A Bird is Flipped in Williamsburg

Posted by jeff

Sun Aug 23rd, 2009 02:21 PM

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I was intrigued by recent articles in The New York Observer and Crain's New York Business on the oft-delayed "Finger" building in Williamsburg. The articles discuss the star-crossed development, whose planned height at 16 stories was deemed so obscene by community members that is was dubbed "The Finger" building, as if the neighbors were all being flipped the bird by original developer, Mendel Brach of North Seven Associates. The articles recount how new sponsor GFI Development Co. has stepped in to take over the project and renamed the project The Albero (Italian for tree).

What interested me were the apparent economics of the deal and what it says about the Williamsburg market and bank losses on projects in the area. Note that according to a recent issue of Real Estate NEW YORK magazine, July Department of Buildings data showed 18 stalled construction projects in Williamsburg. According to an earlier Crain's article, sales of condos in Williamsburg fell at a 70% annual rate in Q1 2009. So let's face it Williamsburg is a disaster for new developments from a supply/demand standpoint. Imagine my surprise when I read that the new developer of the "Albero", recently received a $13.2 million construction loan from CIBC. Now just hearing about someone getting a construction loan for a condominium project (which I assumed this still was) is something to take note of, but in Williamsburg....fuggedabboutit!

So I did a little recon work on ACRIS. Here is the story as best I can put together from the articles and evidentiary documents I could find:

Mendel Brach's North Seven Associates borrowed $19.2 million from HSBC for this project way back in 2005. Looking at the tax map information on the lots in question, my guess is that the loan, which was reportedly for a 16-story building would have resulted in approximately 105,000 sq feet of sellable space, or roughly $180 per square foot of debt. Assuming a 70% loan to cost construction financing, which was likely available at that time, it would have put the full project cost at about $27 million, or $257 per square foot (seems low to me even by 2005 standards, but maybe the land was bought from the Indians and the project was undoubtedly a non-union job). If I am anywhere close on the numbers (I am working off incomplete information and making some assumptions that could be a little off), this is a project that should have worked out just fine, assuming sell outs of Williamsburg condos in the $550 to $650+ per square foot range at the peak. My guess is that the going rate is now in the mid $400s to mid $500s. According to Jonathan Miller's data,Brooklyn condos overall sold for an average $471 per square foot in Q2 2009.

Now the "Finger" was delayed, and as a result likely had significant cost overruns etc. The Observer article claims that the building was foreclosed on and acquired by GFI. That's not what it looks like to me. I'm no lawyer (insert your favorite lawyer joke here), but it looks like this was a "deed in lieu" deal. It appears that GFI's entity CBSH Debt LLC, assumed a $19.2 million mortgage and an additional $1.9 million mortgage from HSBC in December of 2008 (hard to say if the larger mortgage subsumed the smaller). In June of 2009, GFI's Gabriel Realty acquired the deed for a reported $10.00 of consideration. Interestingly, the real property transfer report that was filed showed value of $7.5 million as the sale price. My guess is that this is the equity that North Seven had invested in the deal....which added to the HSBC loan, comes to just about my full project cost guesstimate of $27 million. I am guessing yet again, but I believe that the new $13.2 million CIBC "construction" loan is to be used to both pay off HSBC's mortgage at a discount and finish the building. The project has reportedly been scaled back to 14 stories from the original 16 planned and is reportedly currently an unclad 10 story shell. If GFI's all in cost for this project is not much above the $13.2 million construction loan number, this is probably a pretty good deal.

The finished product will likely be a 14-story building with 90,000 sellable square feet and a cost of $150 per square foot. It would certainly work as a condo project even with sell outs in the low $400s per square foot - with the only wrinkle being sales velocity. More likely, if it were developed as a rental, using a reasonable $30 per sq foot in average rent (a $2.7 million rent roll) a 45% expense ratio (implying a $1.5 million NOI) and a very reasonable 7.5% cap rate, you would have a building worth roughly $20 million. If all of my hypothecations are correct, this is actually a pretty good loan for CIBC to be making and my hat is off to them (let me know if you guys have an appetite for more of these kinds of deals). As for HSBC's $19.2 million mortgage, it's hard to say how much of the money was spent and what HSBC is getting from GFI for its troubles. I think it's safe to assume however, that it's no more than $13.2 million. I'm sure the $6 million+ loss will be easily mopped up by the UK governments' version of TARP. God Bless the Queen!

I certainly hope that The Albero deal works out for GFI (feel free to give us the real story and economics behind the deal if you're reading this). It's good to see some progress being made in New York City's commercial real estate market in the form of projects being completed and properties being transferred into the hands of those with a reasonable enough basis cost to make a decent risk-adjusted return, while supplying consumers with a quality product.