Why should commercial real estate brokers represent only one party? Is buying prime real estate at a top price a great strategy? What are some techniques that buyers and sellers have used when purchasing a property? Top commercial broker in New York, Robert Knakal, Head of New York Private Capital Group for JLL, shares his insights.
Tell us a little bit about you.
I grew up in a little town called Maywood, NJ, and went to school at the Wharton School of Business at the University of Pennsylvania. I got my first job in real estate between my freshman and sophomore year that summer, working in market research at Coldwell Banker Commercial. The next summer I went back and ran a summer internship program. In my third summer I got my New Jersey real estate license and was an assistant to an industrial broker, and I was showing industrial space to industrial tenants.
When I got out of school in 1984, I went to work for CB in Manhattan, and I wanted to sell buildings. I was in the building sales department. I met Paul Massey, we teamed up on my second day on the job, and agreed to work together and split everything 50/50 That was the start of a 30-year partnership with Paul, we were partners for four years at CB left there in 1988 to form our firm, Massey Knakal Realty Services. We grew that firm from the two of us and a secretary to 250 people in four offices, we sold it to Cushman and Wakefield at the end of 2014, left Cushman in mid-2018, and came to JLL with 53 other folks, all of whom had worked with me at MK. I’ve been at JLL since then, still selling buildings and still enjoying it as much as I did when I first got into the business.
You’re one of the top brokers in New York. Can you tell us a little bit about that?
I have been around for a long time, I’ve sold a lot of buildings. As of last week, I’ve closed 2,252 transactions, that’s over $21 billion of sales selling all kinds of properties in New York City with a focus primarily on multifamily and land. I’ve been very fortunate, you can’t rack up those numbers without great people to work with. And over the years, I’ve had great partners and colleagues that have helped me get those totals amassed.
Part of your business is focused on representing one party only, can you share a little bit about that and the reasoning?
Most brokers represent both sides, I’ve always focused my entire career on seller representation. On 2,250 of the 2,252 transactions I’ve been the exclusive agent for the seller, I had two fluky deals over the years where I represented buyers, but that’s not normal. As a broker, working with control is important. Many sellers are optimistic about the value of their property, and when the value gets down to the point where it is truly market, there are a few buyers that would buy at that price. And if you’re a buyer rep representing one of those buyers, even if you have a buyer who’s willing to pay the right price, you still only have a 25% or 33% chance of making a commission. I always wanted to work on the seller side for a couple of reasons: 1) We like to avoid conflicts of interest. We don’t represent buyers. 2) I don’t like to have to remember what I say to anybody. If I’m always working for the seller trying to get the highest possible price, I don’t have to remember what I say. And that has worked out well over the years and as a broker to the extent that you can specialize in something, and articulate what you do and how you do it, it enables you to differentiate yourself from others. Back at the old company, we always say that we only represent sellers, we only sell properties, and we only work on exclusives. And that was very easy to convey, easy to understand, and it let clients know exactly where we stood.
George Ross, Trump’s previous attorney, always talks about the fact that the best deals were the highest-paid deals. Can you attest to that? And how does one go about the first couple of years of paying top price, and waiting on that until it becomes the next phenomenal deal?
Deal size doesn’t matter in terms of complexity. I’ve won the most ingenious deal of the year in New York, which is an award that the Real Estate Board of New York gives out every year. I’ve won that a couple of times, and one time I won a transaction that was only seven and a half million dollars. It doesn’t have to be a giant deal to be complex, and intricate, they need ingenuity and creativity.
In terms of buying property here, there used to be an investor in New York named Sol Goldman. He owned more property than anybody else in New York. I had the good fortune to meet with him back in the mid-80s when I started in the business. I said, Mr. Goldman you own about 500 buildings, how are we able to do that? How did you amass such a big portfolio? He said Bob, I paid more than anybody else. That’s the way he did it and that’s the way you have to do it. I applaud him because he built an unbelievable portfolio and, even though at the time, he may have been paying a lot, in retrospect he didn’t pay that much.
How do people do those first two years when you’re paying top price, and there hasn’t been a real value added? Do they have huge reserves for the first two years? How do they survive the very beginning of paying top prices to accumulate this phenomenal portfolio?
People must have reserves. The most popular type of transaction in New York is multifamily, and often, regardless of what the cap rate is, there’s very little free cash flow in the first few years. You must be able to break even. And a lot of folks are counting on appreciation. But it’s challenging. If you’re paying top price, you must have reserves to be able to make it through the first couple of years.
What are some techniques that buyers have used when purchasing a property after going in contract? What is the best way to approach it?
I’ve seen a lot on all those transactions I’ve done, but I haven’t seen it all. It seems like in every deal there was a new thing that comes up that I wasn’t prepared for. From a buyer’s perspective, buyers try to get contingencies to their transactions to the extent they can. That’s rare in New York, we very rarely have any post-contract execution or due diligence. And by not having that post-execution due diligence, the contract deposit is hard when it goes up. There are times when people will make claims of breaches if they don’t want to close, that’s generally difficult to prove. But the most common area that creates an issue for a buyer is environmental. And there are several environmental issues we have here, we have lead paint, we have asbestos, we have potential oil leaks, and a number of buildings are still using heating oil. Some of those tanks are very old.
A lot of buyers will ask for an environmental contingency, stating that if they find anything that is adverse, that there may be something referenced in the Phase 1 report that gives them concern that they want to check out, they’ll ask for a contingency. And I always tell my seller, they could find one tablespoon of heating oil on the ground and say that’s an adverse condition and not want to close.
We always try to flip the leverage on that environmental contingency and say, Okay, we will give you the contingency, but, we can either agree that you found an adverse condition, remediate the problem and make you close, or we as the seller can give you a credit for the cost of that remediation and make you close. Or we could decide to give you back your deposit and cancel the contract. But it’s not your decision, it’s our decision as a seller. That way, if a relatively minor issue comes up, you can remediate it. And it’s not a free look for the buyer.
In terms of the seller’s side of things, what are some things that they try to put under the rug or any last-minute changes that it’s not good practice and people should not be doing?
The sellers who I find getting in the most trouble are sellers who either don’t want to do a full due diligence on their property or know that there is or suspect there may be a problem and they don’t want to do the due diligence. For instance, in development transactions in New York, there’s something called a massing study that’s required, which tells you the shape the building can have, and how much mass you can have on the site. New York City is an as of right jurisdiction, our zoning tells us what type of building you can build, how much building you can build, and what shape that building can have. But it’s very complicated.
Even the best professionals sometimes have to research certain conditions to figure out what can be done and what can’t be done. I’ve always found that when the sellers don’t want to pay to have a massing study done on a development site, there’s a problem there. You want to make sure that you have that done. Also, regardless of the type of property you have, you want to make sure that you have an environmental report and a Phase 1 study done. In our multifamily properties, our rent regulation system is a labyrinth of rules, regulations, and guidelines. To do very in-depth due diligence to figure out whether your tenants are legal, your rents are legal, whether the unit was deregulated properly or not, it takes a lot of professionals to figure this out. If you don’t take the time to figure that out, you don’t know what you’re selling.
Those are pitfalls that I see sellers get into trouble with where they don’t want to spend the money to figure out what it is that they own. And if they don’t know what they own, I don’t know what they’re selling, and it has become problematic over the years. There are many times when I will tell a seller, You have to do this, if you don’t, it’s very questionable whether you can even sell the property or not. It’s important to know what you’re selling, if a seller doesn’t want to investigate those things, they are either aware of a problem or suspect that there’s a problem. And they don’t want other people to know about it.