December 23rd 2012
The New York Times
NOT that anybody needs more stress during the holiday season, but sellers and their brokers and lawyers across the country have been scrambling to close deals and avoid January tax increases that will eat into their profits.
Sellers are agreeing to sizable discounts, some amounting to hundreds of thousands of dollars, while brokers are sprinting to keep up with the volume of deals.
“I am losing my mind,” said Raphael De Niro, a broker in New York with Douglas Elliman, who said recently that he still had a handful of deals left to close by Dec. 28. “In almost 10 years of doing this I have never seen a scramble to close deals in December before year-end like I am seeing now.”
What is everyone so worried about? Federal capital gains taxes — the tax you pay when you sell an investment — are expected to rise at the top rate from 15 percent to at least 23.8 percent. That would include a 5 percent tax increase and a new 3.8 percent tax on investment income levied on high earners to pay for health care.
While no one knows exactly what will be decided in Washington to avoid the fiscal cliff, many people expect that the cost of selling an investment will be higher in January than in December.
In New York City, where capital gains taxes are the highest in the country, sellers are facing an especially pricey situation. With New Yorkers already having to pay about 12.5 percent in state and local taxes, some owners and investors could be paying 35 percent on their appreciated assets, according to Frederick Peters, president of Warburg Realty.
The new tax picture has prodded owners to unload properties now, leaving brokers to sort out logistical snarl-ups like quickly finding moving trucks for furniture and precious art, and pleading for speedy approvals from lenders, appraisers, and co-op and condo boards.
Dolly Lenz, vice chairman of Douglas Elliman, found herself doing inventory at a wine cellar at 1 a.m. one night earlier this month at a $30 million co-op apartment on Central Park West, before the movers came to collect the 355 bottles. The apartment closing was at 8 the following morning.
“It was a bit of an oversight by the owners, who forgot they had all that wine,” Ms. Lenz said. The wine might have been more valuable than the apartment, she half-joked (three pieces of art in the apartment were valued at a total of $51 million, she said).
Ms. Lenz wrapped up the entire deal, from signing to closing, in just under seven days. It helped that the buyers, foreigners who had lived in the United States before, paid all cash.
Sensing a chance to land an apartment at cut-rate prices, many opportunistic buyers — including several from the hedge-fund and private-equity industries in New York, brokers said — have approached owners with offers that were rejected earlier in the year. They’re suddenly finding a receptive ear.
One buyer promised to close by year-end if the seller of a Central Park West apartment gave him 25 percent of the profit the seller would reap from the sale, Ms. Lenz said. The owners “have owned it for 30 years, so it was a big number,” she added.
For some buyers, the end-of-year deadline has proved particularly challenging.
John Burger, a broker at Brown Harris Stevens, was set to close the sale of a Manhattan apartment when the condo board threw “an unusual curveball,” requesting to interview the prospective buyers, who had already left the country on a vacation. Mr. Burger proposed doing the interview via Skype, but the board declined. “At this juncture we are hopeful there will be an interview by Dec. 27 so the contract can close,” he said. “But all of us are a little bit concerned about the timing.”
Complicating matters in parts of New York and New Jersey are the aftereffects of Hurricane Sandy. Some downtown Manhattan condo buildings that suffered flood damage still have not been deemed habitable, which has caused lenders to back off from approving the financing needed to close deals. Lenders have required reappraisals of flooded buildings’ common areas, but with so many wanting to sell at the same time, appraisal firms have had to turn away business.
“As of 10 days ago, my firm stopped accepting appraisal assignments for financial planning where we had to deliver by Dec. 31 because we are inundated,” said Jonathan J. Miller, president of Miller Samuel, a New York appraisal firm.
Lawyers are benefiting, too. Sandor Krauss, a Manhattan real estate lawyer, had 16 closings scheduled for this week and said he was on pace to do as many as 70 closings this month — triple the volume he did last December. “This will be the biggest December of my career,” he said.
Because of the looming deadline, sellers and their brokers have lost a lot of their negotiating leverage. Senada Adzem, a broker based in Boca Raton, Fla., said a seller recently gave a $50,000 discount to a buyer to close the sale of a five-bedroom beach villa there for $6.3 million — a final sweetener to close by year-end after already having negotiated the price down from $6.795 million.
The seller, Harold Acker, the 82-year-old chairman of Sleepy’s mattress company, has been eager to wrap up this deal, and another one to buy a piece of land for $3.2 million. He is concerned about estate planning, she said.
The other expected changes related to the fiscal cliff include a lowering of the inheritance amount at which estate taxes kick in. Currently, estates under $5.12 million are exempt. Next year the cutoff for an exemption could go back to its 2002 level of $1 million.
Ms. Adzem, who said she was working until 2:30 a.m. on Wednesday, has scheduled five showings for Christmas Day. “There are so many loose ends we have to tie up before the year-end,” she said.
With all the December closings, some in the industry are predicting that early 2013 will be unusually slow.
Mr. Peters of Warburg, on his blog, predicted that next year, “until individuals become accustomed to the changes, owners of large properties, with large embedded capital gains, simply won’t sell. They will shut their doors to a few of their bedrooms and stay put.”