up spaces around the globe. The platform, which is very similar to AirBnb’s interface, has helped over 100,000 brands find pop-up spaces and even provides liability insurance for landlords. Storefront has taken advantage of a niche market, which is mostly a result of the Recession’s aftermath of expensive commercial leases. As for whether pop-ups are a permanent solution, probably not since the licensing agreements by nature are short-term. Licensee’s that wish to elongate the agreement would typically do so under a traditional lease agreement. However for now, pop-ups have provided solutions for an economy seeing a drop in brick-and-mortar store fronts.

22 Aug 2017
New York Developers Creating a Higher Quality of Life

Mercer, the global consulting leader, publishes an annual Quality of Living survey ranking 450 cities across the globe. The survey takes into account factors such as political and social environments, economic environments, medical and health accessibility, public services, housing, and natural environments. As European cities dominate the top ten positions, with Vienna, Austria coming in first place for the past eight years, large U.S. cities such as San Francisco (29), Boston (35) and New York (44) unsurprisingly have lower rankings. However, New York’s lack of green space and quality of fresh air is, lately, providing developers an opportunity to design buildings in a way that improves New Yorkers’ quality of living.

Today, people are more mindful about wellness, local and organic foods, sustainable living, yoga and meditative practices, and holistic education philosophies evident in Waldorf schools. Even the popular spinning company, SoulCycle, advertises that it “doesn’t just change bodies, it changes lives.” In New York, people are drawn to these down-to-earth, soul finding, environmentally friendly trends, which developers are capitalizing off of. More buildings are establishing a sense of community and culture with communal spaces and rooftop gardens that hold workshops, from how-to-sessions in fermenting your own kombucha to more mainstream gardening classes.

The condo development Pierhouse along the Brooklyn waterfront offers “energy-efficient solar shade system[s]”, built-in “odorless composting unit[s]” and even a meditation studio. New Yorkers are drawn to these new developments for the green, organic lifestyle they promote. It is no surprise that properties surrounding Central Park come at such high prices as proximity to green space is relatively rare. The solution for the rest of New York seems to be communal rooftop gardens and environmentally responsible buildings. Developers are integrating parts of country lifestyle and luxury amenities into high rises in order to lure new residents. One Manhattan Square on the Lower East Side even installed an adult tree house above the building’s garden.

New developments that reach for a higher quality of living in New York go much further than providing rooftop gardens and composting units. These luxury condos and co-ops include spas, infrared saunas, large swimming pools, entertainment rooms, culinary lounges, children playrooms, bike shares, meditation studios, pet spas, and most importantly, lavish views featuring New York’s skyline. The lower Manhattan condo 50 West even offers its residents the opportunity to cycle on Porsche bikes, which cost $3,700 each. The New York Times explains that “New York luxury buildings have embraced the hallmarks of 1970s hippiedom with a high-end twist” as New Yorkers strive for a higher quality of living, without having to move across the Atlantic.

18 Aug 2017
Whistleblowers and the SEC

“The Office of Whistleblower (SEC)” by the U.S. Securities and Exchange Commission

Whistleblowers are invaluable to the Securities and Exchange Commission (SEC) as they provide instrumental information to identify securities fraud and violations, facilitate the protection of investors, and safeguard the integrity of the market. The information whistleblowers provide to the SEC must be sufficient enough for the Commission to bring an enforcement action against the wrongdoers. In return, Congress has approved the SEC’s proposed award of ten to thirty percent of sanctions over $1 million.

So how does the process work? Individuals seeking to submit a tip as a whistleblower can do so online or by mail. According to the SEC’s FAQs, the person must voluntarily submit “original information about a possible violation of the federal securities law that has occurred, is ongoing, or is about to occur.” There is the option of submitting tips anonymously. However, those who choose this option must acquire counsel for representation. With each tip submission, the whistleblower will receive a TCR submission number which is subsequently reviewed by the SEC, their attorneys, and analysts. For cases that the SEC’s Division of Enforcement has already looked into, any new information will be handed to the staff working on that team. For a new investigation to be initiated, the SEC needs enough information to bring an action. If the information provided is not sufficient to open an investigation, it will be kept until further evidence is brought to light.

What is considered original information? Typically, original information is information that the SEC (or the public) does not have prior knowledge of. The SEC requires sources and data that are credible and very specific. Individuals who have an inkling that their co-workers are committing securities fraud is not sufficient. Instead, whistleblowers need to provide information like examples of transactions or proof of communications. The SEC also advises whistleblowers to provide any and all information they have available. Whistleblowers are also eligible for a reward if they notify their company’s in-house compliance team and then notify the SEC within 120 days of an in-house report.

So far in 2017, the SEC has awarded around $158 million to 46 whistleblowers. In April, the SEC awarded $4 million to a whistleblower who delivered specific insider information of misconduct to the Commission. The Commission notes that “whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.” Recently, on July 27, 2017 the SEC awarded $1.7 million to a whistleblower and company insider who provided the SEC with “critical information to help stop fraud that would have otherwise been difficult to detect.” Cases such as these illustrate why whistleblowers are invaluable resources to the Commission.

For further information see section 21F of the Securities Exchange Act of 1934 which provides the provisions for whistleblowers.

18 Aug 2017
A Pied-à-terre Tax?

New York City is filled with pieds-à-terre, apartments purchased as non-primary residents that are left vacant for most of the year. The Census Bureau’s 2012 American Community Survey found that 57 percent of co-ops and condos in Midtown, (from East 56th to 59th Street between Park Avenue and Fifth Avenue), are unoccupied for roughly ten months of the year. These half-vacant buildings include Trump Tower at 721 Fifth Avenue, the Plaza’s condos, 15 Central Park West, and One57, which are all exclusive and luxury residences. Who is buying expensive New York real estate and not even renting out the units? For the most part, the absentee owners are wealthy foreign buyers.

This is reinforced by The New York Times’ study of owners who take advantage of the City’s property tax abatement for primary resident-co-op and condo owners. For some of the buildings discussed, only about one-third to half of residents claimed the tax benefit. It follows, then, that in those buildings, half to two-thirds of units are purchased as second homes. Unfortunately, these non-primary homeowners are not paying income tax and are only paying property tax. Therefore, they are not contributing to the City, specifically to infrastructure, in the same way.

As a potential solution, New York Senator, Brad Hoylman, proposed a pied-à-terre tax for non-primary residents. The people who can afford to purchase these units are typically in the “top tax bracket … non-primary residents are just paying property taxes, and the effective property tax rates are so incredibly low.” Sal Albanese, the democratic mayoral candidate, has proposed that the City use revenues from a pied-a-terre tax to fund affordable housing projects. Albanese argues that this scheme could generate billions of dollars in tax revenue, which will benefit New York residents. However, the Fiscal Policy Institute forecasted that under Hoylman’s proposal, the tax would produce around $665 million in tax revenue.

Critics have asserted that such a tax may create uncertainty in New York’s luxury real estate market. John Burger, a broker at Brown Harris Stevens, commented under Hoylman’s proposal that a pied-à-terre tax “could potentially jeopardize Manhattan’s position as the leading international safe haven for blue chip real estate investment.” There are also potential legal implications, as it could be construed as discriminatory to impose an additional tax on non-primary residents only, and it may violate the interstate commerce clause (Article 1, Section 8, Clause 3 of the U.S. Constitution ) by treating buyers from different states or nations unequally. However, if Albanese (if elected as mayor) came up with a stronger proposal that neither discriminated against non-primary residents nor created negative fluctuations in New York’s luxury real estate market, the scheme has potential to solve a number of the City’s affordable housing and infrastructure problems. Albanese would need to clearly address how much funding is necessary to strengthen these areas and what percent can realistically come from pieds- à-terre.

16 Aug 2017
From The Hamptons To The Hudson Valley

The luxury real estate market in the Hamptons has one big problem: successful young professionals are not interested. The Hamptons is filled with lavish, spacious plots of land with large mansions, swimming pools, gardens and tennis courts, which young people are increasingly deciding not to spend their time and money maintaining. Instead, they are purchasing smaller homes with less upkeep and have increased spending on experiences, a major shift from the behavior of buyers and sellers in the 1990s and early 2000s.

In our last Hampton’s blog we saw how the real estate market is rebounding from buyers purchasing multimillion dollar homes and renovating them into their dream properties. However, young individuals with high paying salaries are uninterested in expending so much effort in a holiday home. Unfortunately for the Hampton’s real estate market, it means houses are listed for longer periods of time, even when the offer price is cut down in the millions. In 2016, Brown Harris Stevens reported that house prices decreased by 23.1 percent from the previous year. However, developers continued to invest in projects as the amount of housing increased by 21 percent.

Many professionals in luxury real estate pinned the downturn of the Hampton’s real estate market to the U.S. election and an overall drop in profits and bonuses on Wall Street. Commentators argue that this led to a decrease in people purchasing holiday homes as buyers and sellers feel “uncertain about what their economic future will look like”.  Indeed, with each new administration, some economic fluctuation is inevitable.

So where are these young professionals going if not the Hamptons?  The Hudson Valley has become increasingly popular for its beautiful scenery, quiet small towns, and easy access from the City. While the Hampton’s saw a downturn in 2016, Hudson Valley’s real estate “remained steady”Statistics show that in the summer of 2016, millennials travelled 55 percent more to the Hudson Valley and the Catskills and 46 percent less to the Hamptons than they did in 2012. The Hudson Valley offers ample opportunity for those looking to spend money on experiences, from hiking, mountain biking and kayaking to historic attractions, farms and vineyards open to the public. The Hamptons will always be a destination for New Yorkers, younger generations are slowly changing the market as they seek a different kind of adventure.

11 Aug 2017
A Downturn for Chinese Overseas Real Estate Investments

This year marks a devastating downturn for Chinese overseas real estate investments as it is predicted to fall 84 percent by the end of 2017 and a further 18 percent by 2018. What does this mean for New York’s real estate market? According to a Morgan Stanley report between 25 and 30 percent of real estate deals in New York are curated by Chinese investors. In 2016, out of the $33 billion invested into U.S. commercial property by Chinese investors, 43 percent went towards New York real estate projects.

Chinese regulators have cracked down on overseas investments from Chinese nationals with the aim of strengthening the country’s currency, economy, and encouraging investments in China’s economy. The regulations have capped the amount Chinese nationals can invest overseas, which not only obstructs    investors’ freedom, but also has negatively impacted New York’s real estate market. Ultimately, these new regulations have hindered cash flow for many projects, leaving Chinese investors unable to close deals or even fulfill the EB-5 Visa requirements. Wendy Cai-Lee, head of the debt and equity fund Oenus Capital, told The Real Deal that the aftermath of such regulations “halted” some big deals and even prevented others going forward.

During President Xi Jinping’s first term, he implemented a number of economic reforms to bolster the economy, however, instead of working towards a free market with limited government intervention and greater international trade and investment, the country seems to be swinging in the opposite direction. China needs to spur investment within its borders, as Beijing and Shanghai’s real estate market has a large supply of empty or unfinished buildings and developers face high debt. However, is preventing investors from legally investing in overseas projects going to fix China’s looming problems?

In the view of President Xi, yes, as China’s biggest conglomerates (referred to as the gray rhinos) such as Anbang Insurance Group, Fosun International, HNA Group, and Dalian Wanda Group, who invest extravagantly overseas (especially in New York), “have borrowed so much that they could pose risks to [China’s] financial system.” The National Development and Reform Commission and the Ministry of Commerce have already created ripples in the market by scrutinizing potential overseas deals in an effort to narrow regulatory measures and prevent excessive capital outflow. The outcome? Anbang Insurance Group’s (who purchased New York’s Waldorf Astoria hotel for $2 billion) chairman Wu Xiaohui was detained by Chinese authorities and subsequently announced he was temporarily unable to fulfill his duties. The company questionably lost out on a deal to purchase the Starwood Hotels and Resorts Worldwide amidst a stock market crash in Shanghai and The Real Deal published that the conglomerate may be coerced by their government to sell the Waldorf and reinvest the funds back into the Chinese economy. This illustrates the beginning of the regulations impact on U.S. and New York real estate.

However, this does bring new players into the mix such as the Qatar Investment Authority which is funding the 1,428 feet tall 111 West 57th Street development, which is integrated into the Steinway Hall landmark. The commercial real estate company, CBRE Group predicted that because of negative interest rates, German and Japanese investors will have the opportunity to fill Chinese investors’ absence.  Perhaps this drop in foreign investment in New York real estate will open the market for other nationals to dig deep into their pockets and finance big commercial real estate projects.

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