Buying multifamily in NYC: 4 questions to ask
Buying multifamily in NYC: 4 questions to ask
Asking these four questions will yield a considerable level of insight into the property of interest and help you to avoid pitfalls when buying in NYC
Investors have reached out to me asking how they can capitalize on buying opportunities in the NYC apartment building market today. As a response to the broad-based changes to the market in the last few years, some legacy investors have chosen to exit the market. Other investors have identified these changes as pathways to getting started in buying. This piece is dedicated to those folks:
Have you recently sold your family’s 3rd generation business?
Have you sold some shares in your startup and are now liquid?
Is your investment firm looking to diversify its alternative investments?
The short-list below will cover basic things that are unique to the NY market and important to future property valuations. This will not cover universal elements of housing in the U.S., or the steps required to buy in NYC. It is not a blueprint and it is not exhaustive. Instead, it highlights some important things not to be overlooked in transactions in NYC, that may not exist elsewhere.
Key questions to ask before buying in NYC
1. Is the property subject to rent stabilization (RS) or rent control?
In NYC, something like 45% of all rental housing stock is subject to rent stabilization (very few properties are rent controlled). It’s very important to know if the desired investment property is subject to regulations because these greatly limit the range of motion owners have on their properties- especially in their abilities to raise rents. Outside of some niche tactics to pump rents up, most buyers of RS buildings should assume their rent growth follows whatever is set by the Rent Guidelines Board (RGB) every year. This year, it is expected to be between 3.25% -5% for 1-year leases and between 5.0%-7.0% for 2-year leases. The vote is expected to take place on June 21st, 2023. This is very different from free market properties, which contain few, if any restrictions on the increase of rents.
2. Is the property subject to Local Law 97?
Local Law 97 sets out allowable carbon emissions for specific property types in NYC (industrial, multifamily, retail etc.) and assigns penalties for every additional emission above the threshold. There are two deadlines of carbon emissions to meet– 2024 carbon levels and 2030 carbon levels, which must be even lower. Only multifamily properties that are greater than 25,000 square feet are subject to this policy. Smaller properties do not produce as much carbon emissions. If your desired investment property is greater than 25K square feet, it’s important to understand the fossil fuel consumption of the property. If the carbon emissions lie above the threshold set out for 2030 (which is likely given the aggressive threshold) this means you will have to retrofit the property and make it more energy efficient in the next few years. Another capital outlay to keep in mind. Failure to accurately report adherence to Local Law 97 will result in violations.
3. What is the property tax class?
NYC multifamily buildings that are categorized as 10 apartments or less in size benefit from preferential tax structures that cap annual assessment & tax increases.
Tax class 1 - properties labeled as 1-3 apartments or stores will not see taxes increase by more than 4% per year on average over a period of 5 years.
Tax class 2a or 2b - properties labeled as 4-6 (2a) or 7-10 (2b) apartment units, will not see taxes increase by more than 6% per year on average over a period of 5 years.
It is important to stress the labeling / categorization of properties here. NYC’s Department of Finance’s records are not always the most up to date. Put differently, you may have properties that have lower tax bases than their peer set, due to improper labeling. That’s a win. You may also find the converse. Stay away.
4. Does the property have debt on it?
In NYC, if the property being purchased has a mortgage on it, that makes it harder for the buyer to secure seller financing. On the bright side, existing mortgages mean that buyers can secure something else: savings on mortgage recording taxes. Usually, buyers will pay a hefty 2.8% tax (for properties 4 apartments or greater) on the total loan amount to the city and state of NY. If there is already a mortgage in place, that can drastically reduce the taxed amount. This is done via CEMA (Consolidation Extension Mortgage Agreement). If the buyer’s bank and seller’s bank are on board, the savings can usually be unlocked. Here is how it works:
Example:
A $12M building is for sale with an existing loan balance of $5,142, 875.
You want to buy the building with 60% debt and 40% cash. That means you need a loan of roughly $7,142,875.
If the building prior to the sale has no mortgage, then the 2.8% tax is levied on the full loan balance of $7,142,875. That’s $200,000 in payment.
If the building has a mortgage in place, the tax will be applied only on the difference between the new loan balance and the existing debt balance. In this case that is $7,142,875 - $5,142, 875 = $2,000,000. The fee comes down to just $56,000, for a savings of approximately $144,000.
The seller of the property will often split the savings with the buyer. In this case that’s a $72,000 savings, or a 50 basis point savings on purchase price.
These are some important areas of diligence to look into when considering buying property in the NYC multifamily market. By no means exhaustive, this check list should give you enough basic knowledge to not fall into obvious pitfalls.