Judge’s panel rules over Beach Towing and Deco Capital Group’s fight over Sunset Harbour project

Bradley Colmer, a Sunset Park rendering and 1349 Dade Boulevard (Credit: Domo Architecture and Design and Google Maps)

Bradley Colmer, a Sunset Park rendering and 1349 Dade Boulevard (Credit: Domo Architecture and Design and Google Maps)

As Deco Capital Group and Beach Towing battle over the development of a retail and residential project in Miami Beach’s Sunset Harbour neighborhood, a panel of judges has issued new rulings.

In the latest move, the panel of three Miami-Dade Circuit Court judges last week rejected a petition to overturn decisions by Miami Beach officials allowing automobile and truck storage on Beach Towing’s property at 1349 Dade Boulevard. The petition was filed by Sunset Land Associates and SH Owner, two development entities managed by Deco Capital.

Two other orders in recent months sided with the development firm managed by Bradley Colmer and Marc Rowan, a New York City-based billionaire builder. The panel tossed petitions filed by Beach Towing challenging decisions by the Miami Beach planning board and design review board approving Deco Capital’s Sunset Park, a planned 67,000-square-foot mixed-use project at 1733-1769 Purdy Avenue and 1730 Bay Road, allowing the project to move forward.

The development site is across the street from Beach Towing. Beach Towing has sought to stop the project, while Deco Capital Group has attempted to shut down the towing company’s tow yard.

The battle between Deco Capital and Beach Towing dates back to 2015, when the towing company opposed a height increase for the proposed development site. A year later, the developer sued Beach Towing and the Lofts at South Beach Condominium, which also opposed the height increase. Deco Capital also sent a legal memo to Miami Beach officials that asserted the tow yard was a violation of Miami Beach zoning regulations for Sunset Harbour.

The latest court stand-off was the result of a Miami Beach Board of Adjustment vote last March denying Deco Capital Group’s appeal arguing the city’s zoning director Thomas Mooney wrongly determined Beach Towing is allowed to store automobiles and trucks on its property. In an August 2018 memo, Mooney noted that a 1989 revision to the city code no longer allows tow services in Sunset Harbour, where Beach Towing and the proposed development are located.

However, Mooney also concluded Beach Towing has been grandfathered in since the company had been at its current location since 1986 and has provided towing services for more than three decades.

Deco Capital Group sued the city to overturn the adjustment board’s 6-0 vote. The three-judge panel determined “Beach Towing’s storage facility fits within the defined permitted use” and found “no error in the city’s determination,” last week’s order states.

“We fail to see how storage of cars and trucks on paved land surrounded by a six-foot wall can be fairly characterized as vacant land,” the judges wrote.

On Jan. 16, the panel denied Beach Towing’s petitions after determining the planning board and the design review board votes were “supported by competent, substantial evidence.” In August of last year, the Third District of Appeals also rejected Beach Towing’s appeal of a lawsuit it lost against Sunset Land Associates.

Ralph Andrade, Beach Towing’s attorney, said the Feb. 26 denial last week of Deco Capital’s petition was a “victory of the little guy.”

“The court’s well-reasoned ruling puts an end to the developer’s antics and tantrums to put us out of business,” Andrade said. “We stood up to a greedy bully developer and won.”

Jeffrey Bass, the attorney representing the Deco Capital entities, noted his client won three out of the four recent court cases. “Last time I checked, 25 percent is a failing grade,” Bass said. “We forcibly dispatched their very specious challenge to our wonderful project.”

Condo buyer sues Metropica developer over delays

Metropica and Joseph Kavana (Credit: iStock)

Metropica and Joseph Kavana (Credit: iStock)

Metropica has been pegged as a “city within a city” in western Broward County, a development that plans to span over 4 million square feet with more than 2,250 residential units overlooking the Florida Everglades.

But now, more than five years after launching sales for the first condo building at 2000 Metropica Way in Sunrise, called One Metropica, one couple is suing the development group over delays.

The buyers, Alvaro Juan Llosa and Olga Llosa, allege the unit was supposed to be completed by November 2019 under the terms of their contract and are seeking a refund of their $151,250 deposit, according to the complaint.

The Llosas put their deposit down for a $605,000 condo in the 28-story, 263-unit building in 2015, according to the suit. The couple wanted to be close to their grandchildren before “friends and cellphones become more of a priority,” the lawsuit alleges.

The couple alleges the contract requires that the unit be completed and delivered within three years after the estimated completion date of November 2016. So far, the building has not been completed.

Joseph Kavana of K Group Holdings, who is spearheading development of Metropica, called the lawsuit “groundless.”

“We are within the contract terms. We had some delays as it happens in any project,” Kavana said.

The lawsuit alleges that in August of last year, the development group said an electrical system serving multiple floors of the building sustained water damage and needed to be repaired.

In November 2019, the buyer’s attorney sent a notice of default to Metropica’s attorneys.

Kavana said the contract allows for the development group to have more time to complete the project if it runs into issues. He said the delays were caused mainly by infrastructure issues and also that its construction company and some subcontractors couldn’t deliver on time.

The project should receive its temporary certificate of occupancy by March, according to Kavana.

The Llosas want their deposit returned with earned interest. They are alleging breach of contract, unjust enrichment, and are seeking declaratory action.

In all, Metropica is $1.5 billion development that will include up to 485,000 square feet of retail space, 650,000 square feet of Class A office space, and public spaces in addition to the residential portion.

With units starting in the $450,000s, One Metropica is about 75 percent presold and the development group, according to Kavana.

On Collaborative by Coldwell Banker was tapped to take over sales and marketing of the building about a year ago, but Kavana recently brought sales in house. Kavana said the group is not planning to offer any incentives or discounts on remaining units to lure in buyers.

Next, the developer plans to launch sales for the second luxury residential tower this spring. Kavana hopes to complete the retail space by 2022. Construction will begin on 165,000 square feet of office space and a multifamily project in 2020.

Kavana is also seeking to fill the place of one major tenant, iPic after the movie theatre company declared bankruptcy in August. He said the group is in talks with two other movie theater companies to take its spot.

Harvey Hernandez fights back against Airbnb

Harvey Hernandez (Credit: Airbnb and iStock)

Harvey Hernandez (Credit: Airbnb and iStock)

Harvey Hernandez’s development group is striking back against Airbnb after the short-term rental company alleged he committed fraud and siphoned money out of an apartment-sharing concept.

NGD Homesharing, led by Miami developer Hernandez, alleges in a countersuit filed Friday in Miami-Dade Circuit Court that Airbnb was actually the one operating in bad faith and caused delays and setbacks in opening its projects by going “radio silent” in communication.

“This is a classic case of a big corporate player attempting to misuse its size and strong-armed legal tactics to improperly usurp an innovative business,” Michael G. Austin of McDermott Will & Emery, LLP, who is representing NGD, said in a statement.

The lawsuit alleges that Airbnb is attempting to misappropriate NGD’s confidential business information, trade secrets and proprietary business methods for the benefit of Airbnb.

The suit stems from a partnership between Hernadez’s development group and Airbnb to offer Airbnb-branded apartments. Airbnb claims it invested $11 million in the initiative.

But the local developer and the home-sharing giant are now locked in a heated legal battle.

Last week, Airbnb filed suit against NGD Homesharing in Northern California, claiming Newgard was supposed to open at least seven of projects in 2019, including one in Kissimmee, Florida. But Newgard failed to open a single project in 2019, according to the suit.

Furthermore, Airbnb alleges that Hernandez siphoned off $1 million of Airbnb’s investment into another one of his condo projects, Natiivo in Miami.

Airbnb alleges Hernandez and his company tried to disguise the investment as a loan by producing fraudulent and backdated documentation that showed Hernandez as the signatory on behalf of both borrower and lender.

Hernandez’s development group’s most recent lawsuit disputes that the loan was illegal. As the sole manager of NGD, Hernandez was allowed to make the $1 million loan without Airbnb’s consent or authorization under a previous agreement, Austin said in a statement.

Airbnb did not immediately return a request for comment.

In its suit, Airbnb demands the return of its $11 million investment and wants out of its contract.

It is not the first time Hernandez has faced major legal issues with his real estate developments.

In 2016, Hernandez’s development company was sued over a failed robotic car garage he installed at the luxury condo tower Brickell House in Miami. In September, a Miami-Dade County judge awarded the Brickell House condo association $40.6 million from the development group after the technology malfunctioned and left residents without a working garage.

Airbnb sues Newgard, alleges Harvey Hernandez stole funds in partnership

Harvey Hernandez (Credit: Airbnb)

Harvey Hernandez (Credit: Airbnb)

Airbnb accuses Miami real estate developer Harvey Hernandez of defrauding the short-term rental company and diverting funds that were to be used for an apartment-sharing concept.

Airbnb claims it invested $11 million in a partnership with Hernandez’s Newgard Development Group to offer Airbnb-branded apartments. Newgard was supposed to open at least seven of these projects, including in one in Kissimmee, Florida, in in 2019, according to Airbnb’s lawsuit filed Thursday in Northern California. So far, Newgard has failed to open a single project.

Hernandez could not immediately be reached for comment.

The lawsuit comes as Airbnb prepares for its planned initial public offering this year.

According to the suit, Airbnb planned to provide the capital, and Newgard and Hernandez were to then manage, operate, and market rental properties throughout the United States.

Instead, Airbnb alleges “NGD and Hernandez stole funds, made unauthorized loans to other Hernandez-controlled companies, fraudulently backdated documents, breached contracts, and then lied repeatedly in an attempt to cover their tracks.”

Airbnb alleges Hernandez siphoned off $1 million of the investment into another one of his projects, Natiivo in Miami. Airbnb alleges Hernandez and Newgard tried to disguise the investment as a loan by producing fraudulent and backdated documentation that showed Hernandez as the signatory on behalf of both borrower and lender. The “loan” is now in default and remains outstanding, according to the lawsuit. Airbnb is demanding the return of its $11 million investment and wants out of its contract.

The Financial Times first reported the lawsuit.

It is not the first time Hernandez has faced major legal issues with his real estate developments.

In 2016, Hernandez’s development company was sued over a failed robotic car garage he installed at the luxury condo tower Brickell House in Miami. In September, a Miami-Dade County judge awarded the Brickell House condo association $40.6 million from the development group after the technology malfunctioned and left residents without a working garage.

Moishe Mana sells Hibiscus Island home for $12M, CitizenM scores $48M loan to build Brickell hotel

Every day, The Real Deal rounds up South Florida’s biggest real estate news, from breaking news and scoops to announcements and deals. We update this page throughout the day. Please send any tips or deals to [email protected]

This page was last updated at 5:45 p.m.

The founder of Cash4Gold bought a waterfront home in Miami Beach’s La Gorce Island for $19.6 million. The home sold at a 44 percent discount from its listing nearly four years ago. Jeff Aronson and his wife Carolyn bought the 10,094-square-foot estate at 100 La Gorce Drive for $1,941 per square foot. Rapa Holdings, which is managed by Andrew Feldman, sold the property. [TRD]

Diesel family dishes on Wynwood condo project. Diesel launched a marketing campaign for its condo development, offering to sell 143 “one-of-a-kind” T-shirts starting at just under $1.6 million. With the shirt, the buyer would receive a condo. [TRD]

Moishe Mana sells Hibiscus Island home for $12M. Developer Moishe Mana sold a 1937 home in Miami Beach to a buyer who plans to build a new modern mansion on the property. Mana’s Martini Realty LLC sold the 5,492-square-foot home at 420 South Hibiscus Drive on Hibiscus Island to 420 S Hibiscus Drive SFH LLC, a Delaware company, for $12 million. [TRD]

Miami may be closer to banning Special Area Plans. On Jan. 15, the city of Miami’s Planning, Zoning and Appeals Board will discuss proposed legislation that could do away with SAPs altogether. The board voted Wednesday to discuss a rule at its Jan. 15 meeting that would recommend that the city remove SAPs from the Miami 21 zoning code. [TRD]

Breather bloodbath: Flex-office startup fires 17% of staff. Breather, an on-demand workspace company, fired almost a fifth of its staff Thursday. The Montreal-based firm, which provides office space across 10 different cities and has more than 100 employees, laid off at least 18 staffers, The Real Deal has learned. [TRD]

CitizenM scores $48M loan to build Brickell hotel. CitizenM scored a $48.3 million construction loan to build a new hotel at the former site of Perricone’s Marketplace & Cafe in Brickell. The hotelier secured the loan from Manufacturers and Traders Trust Co. for the 252-key hotel at 955 South Miami Avenue in Miami. [TRD]

AquaBlue Group owner lists South Beach apartments for $14M. A company tied to AquaBlue Group owner Philippe Harari is looking to sell a South Beach apartment complex for $13.9 million. Greenview Courtyard, at 2021-2035 Meridian Avenue, across from the Miami Beach Golf Club, includes three buildings with a total of 30 units. The price breaks down to about $463,000 per apartment. [TRD]

Catsimatidis scores approval for $300M tower in St. Petersburg. Greek-American billionaire John Catsimatidis landed approval for what could become the tallest condo tower on the west coast of Florida. Catsimatidis’ Red Apple Group received site plan approval from the St. Petersburg’s Development Review Commission on Wednesday for a $300 million mixed-use project, the Tampa Bay Times reported. [TRD]

Lawsuit seeks to halt new EB-5 regulations. Less than a month after the new EB-5 rules came out, a Florida regional center has filed a motion in federal court, seeking a temporary restraining order to halt enforcement. The company, Florida EB5 Investments, alleges the new requirements — which took effect Nov. 21 — violate the U.S. Constitution, were not properly reviewed for potential fallout and will end up killing business. [TRD]

Some roads in the Florida Keys may be abandoned due to sea-level rise. Raising three miles of Old State Road 4A in the Keys to withstand sea-level rise and king tide by 2025 could cost $75 million, according to the Miami Herald. In 2045 the costs could increase to $128 million. In 2060, the costs could rise to $181 million. Monroe County asked for $150 million to address sea-level rise for the whole county. [Miami Herald]

Joe Biden proposes $1 Trillion in new corporate taxes. Democratic presidential hopeful Joe Biden proposed nearly $1 trillion in new corporate taxes on Wednesday as part of a plan to bring in more revenue in order to pay for healthcare, climate, infrastructure and education costs, according to the Wall Street Journal. Part of his plan would be to tax companies like Amazon.com that show little or no U.S. tax costs. [WSJ]

LVMH in early talks to buy Tiffany for $16B, Riviera Beach residents being evicted

Every day, The Real Deal rounds up South Florida’s biggest real estate news, from breaking news and scoops to announcements and deals. We update this page throughout the day. Please send any tips or deals to [email protected]

This page was last updated at 6:10 a.m.

Craig Robins’ claim that Ugo Colombo bribed juror in private jet case doesn’t fly with Miami judge. Miami-Dade Circuit Court Judge Michael Hanzman tossed out Craig Robins’ Dacra Development’s claim that Ugo Colombo and his CMC Group bribed a member of a jury — including promising a luxury condo — tied to their dispute over the $22 million private jet. [TRD]

Domio inks deal for first apartment-hotel in Wynwood. The short-term rental operator signed a deal to take over the residential component of the Related Group and Block Capital Group’s 175-unit project. Domio signed a lease for the apartments at The Bradley, a mixed-use project under construction at 51 Northwest 26th Street. [TRD]

SoftBank will move forward with its WeWork stock tender offer this week. The $3 billion offer includes up to $970 million that co-founder Adam Neumann owns. SoftBank was expected to launch the offer earlier this month, but it was delayed after the bank tried to make technical revisions to the offer documents. [Reuters]

Insurance executive Peter Worth just paid $8.8 million for a unit at the Bristol, months after closing on a Palm Beach home. Worth sold his employee benefits consulting firm, American Benefits Consulting, to Alliant Insurance Services in 2015. He closed on unit 1802 at the Bristol, a 25-story, 69-unit luxury tower in West Palm Beach. [TRD]

A wealthy Latvian family paid $6.5 million for a shopping center in North Bay Village. Lexi Commons LLC, managed by real estate agent Val Zevel and Ilmax LLC, purchased the 19,438-square-foot retail space at 1700 John F Kennedy Causeway. Records show Ilmax LLC is controlled by Leonids and Maksims Esterkins, who are real estate investors from Latvia. [TRD]

WeWork may look to its Japanese unit to figure out how to become profitable. The unit is already in the black and will be the springboard for a new service called Passport that WeWork plans to introduce across the globe. Passport users will be given “flexible” access to desks and shared spaces in an aim to boost occupancy. [Bloomberg]

Aging baby boomers are preparing to sell millions of homes, but the younger generations might not want them. A quarter of homes seniors are set to vacate by 2037 are primarily in traditional retirement communities: Florida, Arizona or in areas of the Rust Belt that have long been losing population. Those areas may not attract Generation X and millennial buyers. [WSJ]

Financial firms think that returning Fannie and Freddie to private ownership could be a risky and disruptive move. Investors from firms including BlackRock and Fidelity Investments have told the federal government that any attempt to privatize Fannie Mae and Freddie Mac should include an explicit guarantee of the $5 trillion they issue in mortgage-backed securities, something only Congress can provide. The Trump administration has said it would move forward without this guarantee and that the government needs to reduce its role in housing. [WSJ]

LVMH to acquire Tiffany & Co. in $16B deal. LVMH Moët Hennessy Louis Vuitton reached a preliminary agreement to take over the American luxury jeweler in a deal that values Tiffany at $135 a share, according to the Wall Street Journal. It would be the largest acquisition for LVMH under French billionaire Bernard Arnault. Tiffany has more than 300 stores around the world and about $4.4 billion in annual revenue. [WSJ]

Millennia Companies is evicting Riviera Beach residents after they sued over conditions in the rental community. The Palm Beach County Tenants Union said six of the seven residents of the Stonybrook Apartments who were served seven-day eviction notices are plaintiffs in a class-action lawsuit against Millennia. The tenants are suing over alleged toxic mold, asbestos, rats and more. [Sun Sentinel]

Alan Levan is the next president and CEO of Bluegreen Vacations Corp. Levan will be taking over from Shawn B. Pearson, who is stepping down at the end of the year due to family reasons, according to the South Florida Business Journal. Levan, the CEO of BBX Capital Corp., has been Bluegreen’s chairman for over 15 years. [SFBJ]

From left: Arnaud Karsenti, Nelson Stabile, and Victor Ballestas with a rendering of Sereno at Bay Harbor Islands

From left: Arnaud Karsenti, Nelson Stabile, and Victor Ballestas with a rendering of Sereno at Bay Harbor Islands

Sereno condo association sues alleging poor workmanship. Residents of Sereno at Bay Harbor Islands are alleging that water is intruding in various locations, access gates and doors are improperly installed and stucco is cracking on exterior walls, according to a lawsuit filed this month. The Sereno Residences Condominium Association sued Bay Harbor Holdings, a partnership between 13th Floor Investments and Integra Investments, as well as companies that worked on the design and construction of the 38-unit building completed in 2017. [TRD]

Compiled by Katherine Kallergis

Suffolk fights back against developer over MiamiCentral delays

Parkline at MiamiCentral and Suffolk CEO John Fish (Credit: Suffolk, iStock)

Parkline at MiamiCentral and Suffolk CEO John Fish (Credit: Suffolk, iStock)

Lawsuits continue to mount at MiamiCentral over construction delays.

A month after Suffolk Construction Company and others reached a multimillion-dollar settlement over construction issues at MiamiCentral, the construction company is suing the development group.

Suffolk Construction is suing two subsidiaries of Florida East Coast Industries, alleging the development group failed to give Suffolk an extension and increase the construction budget at the MiamiCentral apartment project, despite weather delays.

Suffolk Construction alleges the two subsidiaries of FECI breached their contract by refusing to increase the costs and timeline of the Parkline apartment project which it is currently building above the MiamiCentral station.

The complaint alleges inclement weather caused multiple delays with the project. It does not specify how the weather impacted the project or if the weather referred to was Hurricane Irma.

Florida East Coast Industries general counsel Kolleen Cobb did not immediately return a request for comment. Suffolk Construction’s lawyer Ira Libanoff also did not return a call seeking comment, while Suffolk Construction declined to comment through a spokesperson.

The lawsuit, filed in Miami-Dade Circuit Court, comes after Suffolk Construction, Virgin Trains USA and the structural engineering firm Skidmore, Owings and Merrill settled a lawsuit in October for $10.5 million over delays at the station component of the MiamiCentral mixed-use project.

In August, a San Francisco REIT also filed a lawsuit over construction issues pertaining to the office component of the project. After Shorenstein Properties purchased the office component of MiamiCentral, 2 MiamiCentral and 3 MiamiCentral, in May for $159.4 million, the San Francisco REIT claims it inherited millions of dollars in construction debt from the previous owner. Facchina Construction of Florida, the project’s now-defunct general contractor, sued the Shorenstein affiliate that now owns the buildings for nonpayment of $4.3 million in construction work that was allegedly completed in 2016.

FECI is the parent company to Virgin Trains USA, the high-speed rail formerly known as Brightline, with stops in Miami, Fort Lauderdale and West Palm Beach. Last year, Richard Branson’s Virgin Group announced a strategic partnership with the rail line.

The two-tower Parkline project sits on top of a three-story parking structure above the MiamiCentral station. The North tower consists of 30 stories with 350 units, while the South tower consists of 33 stories with 466 units. The project will total 930,779 square feet.

Amenities include a 105,000-square-foot amenity deck, two fenced-in dog parks, a running track, a CrossFit lawn, grill stations, resort and lap pools, cabanas, a movie wall and lounge area, according to Suffolk Construction’s website.

Boston-based Suffolk Construction is one of the largest contractors in South Florida. Its projects have included Jade Signature in Sunny Isles Beach, the Bristol in West Palm Beach and CityPlace at Doral.

Lionheart Capital scores TCO for long-delayed Ritz-Carlton Residences, Miami Beach

The TCO from Miami Beach means that closings can finally start at the 111-unit, 15-villa luxury development

Ricardo DuninRitz and Ophir Sternberg with the Carlton Residences, Miami Beach

Ophir Sternberg and Ricardo Dunin with the Ritz-Carlton Residences, Miami Beach

Lionheart Capital secured a temporary certificate of occupancy for its long-delayed luxury condo project The Ritz-Carlton Residences, Miami Beach.

The TCO from the city of Miami Beach means that closings can finally begin at the 111-unit, 15-villa luxury development at 4701 Meridian Avenue, where prices range from $2 million to over $40 million. The project is currently more than 70 percent presold, according to a press release from the development group.

Ritz-Carlton Residences sits in a quiet residential area of Miami Beach overlooking Surprise Lake, and is the first full-scale architectural project in the U.S. by Piero Lissoni, an acclaimed Italian architect who is known for his minimalist design. It was developed by Lionheart Capital, led by Ophir Sternberg and Ricardo Dunin, and Elliott Management Corp.

Sales at Ritz-Carlton Residences, Miami Beach initially began in 2014 and the project was supposed to be substantially completed by 2017, according to marketing materials.

The project was hindered, however, by construction delays, and seven buyers sued the development group seeking to get their deposits back. Three of the lawsuits remain pending in Miami-Dade Circuit Court, including one from Marsha Soffer of the Turnberry Associates family, court documents show.

The development group has not publicly commented on the delays or if it plans to settle the lawsuits. Plaza Construction, the contractor on the project, also has not commented on the delays.

“To compensate that we were late we are going to deliver a product a lot beyond what people expect,” Dunin told The Real Deal in February, when he expected the TCO to be issued in April. This includes importing furniture for the common areas from top European designers, purchased at the Salone del Mobile in Milan, Italy, last April.

The adaptive reuse project features 60 distinct floor plans and was built on the former site of the Miami Heart Institute.

Lionheart Capital paid Mount Sinai Medical Center $20 million for the property in February 2012. The development group secured a $105 million construction loan from Bank of the Ozarks, now known as Bank OZK, in the summer of 2015, including assuming $10 million in existing construction financing.

In addition to the condos and villas, Ritz-Carlton Residences, Miami Beach will feature gardens, pools and 36 private boat slips.

Shared amenities will include an art studio, a rooftop pool deck with private cabanas and a restaurant, a waterfront bar and social room, pet grooming facilities, indoor and outdoor yoga studios, a meditation garden and car wash facilities.

New lawsuits raise question of who should pay homebuyer’s agent

A house with a real estate agent (Credit: iStock)

A house with a real estate agent (Credit: iStock)

The long knives are out again for one of American real estate’s oldest and most controversial traditions: requiring home sellers to pay the agents who represent the buyers of their properties.

A landmark suit filed in March alleged that the 1.3-million-member National Association of Realtors has conspired with local multiple listing services (MLSs) and with major realty brokerage companies to force sellers who list their homes on an MLS to pay a contractually specified percentage of the commissions to the broker/agent who brings in the ultimate buyer. Now two new class-action lawsuits have been filed with allegations along the same lines.

According to all the suits, an NAR rule prevents buyers from unilaterally altering the “split” stated in the listing contract. Say, for instance, you are a seller of a $500,000 home and agree at the listing to pay a total 5.5% commission, allocating 3% to the listing agent and 2.5% to the buyer’s agent. If the house sells for the full asking price of $500,000, that would mean the buyer’s agent would be due $12,500 at closing. If you thought this was more than you wanted to pay — especially given the fact that you knew part of the buyer’s agent’s job was to help your buyer obtain a lower price for your house — you might not be happy about having to shell out the $12,500. Shouldn’t the buyer pay this fee?

In March, the seller of a home in Shorewood, Minnesota, filed suit to challenge this NAR rule, arguing that, among other problems, this system of mandating compensation to the buyers’ agent raises total transaction costs. The rule “saddle[s] home sellers with a cost that would be borne by the buyer in a competitive market,” where buyers can opt to pay directly for their agents’ services. The U.S. market’s total transaction costs tend to be much higher than in most other industrial economies.

The original suit, which already ranks as the most significant antitrust litigation against Realtors in decades, is now pending in U.S. district court in Chicago, with NAR’s reply to the complaint expected shortly.

The two most recent class actions, filed in April, have different plaintiffs than the original suit but have nearly identical allegations. They come with proposed giant classes of alleged victims who have sold and paid millions of dollars in commissions via major MLSs to buyers’ agents across the country. NAR, which is the largest lobby in the real estate field, rejects the premises of the suits and pledges to fight them vigorously. The sheer costs for any single law firm to mount a credible antitrust case against a major lobby and the largest realty enterprises in the U.S. — plus no doubt the prospect of large payoffs and settlements — has apparently attracted the new actions. Sources tell me that it’s not unusual in wide-ranging cases like these for other law firms to jump in with nearly identical copy-cat filings.

Defendants in all three include NAR along with the giants of the brokerage industry: Home Services of America, Keller Williams Realty Inc., Realogy Holdings Corp. and RE/MAX Holdings Corp. Realtors tell me that an adverse decision in the cases would produce transformative changes in home-sale transactions nationwide. Some brokers say that it could create situations where first-time and other cash-short buyers might not be able to afford to pay for their agents’ services — creating a whole new obstacle to home ownership. Rather than buyers having their commissions paid for by the seller, they would now need to come up with that money themselves. Today, however, buyers don’t give it a thought, and in fact they often do not even know what commission split the buyer agent expects to receive.

In places like the United Kingdom and much of Europe, home sellers typically pay total realty fees of 1% to 3% versus the 5% to 6% average commonplace in the U.S. Critics of the American system have long argued that if home buyers paid the fees for the services rendered for them — and negotiated them with the buyers’ agents directly — total fees would be lower. On the other hand, sellers’ agents say that if the buyers-side commission is low under the current system, many buyers’ agents will not show houses because the compensation is not sufficient. In fact, discount realty firms have reported that sometimes they cannot get any of their listings presented to willing and able purchasers because buyers’ agents will not cooperate with them.

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Zillow faces legal action over its co-marketing program

Zillow's CEO Richard Barton

Zillow’s CEO Richard Barton

Zillow is back in hot water: A class-action suit against the online realty giant is moving forward after insider whistleblowers alleged that the company designed its controversial “co-marketing” program to violate federal anti-kickback laws.

Zillow termed the charges “without merit” and says it intends to “vigorously defend” itself.

Best known to the general public for its Zestimates property-valuation feature, Zillow is a multibillion dollar, publicly traded behemoth whose principal revenues come from advertising placed by realty agents. So-called “premier” agents and brokers, who receive prominent placement on Zillow-listed home sites, pay hundreds or thousands of dollars a month in advertising fees to the company. Premier agents need not be the highest volume or most successful agents in their area; they simply need to pay for the label. According to the company’s latest SEC filing, it earned nearly $900 million — two-thirds of its corporate revenue — in fees from agents paying for ads last year.

In 2013, Zillow rolled out a program whereby realty agents could have large portions of their advertising fees paid for by lenders who share advertising costs with them. Buyers interested in a particular property could then contact not only an agent but a lender to shepherd them through the financing process. The idea proved wildly popular among agents and lenders. For paying part of an agent’s Zillow advertising fees — initially up to a maximum of 90 percent, later revised to 50 percent — a lender could get hot leads directly to active buyers. For realty agents, the attraction was obvious. Hey, why not? Lenders will subsidize my costs.

However, a federal law known as RESPA — the Real Estate Settlement Procedures Act — prohibits payment of fees for business referrals among realty, mortgage and title industry providers that are not for services actually rendered. In April 2017, the Consumer Financial Protection Bureau informed Zillow that it was investigating whether its co-marketing program violated the law’s prohibition against kickbacks. Zillow negotiated with the CFPB, but last year, after the Trump administration appointed a new CFPB director, the agency abruptly dropped the case.

Meanwhile, investors who said they purchased Zillow stock at inflated prices relying on company executives’ statements that its co-marketing concept did not violate federal law filed a class-action suit alleging securities fraud. A district court judge later dismissed portions of the suit but allowed the plaintiffs to file an amended complaint if they presented conclusive evidence that the co-marketing scheme violated RESPA.

They appear to have done so successfully — at least enough to convince a federal district court judge to put the case back on track. Last November, the plaintiffs filed their amended complaint, bolstered by testimony from two unnamed Zillow insiders. The first: a regional sales manager for the company who alleged that lenders participated in the program because they “expected real estate agents to refer business.” The second: a sales and operations trainer who alleged that “every agent and lender knew that the co-marketing program was for the lender to get leads and referrals. … It was understood that lenders were paying for referrals.” Whenever the second insider “spoke to Zillow about potential concerns with the co-marketing program,” she was told “not to ask questions,” according to the court. She also alleged that she knew of a lender who had been paying 100 percent of a realty agent’s fees for 2 ½ years. Both whistleblowers provided “consistent testimony regarding how agents and lenders used the [program] to provide mortgage referrals in exchange for advertising payments,” according to the court.

In his decision, which was handed down April 19, Judge John C. Coughenour of the U.S. district court in Seattle said “the court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA.”

Asked for his take on the case, Marx Sterbcow, a nationally known RESPA lawyer based in New Orleans, told me “the court certainly seems to suggest there is a lot of smoke involving the legality of Zillow’s” program. If the whistleblowers’ allegations are correct, he said, “it could cause

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and banks to pull completely out” of the program, for fear of violating RESPA themselves, and being exposed to major legal jeopardy.

The significance for buyers, sellers and owners? The case is still out on the alleged federal law violations, but now when you see “premier” agents linked up in marketing efforts with lenders, you have a better idea about what’s really going on.

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