Inside How A Government-Seized Commercial Building Gets Sold
When Xiao Hua “Edward” Gong was arrested and tried for running a pyramid scheme and laundering money, the U.S. government seized his American properties. Among the millions of square feet are some eye-catching commercial real estate, like a huge Detroit-area hotel, an even-bigger former factory and a majority share of a historic office building in Downtown Chicago.
Those assets are going on the market now, and the seller is as reliable as they come.
“With government-owned assets, the properties are definitely going to sell,” Real Look Vice President of National Development Justin Ochs said. “Inspection and closing windows are relatively short, so you know you have a seller in the marketplace ready, willing and able to sell the property.”
That may catch the eyes of investment capital that has built up dry powder as U.S. investment volume shrank by 32% last year. But if investors approach forfeited properties expecting a distressed asset sale, they will find something completely different.
While states and cities each have their own procedures for taking properties through forfeiture, properties involved in any federal cases are turned over to the U.S. Marshals Service. The agency’s two main objectives with regard to such assets are to liquidate them to repay victims of the associated crime and to preserve their value as much as possible for that eventual liquidation.
“Most of these properties are selling at or above the asking price,” NAI Capital Executive Vice President Gian Starita, who has represented both sides in USMS forfeiture transactions, told Bisnow. “It’s not like a late-night infomercial where government properties are selling for pennies on the dollar; [USMS] has been doing really well on getting close to appraised value.”
The U.S. Marshals Service, which is tasked with handling all federally seized property, moves much quicker from contract to closing than private buyers, but it doesn't feel pressure to offload an asset like some lenders that take possession of buildings through foreclosure. The buildings also undergo extensive repairs and maintenance under USMS, putting them on footing closer to even with the rest of the local market. Those who have dealt with USMS have found that there are no discounts or shortcuts.
“There are procedures and protocols that are always followed, because the assumption is that you might get called in front of Congress to explain your actions,” Starita said.
In a private transaction, the first buyer to make an offer has the inside track, due diligence can take weeks or even months and a sale agreement being reached is not necessarily the end of negotiations. When the USMS is involved, none of those things is true.
USMS contracts with Colliers to manage the asset to preserve its value and ready it for sale. Real Look has a contract with USMS to market properties online, and Colliers often hires local brokers to help understand a property’s market context. That means a potential buyer might see a familiar face on the other side of a transaction, even if the rules are completely different.
By keeping transactions at arm's length and getting involved only to ensure they follow the correct procedure, USMS precludes the possibility of back-room dealings, Ochs and Starita agreed.
Any properties sold through the forfeiture process must remain on the market for a minimum of 21 days, ensuring that as many potential buyers as possible have a chance to make an offer. Once an offer is accepted, the closing process is much quicker than traditional real estate deals tend to be and with less wiggle room. Properties are mostly sold as is, with appraisals having been performed upfront to establish the asking price at which they hit the market.
Though property taxes do not accrue while the government has ownership of a property, all outstanding balances (including the cost of repairs and management fees) are paid by the buyer as part of closing costs. Working out such costs, figuring out any potential issues beyond what the appraisal finds, lining up financing — all of that is the responsibility of the buyer, operating mostly in total ignorance of how much competition they may have until they submit an offer.
“It's a black hole, which is obviously an advantage for the seller,” Starita said.
In a relationship-based business like real estate, having an absentee seller that absolutely will not budge on the structure of a transaction can be disorienting for those without prior experience.
“At best, [USMS] is unemotional,” Starita said. “When potential buyers see a property on the market for a long time, they may wonder if there’s a desperation to sell, and I say, ‘The seller literally prints money; they’re the most dependable seller there is.’”
Real estate is most often forfeited when the associated crime is financial in nature like money laundering or fraud, as was the case with Gong, Ochs said. Though he is being tried in Canadian court, USMS seized his American properties in cooperation with Canada, which together amount to millions of square feet. Separately, a Chicago building owned by Gong is tied up in more local legal troubles.
Among Gong’s properties was the Edward Hotel and Convention Center in the Detroit suburb of Dearborn, Michigan, an 851K SF monster that has been vacant since it was closed in 2018 for safety violations. He also owned a 1.5M SF former Motorola factory in Harvard, Illinois, 65 miles away from Chicago, and controlled a majority of the Pittsfield building in Downtown Chicago, a 38-story skyscraper that was the tallest building in the city when it was completed in 1927. All three were placed under restraining orders when Gong was indicted in 2017, preventing Gong from selling or refinancing them himself.
In one way, Gong’s portfolio is an outlier compared to most government property sales. All three properties are much larger than forfeited properties tend to be, so the buyer pool could be quite different from the norm.
“The Motorola building is kind of a freak of nature,” Ochs said. “Who has 1.5M SF of industrial on 300 acres in the middle of Northern Illinois? The value is so subjective based on who would buy it and what they would do with it that we didn’t post an asking price.”
Those new to the forfeiture-to-sale process require education from the businesses tasked with marketing USMS properties. A large part of Starita's job when he's contracted by Colliers is making sure interested parties are aware of and familiar with the copious paperwork involved.
“Once you understand the process, it’s kind of like bowling with the bumpers up,” Starita said.
As the case against Gong has proceeded, in the last few months USMS has been cleared to begin the process of preparing them for sale. Each of them comes with its own benefits and drawbacks: The Motorola complex is massive, its fire suppression system is broken and it isn’t in a particularly appealing location for a distribution center. The Edward’s fire and plumbing system are close to being fixed, Ochs said, but it still is the second-largest hotel in Michigan at a time when hotels are mostly empty.
The Pittsfield building was taken over as part of a state-level case, so Chicago Homes RE Business Development Officer Courtney Jones was appointed by a judge as the property’s receiver, tasked only with carrying out repairs in the interest of public safety. His experience reveals how different the procedure can be when the feds aren't involved.
The historic tower has suffered from years of neglect, and Jones alleges that City of Chicago Assistant Corporation Counsel Greg Janes has actively worked to sabotage Jones’ efforts, and in doing so misrepresented the City's interests in the case.
“My biggest hassle has been the systemic racism that tends to exist when Black real estate professionals step into traditional spaces where opportunities have been limited,” Jones said. “[Janes] has been fighting me every step of the way, even though he hears what the judge instructs me to do in the courtroom, in a way he wouldn’t with a White receiver.”
Impeding Jones' attempts to rehab the Pittsfield would seemingly benefit Marc Realty, which owns the eight floors in the building that Gong did not. Jones claimed Marc wants to buy the rest of the building at a deep discount, but he still believes he can rehab the Pittsfield and reap the receivership fees and repair reimbursements that come when the building is sold.
Marc Realty didn't respond to requests for comment from Bisnow.
Though state court proceedings differ in many ways from federal cases, the caretaking required to maintain a building’s integrity and value often begins before the legal process ends in both situations. Receivers and asset managers can be appointed if the defendant is not current with property taxes or mortgage payments.
Ultimately, when purchasing a property that has been forfeited, a buyer is faced with a simple but challenging scenario: a tough but fair seller that will move quickly and decisively, whether in closing a deal or rejecting one.
“If the Marshals feel like you’re playing games as a buyer, they’ll give you the money back, kick you out of the escrow and sell it to someone else, even if they would pay less,” Starita said. “So certainty of closing is a big deal.”