The Wall Street Journal-20080130-Plots - Ploys

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Plots & Ploys

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[What's Brewing in the Real-Estate Market]

Lawsuit Filed Against Countrywide

A former Countrywide employee who worked as a regional vice president in the Houston office of a joint venture between Countrywide and KB Home charges he was fired after raising concerns about questionable lending practices, according to a lawsuit.

The former employee, Mark Zachary, alleges that loan officers were helping borrowers submit loan applications with false income amounts, according to the lawsuit filed in U.S. District Court in Houston. The lawsuit also alleges that Mr. Zachary was instructed by the "highest levels" of Countrywide KB Home Loans to give "unconditional final approval" for 10% of the backlog of home loans so KB Home could start constructing the homes under contract.

Countrywide denied the charges and said it would defend itself vigorously. The company said in a written statement it investigated all of Mr. Zachary's claims and found no merit to his accusations. KB Home declined to comment citing the pending litigation.

The Party's Over

One glaring bit of evidence that the office sales frenzy is over: The number of buyers for big portfolios has plummeted.

Consider this two-million-square-foot deal brokered by Eastdil Secured in May. When S. Joe tCo., a Jacksonville, Fla.-based real- estate company, put a mixed bag of 17 office buildings in several southern cities up for sale, 42 investors made offers. Nine made it to the third round. Then, Eastdil interviewed three bidders in person before awarding the sale to Orlando-based Eola Capital for $383 million -- or about $20 million more than expected.

Today? That same portfolio would likely be split up -- not sold intact -- and would get initial bids from no more than 10 investors because so few would be able to get financing, says Michael McDonald, an Atlanta-based managing director for Eastdil.

Closing the Loophole

The New York real-estate industry isn't thrilled about a proposal by Gov. Eliot Spitzer aimed at closing a tax loophole that benefits investors living outside the state.

For years, out-of-towners and foreigners who have owned limited partnership interests in New York property haven't had to pay state income tax on the profits they made when they sold those interests. Mr. Spitzer's plan would allow no such escape.

Calling this proposed tax-rule change a "bombshell," Wayne Berkowitz, a partner at tax and accounting firm Berdon LLP, says "it would discourage nonresidents from investing in New York real estate because of the additional tax burden."

A spokesman for Gov. Spitzer says the governor's goal is "to ensure that taxpayers are treated fairly and equitably under the tax code." The New York State legislature has until Mar. 31 to decide whether to accept the proposal.

-- Michael Corkery, Lingling Wei and Jennifer S. Forsyth