Impact of rent regulation changes on Building Sales

David Goldsmith

All Powerful Moderator
Staff member
About 8 months ago, right after the Housing Security and Tenant Protection Act of 2019 had passed, I posted elsewhere:

"I've been fielding calls from clients since Friday about the impact of the Rent Regulation changes passed in Albany on Friday, and here is my takeaway of the immediate affects: A shocking amount of buyers currently in contract to buy multi-family buildings are planning on walking away from their deposits to get out of their deals. One I spoke to who is in contract to buy 5 deals is planning on walking away from approx $1.5 million in contract deposits (he says he'll sue to get the deposits back even though he has absolutely no just cause just to see if he can recoup any funds by simply being a nuisance). Pretty much everyone agrees that there is no longer any upside, and everyone was buying these based on upside. Now, they are all going a little overboard and saying they are now "worthless," but that's obviously a bit of hyperbole. However, things most probably will go back to the way they were before the 1993 changes. That means that rather than buying for upside, there has to be cash-on-cash returns. So, a couple of years ago they were trading at 3% Cap Rate. A couple of months ago they were trading at 4.5 - 5/% cap rate. But back in 1992 they were trading at %8 to 12% Cap Rate. There is a building I have been marketing in Woodside that would have traded for close to $3 million a few years ago. Since February, the offers we have gotten were between $1.9 million and $2.2 million. But now if things go back to the old ways, the cap rates would indicate a value of under $1.5 million. The second thing which has occurred is the impact on renovations/contractors. Since the renovation increases have been capped at $15,000 no matter what the landlord actually spends, and lowered from 6% of the amount spent to 2% of the amount spent, everyone is cancelling projects. I spoke with one contractor who had 5 jobs scheduled to start this week and had all of them cancelled. He has about 40 people working for him and now none of them have work starting this week. https://www.cityandstateny.com/arti...rs-strike-sweeping-deal-rent-regulations.html "

But more recently we've seen prices actually come down, the market stabilize:

https://www.wsj.com/articles/buyers...l-slams-new-york-apartment-values-11580817601

Some disinformation in this article:
"“This is bad news for a city and state already facing down big budget gaps,” Mr. Whelan said Monday, arguing that a “fire sale” of regulated buildings would mean lower valuations and thus less money in the form of property taxes collected by the city."
Valuations going down doesn't impact the amount of Real Estate Taxes New York City collects. The City decides how much money it wants to collect from Real Estate Taxes and Assessed Valuations merely decides how the bills are apportioned.

However the real takeaway from the article is now that both buyers and sellers have adjusted to a new reality in terms of prices, the speculators which defined the market are being replaced with the long term owners who were always the bread and butter of the deals on these types of properties. Is it possible that in the long run returning to a less disruptive and speculative market could be healthier for our business?
 

David Goldsmith

All Powerful Moderator
Staff member

Multifamily market still struggles with political risk
Despite lower prices for buildings, investors are still wary of Albany

Multifamily investment sales have yet to recover from the impact of last year’s momentous rent-law reform, continuing the slump through the first quarter of 2020.

First quarter investment sales of multifamily properties over $2.5 million have reached about $741 million so far in 2020, compared to $1 billion in the first quarter of 2019 — which already reflected a slowdown in multifamily sales in anticipation of the Housing Stability and Tenant Protection Act of 2019 that upended the business model of many landlords, according to Real Capital Analytics. The first quarter of 2018 saw $1.5 billion in such sales.

“Even though the law went into effect in June, last year, in the aggregate, the sales volume dropped off by almost a third,” said James Nelson, principal and head of tri-state investment sales at Avison Young. “Once we knew the rules, we had an immediate impact on pricing, especially on the regulated properties that you can’t decontrol.”

The new rent regulation ran speculators out of the market and drove down prices of regulated multifamily buildings for bargain hunters with longer-term strategies, but overall sales haven’t picked up because of continued political uncertainty during the current legislative session, according to Nelson.

“The fair market had concern about good cause eviction,” said Nelson, referring to the bill championed by state Sen. Julia Salazar that bans the eviction of tenants in any building who refuse to pay “unreasonable” rent hikes — which landlord groups say is tantamount to universal rent control.

“We have not seen an uptick in the investment sales market because, notwithstanding the slowdown in the last six months of last year, the market is still trying to deal with what’s going to happen regarding rent stabilization, control and the political environment, whether friendly or not,” said Arthur Mirante, principal and tri-state president at Avison Young.

The continuing political uncertainty is driving investors to look to places that don’t have the same rent regulation as New York City – cities like Atlanta, Dallas, Nashville, and the state of Florida, said Mirante.
 

David Goldsmith

All Powerful Moderator
Staff member
From unthinkable to reality: Cheap NYC apartments sit vacant
Landlords explain why even affordable units are empty

Sharon Redhead, a second-generation landlord in East Flatbush, is having second thoughts about continuing the family business.
She blames not Covid, but the state’s rent law.
Redhead’s father immigrated to New York from the Caribbean in the 1970s and bought buildings out of tax foreclosure. Her family eventually accumulated 100 apartments — many of them rent-stabilized — and landlord-friendly regulations helped keep them profitable.

When units were vacated, Redhead made upgrades, such as installing modern appliances, to attract tenants willing to pay more than the $850 per month that her unrenovated rent-stabilized apartments fetched.
It was good business: Before the rent law was changed last year, she could raise rents to cover renovation costs and improve her family’s assets at the same time. Market-rate apartments in her part of Brooklyn could fetch $1,500, Redhead said.

Now she has several rent-stabilized apartments sitting vacant, with no plans to renovate them, and has turned away apartment-hunters. Last year’s legislative changes have her rethinking the future.
“We’re having a family meeting this week to discuss getting out of the landlord business,” Redhead said. “But if I sold now, the only people that would buy are private equity groups.” (Those firms have yet to start gobbling up multifamily buildings at heavy discounts, although some have called that inevitable.)

For now, few are selling, though their properties may be troubled.
The vacancy rate in New York has soared since the onset of the pandemic. Landlord groups don’t blame Covid as much as they do the new law’s limits on how much landlords can be reimbursed for renovations. Some landlords also say they are reluctant to fill vacant apartments because they think state legislators might change the law in their favor.

“You live in hope that owners and managers will help politicians come to the realization that this doesn’t work for anybody,” said Joyce Holland, who currently has two vacancies out of the eight units she owns in Hamilton Heights. “So what owners are doing is keeping the apartments vacant, and not doing renovations.”

Smaller landlords are not the only ones who have considered putting the brakes on renovating and renting out apartments.
A month after last year’s changes to the law, Blackstone Group announced that it was halting renovations at Stuyvesant Town.

Its practice of keeping apartments vacant — which some call warehousing — soon came to light, although the firm later said it was renovating and leasing apartments as usual. According to numerous other multifamily property owners, however, warehousing is now widespread.

On top of the rent law’s reduction in financial incentive, demand for New York City apartments fell when some 420,000 people left the city during peak Covid. One analysis found the Manhattan rental vacancy rate hit an all-time high of 4.3 percent in July.

But the Community Housing Improvement Project reported an even greater vacancy spike for apartments with rents of less than $2,000. The group, which represents landlords of mostly rent-stabilized properties, found in a survey that the vacancy rate has risen to 7.1 percent in August from 3.1 percent in February. The data was aggregated from 70 survey responses, about half from owners of more than 500 units.

It is not clear how much is attributable to reduced demand or warehousing, and whether rent-stabilized units have lost what the New York Times in 2017 called their “mythical” status. “It is the holy grail of New York City living,” began an article about clever ways to find one.

Landlords wishing to shed properties may present an opportunity for city programs, affordable housing developers and tenant groups to step in and “serve as a safety net,” said Moses Gates, the Regional Planning Association’s vice president for housing and neighborhood planning.

“If a landlord wants out of a building, it’s really only a matter of negotiating over price,” he said.
Although more apartments may be empty now, landlords do not intend to let them crumble.
“No one is going to let their asset deteriorate,” said Redhead. “For the most part what they need is updating. If you need structural repairs, that’s a whole different ball game.”
 

David Goldsmith

All Powerful Moderator
Staff member
In 2020, The Pandemic Kicked NYC Landlords When They Were Already Down As the curtains fall on a harsh year for New York City’s real estate market, its investors are bracing for the pain to extend well into next year even as some glimmers of hope emerge.

The city is on pace to see $8.4B in building sales volume in 2020, a nearly 70% drop off the 10-year average, per Avison Young’s latest data. That figure represents a 50% decrease from last year.
Pricing and values are another matter — brokers point to reductions of as much as 30% in some cases, as well as their growing concerns that investors are turning their backs on the city in favor of more business-friendly parts of the country.
“The landlords already were taking a bloodbath on their valuations,” Meridian Capital Group Managing Director Shallini Mehra said, pointing to rent reform legislation that was passed by the state government last year.
She said most buyers who closed on multifamily assets during the coronavirus pandemic got an extra 2% to 10% off the price. Now, the general feeling among investors is that prices have further to fall.
“We have a lot of landlords who bought in the last five to seven years, and there is a certain amount of devaluation that has gone on," Mehra said. "Maybe they want to exit the New York City market and they just want to be in other markets because of the rent laws or they’ve just decided to cut their losses."
Mehra closed on a deal to sell a six-story apartment building at 5 West 91st St. for $20M this month. The building originally came to market asking $34M before the new rent laws were passed last summer and the health crisis affected the city.
“There are a lot of [buyers] sitting on a lot of cash looking to take advantage of lower pricing,” she said.

Though brokers said much of the year has been spent trying to salvage deals with renegotiations and trying to soothe skittish buyers and sellers, 2020 hasn't been completely devoid of sales.
Amazon paid $978M to WeWork for the former Lord & Taylor Building on Fifth Avenue, and 601W Cos. dropped $952.5M on SL Green’s 410 10th Ave. Munich RE closed on its $900M purchase of 330 Madison Ave. from the Abu Dhabi Investment Authority.
Still, Avison Young Head of Tri-State Investment Sales James Nelson said that, on the whole, some of the investment sales pricing in the city hasn’t been seen in a decade.
“Ten years ago, the 10-year treasury was at 2.6%. Today it's under 1%,” he said. "If you can lock in good 10-year financing, the cash on cash returns you can get today, I haven’t seen them in my 22-year career."
“If you take the second quarter and the third quarter and you compare it to 2019, the price of land dropped 30%, multifamily was [down] 29%, office and retail [down] 24%," Nelson added. "The only thing we have to compare this to is 2009, when sales volume dropped 90% from 2007.”
Newmark Capital Markets Debt and Structured Finance co-Head Dustin Stolly said borrowers who have a "fighting chance" are being given more time in the form of forbearance.
“The distress will be situational and asset-specific," he said. "It will take a while for it to pop its head up. There's plenty of capital in the system."

Though President-elect Joe Biden's victory and the vaccine rollout have been shots in the arm for New York City and the panic phase of the crisis has passed, brokers agreed there is still a ways to go before activity and prices return to their pre-pandemic levels.
“It was a year in which the pandemic converted a 53-monthlong correction in investment sales from a volume correction to a value correction,” said JLL New York Investment Sales Chairman Bob Knakal, adding that October 2015 is when the bull market officially ended.
Buyers offered less and sellers have balked at their offers this year, so Knakal expects this sales volume to hit a cyclical low in 2020.
“I thought the savings and loan crisis was the worst thing I ever saw, and that was only 47 months," he said. "This is 62 months now and not over yet."
Knakal said he sees rays of sunshine in the luxury residential market's recent uptick, which could bode well for the coming months. Overall, he says Manhattan values have taken a bigger hit than the outer boroughs, likely because it has seen the largest drop in population.
B6 Real Estate Advisors Senior Managing Director D.J. Johnson, who handles the firm’s Brooklyn business, says there has been an increase in transactions this month as the market has begun to find its footing. There were around 25 transactions over $1.5M per month in the third quarter, he said, but that figure will be closer to 50 in December.

He recently sold 617 Johnson Ave., a 15K SF warehouse on the border of East Williamsburg and Bushwick, for roughly $500 per SF, which he said shows the resiliency of that particular asset type.
“What we’re starting to see is confidence in the market,” he said, adding that price drops on properties will vary significantly. In some cases, there is no discount, and in others, it could be as much as 30%.
He noted the investment sales market has been hit by increasing taxes, rent reform and now the health crisis. As businesses start to stabilize, he said he expects the city to begin to recover.
“The biggest hurdle out of the pandemic was price discovery, investors knowing what they are underwriting against,” he said. "It's not that they are expending higher-yield debt so low; it’s that they just don’t know what cash flow is like. It’s been a big learning experience these last six months trying to figure out how to price."
 

David Goldsmith

All Powerful Moderator
Staff member
In 2020, The Pandemic Kicked NYC Landlords When They Were Already Down As the curtains fall on a harsh year for New York City’s real estate market, its investors are bracing for the pain to extend well into next year even as some glimmers of hope emerge.
The city is on pace to see $8.4B in building sales volume in 2020, a nearly 70% drop off the 10-year average, per Avison Young’s latest data. That figure represents a 50% decrease from last year.
Pricing and values are another matter — brokers point to reductions of as much as 30% in some cases, as well as their growing concerns that investors are turning their backs on the city in favor of more business-friendly parts of the country.
“The landlords already were taking a bloodbath on their valuations,” Meridian Capital Group Managing Director Shallini Mehra said, pointing to rent reform legislation that was passed by the state government last year.
She said most buyers who closed on multifamily assets during the coronavirus pandemic got an extra 2% to 10% off the price. Now, the general feeling among investors is that prices have further to fall.
“We have a lot of landlords who bought in the last five to seven years, and there is a certain amount of devaluation that has gone on," Mehra said. "Maybe they want to exit the New York City market and they just want to be in other markets because of the rent laws or they’ve just decided to cut their losses."
Mehra closed on a deal to sell a six-story apartment building at 5 West 91st St. for $20M this month. The building originally came to market asking $34M before the new rent laws were passed last summer and the health crisis affected the city.
“There are a lot of [buyers] sitting on a lot of cash looking to take advantage of lower pricing,” she said.

Though brokers said much of the year has been spent trying to salvage deals with renegotiations and trying to soothe skittish buyers and sellers, 2020 hasn't been completely devoid of sales.
Amazon paid $978M to WeWork for the former Lord & Taylor Building on Fifth Avenue, and 601W Cos. dropped $952.5M on SL Green’s 410 10th Ave. Munich RE closed on its $900M purchase of 330 Madison Ave. from the Abu Dhabi Investment Authority.
Still, Avison Young Head of Tri-State Investment Sales James Nelson said that, on the whole, some of the investment sales pricing in the city hasn’t been seen in a decade.
“Ten years ago, the 10-year treasury was at 2.6%. Today it's under 1%,” he said. "If you can lock in good 10-year financing, the cash on cash returns you can get today, I haven’t seen them in my 22-year career."
“If you take the second quarter and the third quarter and you compare it to 2019, the price of land dropped 30%, multifamily was [down] 29%, office and retail [down] 24%," Nelson added. "The only thing we have to compare this to is 2009, when sales volume dropped 90% from 2007.”
Newmark Capital Markets Debt and Structured Finance co-Head Dustin Stolly said borrowers who have a "fighting chance" are being given more time in the form of forbearance.
“The distress will be situational and asset-specific," he said. "It will take a while for it to pop its head up. There's plenty of capital in the system."
Though President-elect Joe Biden's victory and the vaccine rollout have been shots in the arm for New York City and the panic phase of the crisis has passed, brokers agreed there is still a ways to go before activity and prices return to their pre-pandemic levels.
“It was a year in which the pandemic converted a 53-monthlong correction in investment sales from a volume correction to a value correction,” said JLL New York Investment Sales Chairman Bob Knakal, adding that October 2015 is when the bull market officially ended.
Buyers offered less and sellers have balked at their offers this year, so Knakal expects this sales volume to hit a cyclical low in 2020.
“I thought the savings and loan crisis was the worst thing I ever saw, and that was only 47 months," he said. "This is 62 months now and not over yet."
Knakal said he sees rays of sunshine in the luxury residential market's recent uptick, which could bode well for the coming months. Overall, he says Manhattan values have taken a bigger hit than the outer boroughs, likely because it has seen the largest drop in population.
B6 Real Estate Advisors Senior Managing Director D.J. Johnson, who handles the firm’s Brooklyn business, says there has been an increase in transactions this month as the market has begun to find its footing. There were around 25 transactions over $1.5M per month in the third quarter, he said, but that figure will be closer to 50 in December.

He recently sold 617 Johnson Ave., a 15K SF warehouse on the border of East Williamsburg and Bushwick, for roughly $500 per SF, which he said shows the resiliency of that particular asset type.
“What we’re starting to see is confidence in the market,” he said, adding that price drops on properties will vary significantly. In some cases, there is no discount, and in others, it could be as much as 30%.
He noted the investment sales market has been hit by increasing taxes, rent reform and now the health crisis. As businesses start to stabilize, he said he expects the city to begin to recover.
“The biggest hurdle out of the pandemic was price discovery, investors knowing what they are underwriting against,” he said. "It's not that they are expending higher-yield debt so low; it’s that they just don’t know what cash flow is like. It’s been a big learning experience these last six months trying to figure out how to price."
 

John Walkup

Talking Manhattan on UrbanDigs.com
“The biggest hurdle out of the pandemic was price discovery, investors knowing what they are underwriting against,” he said. "It's not that they are expending higher-yield debt so low; it’s that they just don’t know what cash flow is like. It’s been a big learning experience these last six months trying to figure out how to price."

--> But now we know what the low-water mark is for cash flow now. I have to think that creates a world of opportunity for smart money.
 

David Goldsmith

All Powerful Moderator
Staff member
Four bankrupt Brooklyn rentals look to escape rent regulation
Neglected buildings could return to market-rate after substantial repairs

Four bankrupt rent-stabilized apartment buildings in Clinton Hill could have a path to deregulation, thanks to an obscure exemption intended to repair run-down properties.
Rosenberg & Estis, the attorneys for the bankrupt properties, filed an adversary proceeding on Jan. 7, arguing that because the previous owner rehabilitated the buildings in 2002, 46 of their total 128 units should be deregulated.

A little-used “substantial rehabilitation” provision allows landlords to deregulate units — even, at least theoretically, under the new rent law — if a building is found to be dilapidated, and 75 percent of the building-wide systems are completely replaced.

In October 2019, the buildings at 27-29 Putnam Avenue, 423-427 Grand Avenue, 429-435 Grand Avenue and 88-100 Downing Street, known as the Grand Putnam Portfolio, filed for Chapter 11 bankruptcy in New York’s bankruptcy court in the Southern District.
According to DelShah Capital vice president Justin Amirian, who submitted a March 2020 affidavit in the case, the cashflow from the properties couldn’t cover the monthly expenses. DelShah, a private equity firm led by Michael Shah, acquired the $29.3 million debt for the buildings in 2018.

Amirian said the 2019 rent law is partly to blame, and made raising rents nearly impossible. But some residents also refused to pay rent. The owner, meanwhile, still had to pay credits to tenants from a 2019 settlement with the New York Attorney General for inflating rents, serving improper evictions and pressuring tenants to take buyouts.
Attorneys for the plaintiffs declined to comment.

The market for rent-regulated apartments was already bad, and the coronavirus had made lenders even more hesitant, according to Amirian. Finding new financing while Chapter 11 proceedings continued would be nearly impossible and would surely come with terms “so onerous” they would amount to a “loan to own” arrangement, he said. The next week, Judge Robert Grossman granted debtor-in-possession financing.

Now, the attorneys are hoping that the rehabilitation provision will help right the properties’ finances for good.
At the bankrupt Clinton Hill buildings, the alleged rehabilitation was completed in 2002, aided by a state tax benefit as well as federal low-interest loans for deteriorated multifamily buildings, overseen by Housing Preservation and Development, to renovate 46 of the units in exchange for setting them aside for lower-income tenants.

When that program expired, those units should have left rent-regulation, attorneys for the buildings argued, and they should be able to raise the rents when the current tenants leave.
What the provision entails — replacing a building’s plumbing, heating, gas supply, electrical wiring, intercoms, windows, roof, elevators and painting or exterior façade — often amounts to a significant expense. That’s usually a strong deterrent for landlords, said attorney Michelle Maratto Itkowitz, whose firm Itkowitz PLLC specializes in residential landlord and tenant litigation. In recent years, hundreds of hopeful landlords have called her to ask if their buildings could be freed from rent regulation, and she has turned nearly all of them away.

Meeting the exemption’s standard is very high, Itkowitz said. Buildings must typically be empty before the rehabilitation, and the project must be meticulously documented. But it’s possible that because the new rent law greatly reduced the financial incentive to improve buildings, landlords will hunt for novel ways to deregulate apartments, especially if their financing was based on future revenue increases.

The success of that aim, in the Brooklyn properties’ case, now depends on attorneys for New York City and New York State, who have until Feb. 11 to file motions to abstain or intervene in the case.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
In 2020, The Pandemic Kicked NYC Landlords When They Were Already Down As the curtains fall on a harsh year for New York City’s real estate market, its investors are bracing for the pain to extend well into next year even as some glimmers of hope emerge.

The city is on pace to see $8.4B in building sales volume in 2020, a nearly 70% drop off the 10-year average, per Avison Young’s latest data. That figure represents a 50% decrease from last year.
Pricing and values are another matter — brokers point to reductions of as much as 30% in some cases, as well as their growing concerns that investors are turning their backs on the city in favor of more business-friendly parts of the country.
“The landlords already were taking a bloodbath on their valuations,” Meridian Capital Group Managing Director Shallini Mehra said, pointing to rent reform legislation that was passed by the state government last year.
She said most buyers who closed on multifamily assets during the coronavirus pandemic got an extra 2% to 10% off the price. Now, the general feeling among investors is that prices have further to fall.
“We have a lot of landlords who bought in the last five to seven years, and there is a certain amount of devaluation that has gone on," Mehra said. "Maybe they want to exit the New York City market and they just want to be in other markets because of the rent laws or they’ve just decided to cut their losses."
Mehra closed on a deal to sell a six-story apartment building at 5 West 91st St. for $20M this month. The building originally came to market asking $34M before the new rent laws were passed last summer and the health crisis affected the city.
“There are a lot of [buyers] sitting on a lot of cash looking to take advantage of lower pricing,” she said.

Though brokers said much of the year has been spent trying to salvage deals with renegotiations and trying to soothe skittish buyers and sellers, 2020 hasn't been completely devoid of sales.
Amazon paid $978M to WeWork for the former Lord & Taylor Building on Fifth Avenue, and 601W Cos. dropped $952.5M on SL Green’s 410 10th Ave. Munich RE closed on its $900M purchase of 330 Madison Ave. from the Abu Dhabi Investment Authority.
Still, Avison Young Head of Tri-State Investment Sales James Nelson said that, on the whole, some of the investment sales pricing in the city hasn’t been seen in a decade.
“Ten years ago, the 10-year treasury was at 2.6%. Today it's under 1%,” he said. "If you can lock in good 10-year financing, the cash on cash returns you can get today, I haven’t seen them in my 22-year career."
“If you take the second quarter and the third quarter and you compare it to 2019, the price of land dropped 30%, multifamily was [down] 29%, office and retail [down] 24%," Nelson added. "The only thing we have to compare this to is 2009, when sales volume dropped 90% from 2007.”
Newmark Capital Markets Debt and Structured Finance co-Head Dustin Stolly said borrowers who have a "fighting chance" are being given more time in the form of forbearance.
“The distress will be situational and asset-specific," he said. "It will take a while for it to pop its head up. There's plenty of capital in the system."

Though President-elect Joe Biden's victory and the vaccine rollout have been shots in the arm for New York City and the panic phase of the crisis has passed, brokers agreed there is still a ways to go before activity and prices return to their pre-pandemic levels.
“It was a year in which the pandemic converted a 53-monthlong correction in investment sales from a volume correction to a value correction,” said JLL New York Investment Sales Chairman Bob Knakal, adding that October 2015 is when the bull market officially ended.
Buyers offered less and sellers have balked at their offers this year, so Knakal expects this sales volume to hit a cyclical low in 2020.
“I thought the savings and loan crisis was the worst thing I ever saw, and that was only 47 months," he said. "This is 62 months now and not over yet."
Knakal said he sees rays of sunshine in the luxury residential market's recent uptick, which could bode well for the coming months. Overall, he says Manhattan values have taken a bigger hit than the outer boroughs, likely because it has seen the largest drop in population.
B6 Real Estate Advisors Senior Managing Director D.J. Johnson, who handles the firm’s Brooklyn business, says there has been an increase in transactions this month as the market has begun to find its footing. There were around 25 transactions over $1.5M per month in the third quarter, he said, but that figure will be closer to 50 in December.

He recently sold 617 Johnson Ave., a 15K SF warehouse on the border of East Williamsburg and Bushwick, for roughly $500 per SF, which he said shows the resiliency of that particular asset type.
“What we’re starting to see is confidence in the market,” he said, adding that price drops on properties will vary significantly. In some cases, there is no discount, and in others, it could be as much as 30%.
He noted the investment sales market has been hit by increasing taxes, rent reform and now the health crisis. As businesses start to stabilize, he said he expects the city to begin to recover.
“The biggest hurdle out of the pandemic was price discovery, investors knowing what they are underwriting against,” he said. "It's not that they are expending higher-yield debt so low; it’s that they just don’t know what cash flow is like. It’s been a big learning experience these last six months trying to figure out how to price."
Interesting to hear Knakal describe it as 62 month cycle. Price discovery will be very challenging this cycle with sales vol down so much. Good and bad I suppose. As our markets open back up to buyers that were sidelined, luxury will find it's legs
 

John Walkup

Talking Manhattan on UrbanDigs.com
“The biggest hurdle out of the pandemic was price discovery, investors knowing what they are underwriting against,” he said. "It's not that they are expending higher-yield debt so low; it’s that they just don’t know what cash flow is like. It’s been a big learning experience these last six months trying to figure out how to price."

--> this is exactly the problem that uncertainty brings. It's not that you don't have a sense of value, it's that you can't trust it anymore.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
this is painful and healthy. We need to purge the excess and need more of this to clear the inventory tied to those with most leverage. This is the part where savvy buyers scoop up the best of the worst debt/products out there that pay out nicely in the long run
 

David Goldsmith

All Powerful Moderator
Staff member

Rent law, Covid leave family landlord with one choice: sell​


When the 2019 rent law passed, the real estate industry warned of a housing apocalypse — small owners, unable to raise rents enough to maintain their properties, forced into distressed sales with faceless investors.

 

David Goldsmith

All Powerful Moderator
Staff member
The Gaia CEO picked up three neighboring multifamily buildings at 50-58 East 3rd Street in the East Village for $49.5 million. That’s 14 percent less than when the portfolio last changed hands in 2016 for $58 million.
 

David Goldsmith

All Powerful Moderator
Staff member


Who is still buying NYC’s rent-stabilized buildings?​

Two years after the state's rent law passed, a crop of young, deep-pocketed investors bet it won’t be around forever​

After New York lawmakers passed the Housing Stability and Tenant Protection Act in 2019, greatly strengthening rent regulation in the state, investors were certain: Rent-stabilized buildings were no longer assets, but liabilities.
All manner of violent metaphors surfaced to explain just how bad the changes were for landlords.

The new law was “a horror show” that “gutted and neutered” routes to deregulation, insiders said at the time. Repairs would backlog, facades crumble. Hordes of mom-and-pop landlords would be forced to sell. On quarterly earnings calls, institutional players warned of a chilling effect on investment.

Over two years later, the market aftershocks are still unfolding, but two consequences have crystallized: Some struggling landlords were forced to sell, but where they’ve cut their losses, others see long-term opportunity.
Emerging from the rubble is a new crop of buyers — investors with deep pockets and deeper patience, willing to wait out a bet that the new rent law won’t hold forever.

Depreciating assets

From a data perspective, it’s hard to parse out precisely the extent to which HSTPA ruptured the real estate market, as another trauma, Covid, arrived directly on its heels.
While the rent law slowed landlords’ revenue streams, pandemic-related eviction bans brought some to a halt, essentially permitting nonpayment without consequence.

To account for the variable, NYU’s Furman Center dialed in on stabilized building statistics in the first quarter of 2020 to gauge the law’s short-term impacts with the potential to become permanent shifts.
Researchers found that less than a year after the bill’s passage, before the pandemic locked down New York City, stabilized buildings were already declining in value and owners were increasingly offloading these depreciating assets.

While the sale prices per square foot of all residential buildings dropped in the immediate wake of the rent law, the value of properties in which half of the units were stabilized fell disproportionately, the Furman Center found, and did not experience the rebound in pricing seen by less-stabilized residential buildings in early 2020.

“In this short-term period, we find that HSTPA had a statistically significant differential impact on the change in sales prices,” the report’s authors wrote. Sales volume, meanwhile, increased.
Rosedale Management, a third-generation owner and operator, has sold 10 of its 13 buildings since the start of last year. Covid-decimated rent rolls accelerated the firm’s retreat, but four of the buildings were listed immediately after the rent law passed in 2019, when new limits on rent hikes left the landlord with insufficient revenue to fund needed repairs. One building in Soundview sold for $700,000 less than what Rosedale had paid for it nearly a decade earlier.

“That was solely due to the changes in the rent laws,” a Rosedale spokesperson told The Real Deal in July. “There was absolutely no way to break even.”

Running toward the fire

Digging into the rent law’s sweeping provisions, it’s easy to see why owners are tempted to sell. Avenues to deregulate have been severed, rent hikes for improvements squashed and raising rents was almost entirely left to the Rent Guidelines Board, which has voted to freeze them three times in the last seven years, and approved only modest increases in the other years.

“If you really look at rent-stabilized, the units are worth almost zero,” said Danny Fishman, CEO of multifamily investment firm Gaia Real Estate. “Why would you have an apartment where your taxes and maintenance are higher than your rent roll?”
“The only logical reason to invest would be if you think that sometime in the future the law will reverse,” he added.

While investors who are raising outside capital or looking to get in and out within five years are running away from rent-stabilized buildings, Marcus & Millichap broker Joe Koicim has observed a subset of investors who believe the rent law won’t be around forever.
The buyers in question are mostly well-heeled families who own property in the Bronx, Queens or Brooklyn, Koicim said, and are eyeing fully or partially regulated buildings in Manhattan as a long play — a wager that lawmakers will eventually chip away at HSTPA.

They see the lower prices, low yields and low interest rates of today as an opportunity to buy on the dip. And they’re operating on a decades-long timeline.
“They’re buying for generations, for their grandkids,” Koicim said.

Faith in SCOTUS

The notion that rent regulations could backslide is generally based on speculation that time begets change.

“Everybody expects at some point the political pendulum will swing the other way, because it always does,” said Michelle Maratto Itkowitz, a landlord and tenant attorney and founder of Itkowitz PLLC.
Landlord groups have lobbed at least five suits at HSTPA since its passage, arguing that the law violates the Fifth Amendment’s takings clause — that the government cannot seize property without compensation — and procedural due process under the Fourteenth Amendment.

All five have been dismissed, though the plaintiffs in most cases appealed. Oral arguments in the most prominent suit are expected to be heard in the Second Circuit before the end of the year. From the outset, the strategy has been to navigate the appeals process in the hope of getting the issue before the Supreme Court. The majority-conservative bench, landlords believe, might sympathize with real estate.

“The Supreme Court in recent years in a series of decisions has become more protective of property rights,” Andrew Pincus, the attorney representing the Rent Stabilization Association and Community Housing Improvement Program landlord groups in one of the cases, told TRD.
One such decision came down in Cedar Point Nursery v. Hassid. In the June ruling, the Supreme Court held that a California law allowing union organizers regular access to farms to recruit workers without the consent of property owners resulted in an unconstitutional taking of property in violation of the Fifth Amendment.

“We think the New York rent stabilization law does exactly the same thing,” Pincus said, arguing that the law enables a stabilized unit to remain regulated in perpetuity and the lease to be passed down through succession rights, essentially denying the owner the right to the property.
Reaching the Supreme Court, however, could be a long shot. The court only agrees to hear about 100 to 150 of the over 7,000 cases put before it each year — about 1.5 to 2 percent.

Any revision to the law by the state legislature is equally unlikely next session. Democrats control the governorship and hold supermajorities in both houses of the legislature. To flip the state Senate, Republicans would need to gain 12 seats in the 2022 election.

Straight shooters

Owners do have an opportunity to make some money in the near term, though.

Itkowitz, whose firm provides rent-stabilization and regulatory due diligence for multifamily properties, said she has recently seen an influx of younger buyers looking to pick up stabilized buildings at a discount.
As part of her service, Itkowitz collects information on a building or unit’s ongoing litigation and violations. More often than not, a stabilized property will be steeped in both. An owner may have put off repairs in the wake of the rent-hike caps for improvements, for example, prompting the tenants to sue and channel their rent payments into an escrow account. The owner is left further behind on rent, still unable to afford repairs and with legal fees to boot — a vicious, expensive cycle.

To break it, Itkowitz advises incoming owners to first clean up the building.
“We’re not doing another goddamn thing until you fix every violation in this building,” she said.
In a case she recently took on — an eight-unit building in Brooklyn — the new owners followed her advice and fixed up the property. Rent started rolling in and all but a few cases were dropped, she said.

The remaining litigation concerned the rent-stabilized status of the building’s six occupied units. The tenants argued they should be paying a stabilized rent; their landlord had been charging them market rate.
After researching the apartments’ improvement history and comparing physical leases with the records kept by the state’s Division of Homes and Community Renewal, Itkowitz was sure that three of the units were stabilized; she couldn’t win those. On the other three, she felt she had a good chance of showing they should fetch market rate.

“The difference between these apartments being stabilized or not being stabilized is so huge to the future of the asset,” Itkowitz said. “That’s a fight worth having.”
Still, owners who get in at a reasonable price can have a viable business, she said, provided they run their buildings efficiently and are aboveboard about which units are deregulated and which are not.

“You can still make money organically,” she noted.
And because buyers in the market have generally been younger — late 30s to early 40s — there’s always the chance that they could cash in if the tenant-friendly rent law eventually shifts back in real estate’s favor.

A closing window

For the time being, there’s still one route to deregulation: apartment combinations.

Landlords who buy a stabilized property with a high number of vacancies are permitted to combine the unoccupied apartments and set a market-rate “first rent” for the next tenant, although rent increases after that are still subject to the new law.
Vacancies surged in the city during the pandemic, but they are now moving back toward pre-Covid levels. In August, Manhattan rentals had a 3.2 percent vacancy rate, down from July’s 6.1 percent. The survey, however, does not account for warehousing — vacant units kept unlisted in an attempt to spur demand or because rent hikes no longer cover needed renovations.
At the beginning of summer, Jonathan Miller, CEO of appraisal firm Miller Samuel, estimated that about one-third of the city’s inventory was hidden in this manner. In rent-stabilized buildings, Gaia’s Fishman said, it became common during the pandemic for owners to shutter an apartment in need of heavy repairs rather than drop the capital and risk not being able to find another renter.
The window to hike rents on stabilized units could be closing, though. A bill introduced by state Sen. Brian Kavanagh in June would block that profit opportunity by capping the rent of a combined apartment at the sum of the formerly separate units’ rents.
Itkowitz said she had heard the bill could pass as early as January, when state legislators go back into session.
“They’re gonna plug that hole, too,” she said.
 

David Goldsmith

All Powerful Moderator
Staff member
"Air Communities, an $8 billion landlord/manager that was spun out of the publicly traded developer AIMCO last year, is selling out of the New York market and investing in others with a focus on the South and Sun Belt."
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
"Air Communities, an $8 billion landlord/manager that was spun out of the publicly traded developer AIMCO last year, is selling out of the New York market and investing in others with a focus on the South and Sun Belt."
one off or sign of times?
 

David Goldsmith

All Powerful Moderator
Staff member

Rent-controlled units need 11% rent hike, but landlords will get 1%: analysis​

State report says owners’ costs soaring as 2019 law keeps rents down​

Landlords whose tales of soaring expenses were largely ignored by the Rent Guidelines Board can now say, “Told you so.”
A statewide analysis of rent-controlled apartments — a subset of rent-stabilized housing — shows the deficit between expenses and revenue may be even steeper than owners claimed.

The board’s vote in June dealt a major blow to landlords, who sought a 2.75 percent increase, in line with the 3 percent rise in costs estimated by the board’s staff. Instead they got six months of 0 percent on top of 2020’s full-year freeze, then a 1.5 percent hike for one-year leases.
Owners’ groups called that “unsustainable” and “incomprehensible.” Now a preliminary report by the state’s Division of Homes and Community Renewal estimates that to keep pace with costs, a rent-controlled unit’s owner would need to raise rents by 11.4 percent during the 2022-2023 leasing cycle.

The report informs the Maximum Base Rent Program, which ensures that rent-controlled owners get enough income to cover maintenance and improvements. Every two years, the state averages the percent change of landlords’ costs, including for taxes, water and sewer, operations and maintenance. It then allows stabilized landlords to apply for a rent raise in line with those costs.
Because buildings with rent-controlled units have rent-stabilized units in them as well, the 11.4 percent estimate should reflect the rising costs of all rent-stabilized units, said a spokesperson for the Community Housing Improvement Program, a landlord group.
Before the Housing Stability and Tenant Protection Act of 2019, owners could request a hike that would get rents closer to the Maximum Base Rent — up to 7.5 percent over a two-year period until the rent reached that maximum.
Under the new rent law, however, hikes are capped at either 7.5 percent or the average of Rent Guidelines Board increases over the past five years, whichever is lower. With three freezes in the past five years, the new stipulation has severely limited what landlords can request.
Owners of rent-controlled units are looking at a 1 percent increase next year.
Landlord groups see the report as evidence that the 2019 law devalued their buildings. In the wake of the state law’s passage, owners predicted its caps on rent raises for improvements would undermine maintenance of their buildings. A Furman Center report showed the value of properties in which half of the units were rent-stabilized had dropped just six months after the law passed.
Within the state’s findings — called the Standard Adjustment Factor report on Maximum Base Rent — the category contributing the most to the need for a higher rent was “Return on Capital Value Allowance.” CHIP described it as a gauge of a building’s value considering depreciation caused by high vacancy rates or decreased rent collection.
“It is fair to say the declining value of buildings is the biggest driver for the MBR SAF going up 11.4 percent,” said the spokesperson.
Asked whether the 2019 law is preventing landlords from collecting the rent needed to operate and maintain buildings, a spokesperson for Homes and Community Renewal said the agency protects the rights of rent-regulated tenants by enforcing the state law.
In the report, the agency acknowledged that the law created a discrepancy between the rent owners need to maintain buildings and the amount tenants ultimately have to pay.
Other analysis has found that landlords cut back on maintenance to offset declining rent revenue during the pandemic.
 

David Goldsmith

All Powerful Moderator
Staff member

In rare move, Steve Croman looks to sell large apartment portfolio​

Notorious landlord asking $120M for 14 buildings in and around East Village​


Aside from his history of scandals, Steve Croman is known for rarely — if ever — selling his apartment buildings. But now, the landlord plans to do just that.
Croman is looking to offload 14 apartment buildings in and around the East Village for more than $120 million, The Real Deal has learned.

He’s the latest in a group of old-line New York landlords who have moved to part ways with their properties in recent months as fallout from the state’s 2019 rent-regulation overhaul has combined with demand from investors eager to get in on the city’s recovery.

But unlike investments that were suddenly strained when state lawmakers limited landlords’ ability to raise rents on regulated apartments, the properties Croman is offering are almost entirely free-market.

The 14 buildings are all small walk-ups that hold a combined 102 units, collectively covering more than 80,000 square feet, according to a marketing brochure from Marcus & Millichap.

Property records show Croman acquired the buildings between 2005 and 2014 for at least $35 million. The offering price for the portfolio is $121 million.
Sources believe the landlord has put other buildings up for sale. Croman did not immediately respond to a request for comment.
Croman — whose 9300 Realty at once owned more than 150 buildings in the city — is infamous for his allegedly predatory treatment of tenants. For years, he was accused of harassing rent-stabilized renters so his company could deregulate their apartments and rent them at higher rates.

Croman went to jail on a one-year sentence in 2017 after pleading guilty to mortgage fraud charges.
Apart from the scandals, Croman is also known as a longtime owner who rarely sells his properties. But he’s one of many similar investors who have chosen to do so in recent months after finding the regulatory environment unfavorable.
 

David Goldsmith

All Powerful Moderator
Staff member
Treetop Development returns to NYC, buys 13 Brooklyn apartments for $76M

Adam Mermelstein’s Treetop Development snagged 13 apartment buildings in Brooklyn for $76 million, signaling the firm’s return to the New York City market.

Treetop bought the portfolio, consisting of 389 rent-stabilized units, from the Knoll family, multifamily investors who amassed the properties over 40 years and appear to be the latest in a growing line of old-school city landlords unloading their buildings in the wake of the state’s 2019 rent-regulation overhaul.

Primarily in and around Williamsburg, along with some in Sheepshead Bay and Midwood, the buildings include 381 Hooper Street, 390 Hooper Street, 1479 Dahill Road and 1529 Dahill Road, among others.

Steven Vegh and Phil Goldstein of Westwood Realty Associates brokered both sides of the off-market deal, which also includes five commercial spaces. Vegh confirmed the purchase to The Real Deal.
 
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