Real Estate Market Manipulation?
Real Estate Market Manipulation?
Transparency isn’t the first thing that comes to mind when it comes to residential real estate transactions. In a buyer beware state like Massachusetts, where real estate brokers aren’t shy about rounding the edges of the truth, a lack of transparency puts consumers at a significant disadvantage. Can a lack of transparency be used to manipulate market prices? Maybe.
When it comes to any market manipulation scheme, secrecy and leverage are critical elements. With real estate, secrecy dictates that the title of the property is held in the name of an entity, generally a limited liability company (LLC) or a nominee trust.
In Massachusetts, when a buyer takes title to a property in a nominee trust, typically only the trustee’s name appears on the deed - not the name of the actual owner or owners. The names of the actual owners, or the beneficiaries, are filed with the trustee and not publicly disclosed. The same basic thing can happen with LLC ownership.
We pay close attention to property transfers in the downtown luxury market and occasionally we see unusual patterns; not surprisingly they usually involve entities holding title. A string of transactions in the Back Bay recently caught our eye and has us pondering if market pricing can be manipulated.
35 Commonwealth Avenue, unit PH
This 5,320 square foot triplex is part of a three-unit redevelopment. It was originally offered at $15.5 million in the spring of 2019. After sitting on the market for nearly six months, the developer sold the unit to a nominee trust for $14.0 million in late 2019.
A year and a half later, the unit was re-offered for sale with an asking price of $15.5 million and miraculously found a buyer in just three days for $14.5 million.
122 Commonwealth Avenue, unit PH
Across the street at 122 Commonwealth Ave., there was a nearly identical situation. This slightly smaller (4,144 square foot) penthouse duplex was also part of a three-unit redevelopment. This unit was offered for $13.2 million and sat on the market for nearly eight months. The developer ultimately sold the unit to a nominee trust for $12.5 million in the spring of 2021.
Unit PH at 122 Commonwealth sold on the same day as the penthouse at 35 Commonwealth.
Not surprisingly a year and a half later, unit PH at 122 Commonwealth was listed for sale with a $15.0 million asking price. Wouldn’t you know it, just 13 days later a buyer came along, and the unit sold for $14.4 million on January 20, 2023.
776 Boylston Street, unit PH2E
Over at the Mandarin Oriental, unit PH2E kicked around the market for a few years with an initial asking price of $28 million. The unit finally sold in September of 2021 for $21.5 million. This unit was reoffered for sale 14 months later for $24.99 million. 11 days later a deal was struck with a nominee trust at $23.0 million.
Unit PH2E sold the day after the Penthouse at 122 Commonwealth sold. If you thought about buying this unit, you’ll likely will have another shot at buying it in about a year.
Who Moves Every Year?
It’s possible that this activity could simply be an extremely restless individual who loves moving every year or so – and doesn’t mind generating nearly $4.0 million in real estate fees along the way. We doubt it.
We also doubt that these transactions are part of a coherent investment plan. The cost of servicing the debt together with property taxes, condominium fees, and transaction fees for a non-income generating asset doesn’t make for an attractive investment. The annual carrying cost for unit PH2E at the Mandarin is about $1.2 million. The “greater fool” theory just isn’t a compelling investment strategy.
A Common Pattern
This pattern is more widespread than you may think. At Pier 4, over in the Seaport, the developer sold one of the penthouses for $15.2 million – a record $4,180/sf. The players were different, but the pattern is the same. The unit was heavily mortgaged and a year and a half later it reappeared on the market with an asking price of $16.5 million. The nominee trust ended up selling that unit for a $400,000 loss.
Not to be outdone by Pier 4’s record sale, in a highly publicized transaction the developer of the St. Regis on Seaport Blvd recently sold unit PH2E for just shy of $13.0 million – a new record of $4,572/sf. The buyer in that transaction was an LLC with an attorney as the sole managing member. That purchase was financed with an $8.4 million mortgage. What are the odds that this unit hits the market in a year or so?
Arm’s Length Transactions?
These patterns beg the question, are these entity sales true arm’s length transactions? We can’t say with any degree of certainty (that’s the magic of secrecy), but it wouldn’t surprise us if the parties selling into these entities continue to have a beneficial interest in the underlying units.
Taken at face value, it’s not too much of a stretch to suspect that this churning activity is aimed at driving prices higher while creating the illusion of higher demand. At the St. Regis, they’ll be grandstanding for years that, “someone paid a record high price per square foot for one of the penthouses.” That makes for a good marketing pitch when you have a bunch of expensive ho-hum units to sell.
At the Four Seasons on Dalton Street, they’re quick to quietly point out how much Michael Dell (who is reportedly the beneficiary behind a nominee trust) paid for his penthouse unit. Michael Dell, through his investment firm MSD Capital, is also major investor in several Four Seasons developments. Naturally they don’t mention the fact that the 1 Dalton developer is still holding the bag on a few unsold penthouses.
The Ultimate Momentum Market
Residential real estate values are typically driven by comparable sales – it’s a rising tide lifts all boats mentality. Should an inflated “arm in arm” transaction (where the buyer and seller have a relationship) slip into the valuation calculus, the market pricing can be manipulated.
Residential real estate math is very simple – sellers and developers see big-ticket transactions and they fully expect a higher valuation. It’s clear to us that the high prices at 35 Commonwealth paved the way for even higher prices at redevelopments like 29 Commonwealth Avenue and the Back Bay as a whole. The same can be said for the Seaport transactions.
In Wall Street speak, this could be akin to “painting the tape” where dealers create artificial trading volume to attract investors and drive up prices, or maybe even a good old fashioned “pump and dump” scheme where investors holding shares hype up the companies and sell their shares into the hype. Either way, that kind of stuff could land you in the slammer in the real world.
We’re not suggesting that holding property in the name of an entity is indicative of nefarious activity. To the contrary, there are many valid reasons why it can make very good sense (your attorney can advise you as to the ideal ownership structure). However, buyers need to scrutinize comparable sales that are used to justify lofty prices. Should the identity of parties behind bellwether transactions be shrouded in deep secrecy, those comps should probably be rejected out of hand.
Buyers of luxury Boston real estate should take transparency issues seriously. When coupled with the issues raised in our report “The Boston Real Estate Oligopoly” it’s clear that the deck is stacked against them.
About Batterymarch Group LLC – Batterymarch Group is an independent full service real estate brokerage and advisory firm focused on the downtown Boston high-end residential market. We represent buyers with a sharp focus on valuation. We also offer sub-advisory and owner’s representation services to financial institutions, family offices, and trustees.
About Andrew Haigney – A 25-year Wall Street veteran, Andrew held senior positions at leading global investment banking institutions where he routinely valued and negotiated complex securities transactions on behalf of institutional clients. Andrew has been an outspoken advocate of a universal fiduciary standard. In founding Batterymarch Group, Andrew brings that same discipline and passion to real estate brokerage.