Investors Are Finding NYC Deals - Why Not You?
Investors Are Finding NYC Deals - Why Not You?
A look at how an investor can make money on a 100% RS property when the pricing meets the market
Following the success of last week’s email, below is another deal story that illustrates the change in market pricing in NY real estate, which can be a catalyst for dealmaking activity. Last week's deal contained mostly fair market units. Not every property will benefit from having fair market units, and not all investors want to test their luck with the potential liability of tenant overcharges for spotty DHCR records. In light of those considerations, this week's deal is a rent stabilized property that doesn't require renovations and showcases how an investor can benefit from buying today.
475-477 Wilson Avenue Sale
16 Multifamily Units
Bushwick, Brooklyn
The timeline
2016: Property purchased for $4,300,000
2016: Financed with loan of $3,050,000
2021: Listed for sale at $4,300,000
2023: Listed for sale at $3,700,000
2024: Listed for sale at $2,800,000
Today: Under contract
The property is composed of two contiguous 8 family properties and it is located in a non-prime enclave of a popular neighborhood in Brooklyn. Rents in Bushwick, Brooklyn have increased +100% in the last ten to twelve years. The property is completely rent stabilized and that means investors today cannot capture the upside from raising rents to market.
The property was gut renovated in 1995 using a 34-year J-51 tax abatement, which kept the taxes at or near $1,000 per building per year. In 2016, the sponsor took out a $3,050,000 loan against the property's value. Today that would have put the owner underwater on his mortgage (assuming a sale price of 95% of asking – closing costs of 7% = $2,500,000.) The savvy sponsor consolidated the mortgage note with the mortgages of other buildings owned in 2022, which reduced the pressure to sell the asset. Still, every year that the building did not sell, the J-51 tax abatement came closer to expiring, which meant the pricing on the building would continue to weaken over time because the day that property taxes would shoot up precipitously after the tax abatement wore off got closer and closer. The tax abatement cliff also meant getting financed by a lender would continue to grow more difficult. The difficulty in getting high LTV financing highlights the advantage that well-heeled investors have today. This transaction has not closed yet, so we'll see how it progresses. Even so, the opportunity to obtain two renovated properties with close to no violations for an +8% cap rate isn't the worst in the world. After capital expenditures, transaction costs, and soft costs of managing the property, this could stabilize at close to a 7.9% yield on cost.
The wildcard is what happens in 2030 when the tax abatement expires. My hunch is that the buyer will try to extend the J-51 since there are talks of its renewal. Or, the play will be to take units out of stabilization in 2030, on the premise that that will once again be an option for investors (very speculative). Absent any ‘play,’ to take advantage of or remedy the expiring tax abatement, the downside case is a 6.25% yield on cost, which is not the worst or the best.
Summary
The asset pricing of the previous NYC cycle is slowly moving away, making room for new purchasers to enter the market at more desirable pricing. At the national level, the Fed's policy of high interest rates has flipped the economics of real estate leverage. Having the liquidity to do deals without as much debt today will enable investors to grab hold of opportunities unavailable to investors who typically lever to the hilt. Across the United States, sponsors with levered assets struggle to refinance because asset incomes won't adequately cover new loan debt service. I spend time in my newsletters contending with this reality, sitting with it, and trying to find the silver lining. It boils down to this: when the market recovers, do you want to own property in NYC and benefit from that recovery, or not?
It's time to jump in and start buying. Or doubling down if you already own property.
Call me crazy, sure, but call me –> 212 658 1471
I am bullish on NYC multifamily
Best Regards,
Romain Sinclair
212 658 1471