Inside How A Government-Seized Commercial Building Gets Sold
When Xiao Hua “Edward” Gong was arrested and tried to run a pyramid scheme and launder money, the US government confiscated his American property. Among the millions of square feet are some eye-catching commercial properties like a huge hotel in the Detroit area, an even larger former factory, and much of a historic office building in downtown Chicago.
These assets are now being launched and the seller is as reliable as they come.
“With government-owned assets, the property will definitely be sold,” said Justin Ochs, vice president of national development at Real Look. “Inspection and shutdown windows are relatively short, so you know you have a seller in the market ready, willing and able to sell the property.”
This could attract the attention of the investment capital that dry powder built when US investment volumes contracted 32% last year. However, when investors near forfeited properties and expect a distressed asset sale, they will find something entirely different.
The Edward Hotel and Convention Center in Dearborn, Michigan, as of July 2016
While states and cities each have their own procedures for taking over real estate through forfeiture, real estate involved in federal cases is turned over to the US Marshals Service. The agency’s two main objectives in relation to such assets are to liquidate them in order to repay the victims of the related crime and to preserve their value as much as possible for that eventual liquidation.
“Most of these properties are being sold at or above the asking price,” Gian Starita, executive vice president of NAI Capital, who has represented both sides on USMS foreclosures, told Bisnow. “It’s not like a nightly advertisement selling government real estate for pennies to the dollar. [USMS] did really well getting close to the appraised value. “
The U.S. Marshals Service, which is in charge of handling all nationwide property seized, is moving from contract to closing much faster than home buyers, but it feels no pressure to outsource an asset like some lenders who own buildings through foreclosure. The buildings are also being extensively repaired and serviced as part of USMS, bringing them closer to the rest of the local market. Those who have looked at USMS have found that there are no discounts or short cuts.
“There are procedures and protocols that are always followed as it is assumed that you may be called in front of Congress to explain your actions,” Starita said.
In a private transaction, the first buyer to bid has the inside information, due diligence can take weeks or even months, and a sales contract isn’t necessarily the end of the negotiation. When the USMS is involved, none of these things are true.
USMS hires Colliers to manage the asset to preserve its value and prepare it for sale. Real Look has signed a contract with USMS for the online marketing of real estate. Colliers often hires local brokers to better understand a property’s market context. This means that a potential buyer may see a familiar face on the other side of a transaction, even if the rules are completely different.
Ochs and Starita agreed that USMS eliminated the possibility of backroom deals by keeping transactions at a distance and only getting involved to ensure they were following the correct procedure.
All properties sold under the forfeiture process must remain on the market for at least 21 days to ensure that as many potential buyers as possible have the opportunity to bid. Once an offer is accepted, the closing process is much faster than traditional real estate deals and with less leeway. Properties are largely sold as they are, with valuations carried out in advance to determine the asking price at which they will come on the market.
Although property taxes are not applicable while the government owns the property, any outstanding amounts (including repairs and administration fees) are paid by the buyer as part of the closing costs. Identifying these costs, identifying potential problems beyond the outcome of the evaluation, aligning the financing – all of this is the responsibility of the buyer, who for the most part is completely ignorant of how much competition they may have until they get an offer gives.
“It’s a black hole, which is obviously an advantage for the seller,” said Starita.
The Pittsfield Building in Chicago as seen from Millenium Park
In a relationship-based business like real estate, having an absentee salesperson who absolutely does not affect the structure of a transaction can be confusing for those with no prior experience.
“At best, [USMS] is emotionless, ”said Starita. “When potential buyers see a property in the market for a long time, they may wonder if there is desperation to sell and I say, ‘The seller is literally printing money. You are the most reliable seller there is. ‘”
Real estate is most likely to deteriorate when the crime involved is financial, such as money laundering or fraud, as was the case with Gong, Ochs said. Despite being tried in a Canadian court, USMS, in collaboration with Canada, seized his American properties, which together total millions of square meters. Regardless, a building in Chicago owned by Gong has more local legal issues associated with it.
Gong’s property included the Edward Hotel and Convention Center in the suburb of Dearborn, Michigan, Detroit, an 851,000 SF monster that has been vacant due to security breaches since its closure in 2018. He also owned a former Motorola 1.5 million SF factory in Harvard, Illinois, 65 miles from Chicago, and controlled much of the Pittsfield building in downtown Chicago, a 38-story skyscraper that will be the tallest when completed All three were placed under restraining orders on the 2017 indictment against Gong, preventing Gong from selling or refinancing them himself.
In one way, Gong’s portfolio is an outlier compared to most government real estate sales. All three properties are much larger than the dilapidated properties, so the pool of buyers may differ significantly from the norm.
“The Motorola building is kind of a nature freak,” said Ochs. “Who has 1.5 million SF industry in 300 acres in the middle of northern Illinois? The value is so subjective, depending on who would buy it and what they would do with it, that we haven’t given a price. “
Those who are new to the forfeiture process must be trained by the companies tasked with marketing USMS properties. A big part of Starita’s job, when signed by Colliers, is ensuring that interested parties are aware of and are familiar with the extensive paperwork.
“Once you understand the process, it’s like bowling with the bumpers,” Starita said.
In the further course of the proceedings against Gong, USMS was released in recent months to begin preparing the sale against Gong. Each of them has its own advantages and disadvantages: the Motorola complex is huge, its fire-fighting system is broken, and it is not in a particularly attractive location for a distribution center. The Edward’s fire and plumbing system is about to be repaired, Ochs said, but it’s still the second largest hotel in Michigan at a time when hotels are mostly empty.
The Pittsfield building was acquired under state-level proceedings, so Courtney Jones, Principal of Chicago Homes RE, was appointed recipient of the property by a judge who was only charged with performing repairs in the interests of public safety. His experience shows how different the process can be when the government is not involved.
The historic tower has been neglected for years, and Jones claims the owner of the nine stories, separate from Gong’s interest, Marc Realty, actively worked with attorney Greg Janes to sabotage Jones’ efforts.
“My biggest anger has been the systemic racism that tends to exist when black real estate professionals walk into traditional spaces where options are limited,” Jones said. “[Janes] fought me every step of the way despite hearing what the judge orders me in the courtroom like he wouldn’t with a white recipient. ”
Marc Realty did not respond to Bisnow’s requests for comments.
Jones claimed Marc was trying to keep the property’s value as low as possible so he could buy the rest of the building at a deep discount. Jones said he still believes he can rehabilitate the Pittsfield and reap the reception fees and fix the refunds that come with selling the building.
Although state judicial processes are different from federal processes in many ways, the due care required to maintain the integrity and value of a building often begins before the legal process ends in either situation. Recipients and asset managers can be appointed if the defendant has no property taxes or mortgage payments.
Ultimately, when buying a forfeited property, a buyer faces a simple but challenging scenario: a tough but fair seller who moves quickly and decisively, be it closing a deal or rejecting a deal.
“If the marshals feel like they are buying games, they’ll give you the money back, throw you out of the escrow account and sell it to someone else, even if they paid less,” Starita said. “So the security of the degree is a big deal.”