Rescuing Failed Condos

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Rescuing Failed Condos
Turning Around Condos is 'Not for the Faint of Heart,' Says Radow. The Turnaround Specialist Needs to Be Both a Legal Expert -- and a Great Developer

By Keat Foong, Executive Editor

DECEMBER 09, 2005 -- Chicago-As he relates it, Norman Radow happens to have fallen into undertaking difficult projects smoothly.

After years gaining experience as a turnaround attorney, Radow purchased his first distressed property in Atlanta in 1994, to rescue an incredibly complex 53-story mixed-use hotel, office and residential development. The hotel portion of the project, The Grand in Atlanta, was sold in just two years and ultimately converted into a five-star Four Seasons hotel. Subsequently, Radow describes the series of deals he undertook as "by accident all very difficult situations."

Today, Radow's Chicago-based firm, The Radco Companies, has made its specialty working out the most financially, legally, developmentally and managerially complex distressed projects, many of them foundering condominiums, both for his own account and third parties.

In the past three years, the company has undertaken five major projects that are "right in the sweet spot" of turnaround deals, said Radow, who is founding principal of the company. "Our business plan is to go after complex, challenging deals with some turnaround aspects to them," he said.

In addition to The Grand in Atlanta, high-profile turnarounds undertaken by The Radco Cos. include: The Grandview on the Common, a 62-unit condominium on the Boston Common; the 187-unit lakefront mid-rise in Chicago's South Loop called Prairie House at Central Station; and The Residences at Riverbend, a 149-unit condo high rise also in Chicago. Prairie House, for example, was once subject to foreclosure. The Radco Cos. eliminated the property's debt, upgraded the building and successfully re-marketed the property.

For its own account, The Radco Cos., which has development, marketing, investment advisory and management capabilities, acquires properties often in partnership with banks. The company also raises money from investors. With 16 employees-"young, dynamic and exciting"-overseeing its real estate operations, The Radco Cos. has offices in Atlanta, Chicago and Boston.

According to Radow, turning around properties, especially mixed-use projects and foundering condos, is a specialty "not for the faint of heart." In truth, rescuing properties "drains people," said Radow, and long hours and late nights are the norm. Radow's 25-year experience as an attorney-his resum� includes a stint as assistant corporation counsel for the City of New York and general counsel for Euramex, an international real estate company-no doubt helps in his condo rescue business. "To reposition properties, you cannot turn only to the lawyers. You need to understand the nature of the legal problems," he said, adding that "business-savvy lawyers" are also rare.

A number of traits are important to the successful turnaround specialist, said Radow. Besides understanding the intricate legal and accounting issues, a turnaround specialist also needs all the skills of a great developer who has a strong sense of the market. "You have to execute the business plan-you need all the skills of a great developer-while putting out fires," said Radow. "You cannot make as many mistakes. And you need to have a very thick skin. A lot of people will yell at you. You also need to be a great communicator. You have to set expectations. You have to say, 'Look, we want to help you but we cannot get to everything at once.' And if there is bad news, people want to hear it."

Picking Up a Chicago Condo

The Residences at Riverbend provides an example of the challenging and complex projects that The Radco Cos. says are its focus. The project had come on line after 9-11, and a lot of presales were lost, not to mention that the market had "stopped" around that time. "The [prior] developer went belly up," said Radow. Towards the end of September this year, five units were remaining for sale, but the 37-story high-rise was only 40 percent occupied as a condominium when Radco took it over in September 2003. The Radco Cos. went into the deal with the lender and took on the project as a UCC foreclosure which, according to Radow, is a quicker process requiring weeks compared to real estate foreclosure which can take years. With the lender foreclosing on the stock of the developer rather than the real estate, Radco Cos. walked into the shoes of the prior developer, and the prior debt of the property was not wiped out-a challenging situation as can be imagined.

Indeed, The Radco Cos. faced challenges that not only included developing the marketing program and picking up the construction, but also legal challenges-lawsuits from individual homeowners-and financial-liens and claims from vendors. "We had to start the construction program, the financing and the marketing, all at the same time," said Radow. For example, the homeowners had 4,000 warranty claims. "We had to deal with all that and do it quickly and methodically, keeping in mind that you want good and positive relations with the homeowners [but] without being a pushover."

One reason the prior developer failed was because it was not willing to make changes to its business plan in response to market conditions, said Radow. For example, the Chicago condominium market had become much more competitive, and condo buyers were demanding more. As a result, Radco Cos. upgraded the selection of finishes and renegotiated the concessions. "The concessions and pricing are based on the sales velocity, and the prior developer had not responded to that," said Radow.

Also, the prior developer had 28 executives working on two projects which was excessive as it resulted in an unnecessary level of overhead costs and clashes of ego. "A lot of mistakes developers make are ego-based," observed Radow.

Negotiating Supplier Claims

Taking care of liens and claims from vendors were also a major part of turning around The Residences at Riverbend, as with many other failed multifamily projects. Radow noted that suppliers, when faced with the possibility of bankruptcy by the developer, may inflate claims to ensure they are properly protected. To take on these claims, the strategy is to first "triage:" place the claims into three categories. According to Radow, the first type of claims, the small and "black-and-white" claims, can be easily quantified and ascertained. These should be "paid, settled and gotten out of the way." At the other extreme are claims that appear to be excessive and questionable. These are claims that "make it seem as though you are being gouged," said Radow. These vendors need to be "made an example of," and "we will litigate these cases very strenuously," he said. The majority of claims fall between the two extremes, and these constitute the third type of claims. To these claimants, it is made clear that they have a choice: "the good ones" are the ones to get paid. This group "understands that we are not the bad guys. We need to be communicated to." The other group are "the pernicious" claimants, who are exaggerating. This group is told that "we will litigate, and we are not afraid of that," said Radow. "We give the suppliers a choice: 'Which group do you want to be?'" He reports the great majority of claims are resolved happily.

In taking on challenging rescue operations, the turnaround specialist's employees are a critical component of the company's success. Radow stresses the importance of bringing on team members who are willing to take action. "In this business, you must be able to move and change directions very quickly. You must not be afraid to make decisions The people we hire have to be willing to make decisions even though they are wrong, as long as they self-correct," he said. "We want people who are willing to make decisions rather than no decisions." Besides hiring young, energetic project managers, The Radco Cos. also has an excellent accounting staff "which is very important for the forensic work" needed in working out distressed properties, Radow noted.

At press time, The Radco Cos. was in negotiations to close on a $110- million acquisition of a 1920s historic apartment complex in Boston called Longwood Towers. The property will be converted into condominiums. The prior owner had begun the conversion process, Radow said, but the project has many construction issues.

Perhaps much more rescue business is down the road for The Radco Cos. if there is indeed a condominium bubble that is about to burst. However, Radow is coy on this point. Even in such a great condominium market, The Radco Cos. has been extremely busy with turnarounds, he noted. "The great developers in bad times will always execute well. On the other hand, there are always developers who will execute badly whether it is a good or bad market. There are always opportunities for us to come in."