Wealthy clients from CIS countries seek to secure a "backup airfield" in the New World
Our compatriots have also long been eyeing across the ocean. Selling an apartment profitably in Kyiv and using that money to buy real estate abroad has always been considered a most advantageous investment. And some people managed to simply rent out their capital "little house" (preferably to the same foreigners), and thereby live a comfortable life. Still, thoughts of foreign lands never left the minds of our potential immigrants.
Foreigners use American real estate primarily as a pied-à-terre, which can be loosely translated from French as "backup airfield". That is, they keep housing as a reserve, just in case, and live in it on visits - as NAR experts calculated, about 2.6 months a year. Moreover, according to the association, four out of ten foreigners pay the full purchase price in cash, while among American buyers only 7% did so. As "Itogi" notes, buyers from Russia are increasingly becoming holders of "golden keys".
The Russians are coming!
According to a report in USA Today, New York realtor Jackie Teplitsky sold $30 million worth of real estate to Russian buyers. Wealthy Russian citizens have recently been setting records, paying huge sums for real estate in the US. Thus, according to the aforementioned publication, Evgeny Shvidler bought a country house in Snowmass (Colorado) for $14.5 million, Roman Abramovich bought two homes for $50 million. Earlier, owners of luxurious apartments became co-owner of TNK-BP Leonard Blavatnik, president of Coalco Vasily Anisimov, president of Eurofinance Bank Vladimir Stolyarenko, co-owner of gambling holding Ritzio Boris Belotserkovsky, chairman of the board of Russian Standard Bank Rustam Tariko - the list could go on.
As renowned American attorney Edward Mermelstein notes, wealthy people from Russia as well as from Ukraine are targeting the most expensive condominiums and townhouses in the most prestigious areas of New York. In his opinion, there are two reasons for this new phenomenon from the "Russians are coming!" series. First, the collapse of Wall Street due to the collapse of the mortgage system and the surge in property bankruptcies in America caused a significant drop in real estate prices, including in the luxury sector. This inevitably attracts foreign buyers who see tempting investment opportunities. Second, financial troubles and panic in their own countries force some enterprising people to seek investment niches abroad that they consider more reliable, as well as to create a backup airfield.
It is no coincidence that Mermelstein and his colleagues are increasingly approached by clients from CIS countries to buy real estate and simultaneously obtain legal immigration status for themselves and their families. This is something new in legal practice, because over the past 10-15 years the reverse process was growing - Russians who had moved to the US were becoming actively interested in the business opportunities of the new Russia, conducting commercial operations there, opening offices, and even moving back to their homeland. What is happening now somewhat resembles the first years after the collapse of the Soviet Union. Flight of capital. And of some capitalists.
We spoke with Edward Mermelstein in his office on Fifth Avenue. He understands Russian and speaks a little, which greatly helps him in business. His parents brought him from Ukraine to America as a child, and he graduated from Thomas Cooley Law School in Lansing (Michigan). Mermelstein founded his firm in 1995, has offices in New York and Moscow, and provides foreigners with a variety of services in the field of real estate sales, but not only. The 12 lawyers in his office on Fifth Avenue speak 12 languages and serve clients from CIS countries and Eastern Europe, as well as France, Saudi Arabia, UAE, China, South Korea, England, and Ireland. Among other things, Mermelstein represents in the US the fund of Viktor Vekselberg "Svyaz Vremen" (Connection of Times), which is known for returning the Fabergé collection to Russia. He is proud that on behalf of the fund, he handled from A to Z the operation to deliver the bells that had been kept at Harvard University to the St. Daniel Monastery. And a little earlier, the transfer of the archive of philosopher Ivan Ilyin, bought by the Vekselberg fund, from the University of Michigan to Moscow State University. "When dealing with Russian clients, a lawyer is always more than a lawyer," says Edward Mermelstein smiling. Not long ago, he appeared on a popular Fox News program, where he talked about the record-breaking deal he closed thanks to Russian buyers. A few months ago, closing was signed for six apartments. This is one of the most prestigious addresses in Manhattan - 15 Central Park West, luxurious condominiums designed by architect Robert Stern. They were put up for sale by bankers and hedge fund managers from Wall Street who were experiencing financial difficulties, at prices significantly lower than a year or two ago - ranging from $3.6 million to $20 million.
Besides this prestigious location, the most popular addresses among foreign buyers, including Russian-speaking ones, are all quality housing in the area of Central Park on the south side, including the Time Warner building, the Plaza Hotel, which was converted from a hotel into a condominium in 2004. Mermelstein says that in the Time Warner condominiums, the number of Russian residents is disproportionately high: for every 100 apartments, there are ten Russian owners. Demand among "outsiders" is stable for condos in the areas of Wall Street, Battery Park, the Upper East Side, and the Upper West Side. Why? Foreign buyers know that they won't lose money here, because housing prices in these locations very rarely decrease. And also because it's prestigious. Bankers, movie and show business stars, and prominent politicians live here. One Russian doctor living in the heart of Manhattan always happily tells his guests that his neighbor is Julia Roberts. Clearly, this flatters his ego and boosts his self-esteem.
Besides New York, Florida is traditionally highly valued, especially the Atlantic coast in the Greater Miami area. There you can buy luxurious condos for $1-5 million, which is three to four times cheaper than in New York. Recently, some clients have become interested in properties in far-flung states—Montana, Colorado, Wyoming, Nevada—where they seem to be attracted by the wild nature and sparse population.
Insidious Money Relations
Often, buyers from Russia are consumed by a burning desire to surpass Americans in terms of luxury and grandeur of housing. For example, the Connecticut daily newspaper Greenwich Time in April of this year described a conflict between Russian millionaire Valery Kogan, head of East Line Group, and the authorities of the respectable town of Greenwich. According to the publication, Kogan and his wife Olga stunned the municipality with the submitted plan for rebuilding the house they had purchased. They intended to demolish a mansion of over 19,000 square feet, which they had acquired in 2005 for $18.5 million. And in its place, they planned to erect a mega-mansion of over 27,000 square feet, featuring a Turkish and Finnish sauna, a dog grooming salon, a gym, a cinema, a billiard room, a wine cellar, servants' quarters, an underground garage, eight bedrooms. And, what particularly shocked the Greenwich community, 26 toilets. The city council rejected the plan as not conforming to generally accepted development standards. However, as Greenwich Time notes, Kogan did not give up and submitted a revised plan for approval, reducing the number of toilets to 15. Apparently, the Russian owner was not properly informed that fighting with city fathers in America is difficult and often futile. Zoning, development regulations, adherence to height limits—these are sacred. If it's not allowed, then it's not allowed. Perhaps the architect is to blame for not grounding the owners' construction fantasies in time. Or maybe the owners themselves, despite objections, insisted: make it beautiful for us. There are known cases in America where in similar situations, they had to either demolish an improperly built building or remove unauthorized extra floors.
New York magazine reported another conflict involving "our people." Andrei Vavilov, a former deputy finance minister who is called an oil baron in the US, signed a contract to purchase two penthouse apartments in the famous Plaza for $53.5 million. Today, he is suing the Plaza's developer, El-Ad, demanding the return of his $10.7 million deposit and an additional $20 million in compensation. Vavilov believes he was deceived. The deception, in his opinion, is that the apartments, which were presented as luxurious and the best among the Plaza's 180 units, have low ceilings, an unattractive layout, and... ugly heating grates. The Plaza, according to the magazine, accused the financier of slander. Its lawyers insist that the developer concealed nothing from the buyer, and Vavilov signed the contract only after personally viewing the penthouses in June of this year, and his lawsuit is a clever tactic to lower the price, or perhaps an attempt to back out of the contract while saving face. As American newspapers suggest, a key role in Vavilov's change of attitude toward the contract might have been played by his actress wife: upon seeing the penthouses, she was allegedly greatly disappointed.
Some local commentators present this story as an example of "new Russian-ness." Others point out that another buyer, but an American this time, is suing the Plaza for roughly the same reasons as Vavilov. And two more potential buyers decided to back out of their apartments at the last moment. So maybe it's not as simple as journalists think.
The Science of Buying
However, making a purchase is not that tricky. Another question is how to subsequently own this property. About ten years ago, one star of Russian show business, following the example of several colleagues, bought an expensive condo in Miami. Bought it, as usual, for cash, paying the entire amount at closing. Huge rooms, excellent layout, ocean view, decent neighbors. The star visited rarely, very rarely—due to a busy tour schedule. And suddenly she gets an alarming call from an acquaintance in Miami: the authorities are going to confiscate the apartment. Why?! It turned out that a large debt had accumulated for non-payment of maintenance—the monthly fee that must be paid for building operation and numerous services (pool, parking, gym, etc.). The star is furious: no one told her this, and in this scenario, the overseas apartment is a total loss. She had to sell it urgently—at a loss.
“People have money but lack experience,” comments Edward Mermelstein. “The task of a lawyer handling a real estate transaction is to explain all the nuances, everything written in small print at the bottom of the contract. You must remember that in America, a property owner must pay property tax and maintenance, and the amounts can vary greatly depending on the size of the home, location, and other factors.”
Overseas buyers often complain about high taxes when purchasing real estate, which they are forced to pay to Uncle Sam. These taxes resemble a special barrier, a kind of excise curtain against the expansion of wealthy foreigners. They can range from 30% to 60% of the property’s price – it all depends on the type of purchase. If the authorities verify that the property is acquired as an investment and not as a place to live, the levies increase. American authorities also typically check the legality of the funds invested in the transaction. How, you may ask, if the money was earned not in the US but, say, in Russia, thousands of kilometers from the auditors?
“Let’s just say there are established mechanisms,” explains Edward Mermelstein. “When we check local investments, we turn to special auditing firms that employ former CIA and FBI agents. As for Russia, Ukraine, and other republics of the Soviet Union, we turn to private counterpart firms on their territory that employ former FSB and other law enforcement officers. This costs a lot of money, but there is no alternative. Most buyers from Russia have no credit history. And in that case, even if you are a billionaire, you won’t get a bank loan or even open a bank account in the US. It’s no secret that after the well-known money laundering scandal involving the Bank of New York, American authorities have created a sort of blacklist that includes some Russian-speaking businessmen and public figures. Today everything has become quite transparent. We are closely connected with large banks that know the sources of clients’ income. So our task is to create a credit history for such a client over the months preceding the transaction. In general, keep in mind that lawyers in the USA value their reputation highly. If you take on a slippery case, you risk losing your license. And besides, it’s hard to spend money when you’re in jail. (Laughs.)”
Experts from the US National Association of Realtors particularly note that foreigners are clearly focused on condominiums. Why are condos so popular? The form of ownership is convenient, leaving no doubt – the owner is the owner, just pay. As for cooperatives, which are also common in America, that is collective ownership. And you can’t get into prestigious co-ops: a foreign buyer will waste time and nerves and leave empty-handed if they have no credit history and proper personal recommendations. The boards of American cooperatives are draconian organizations, famous for their pickiness and caprices. In a posh Manhattan cooperative, even Madonna was refused: they said they don’t want a star as a neighbor, too much noise and paparazzi. Besides condos, townhouses are often purchased. But interest in country homes has declined somewhat. Americans notice that the requests from Russian clients have become less ostentatious and more businesslike.