Commercial Grade

For an up-to-date perspective on the investment salaes market for multi-family buildings read Bob Knakal’s commentary in the the Commercial Observer, the Ups and Downs of the Multifamily Market. Bob’s firm, Massey Knakal Realty Services is one of the city’s most active in this asset class. Many thanks to Bob and his firm for their research, which is used by appraisers throughout the city. Among their findings,

In 1H10, there were approximately $1.6 billion in investment sale transactions, exceeding the $1.26 billion in all of 2009. Activity in the multifamily sector in 1H10 represents a 151 percent increase on an annualized basis.

While overall activity has clearly increased, making sense of the value trends is more difficult. Some submarkets reflected value increases (Manhattan, Brooklyn and the Bronx), while others (Queens and Northern Manhattan) reflected a value decline. Inexplicably, though Manhattan saw a 26% increase in the price/SF of walk-up apartment buildings, it also reflected an increase in average cap rate, from 5.46% to 6.08% (from 2009). This is the difficulty in working with averages, where outliers can skew the results, and some submarkets may have had relatively little sales activity from which to infer the trends.

Bob sums it up,

LOOKING AT ALL this data can be a little confusing, as clear trends have not been established…..It is difficult to draw conclusions about any single asset using these averages. Consultation with a market expert is advised to determine value accurately. (bold type added by me!)

On behalf of appraisers throughout the city, thanks for promoting our services! I love that last line!

Shouldn’t come as any surprise that many commercial property owners have also decided to send the keys back to their mortgage lenders and walk away (a term cleverly coined by someone as “jingle mail). Article in yesterday’s Wall Street Journal, Commercial Property Owners Choose to Default, notes that such major landlords as Vornado, Macerich and Simon Property Group have all done it:

These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

It used to be that walking away from a property would mean that lenders wouldn’t work with you again and that the owner would be burning bridges. But it seems that many of the investors that survived the S & L debacle in the late 80’s and walked away from property then had no trouble getting financing in the recent credit boom. Maybe because many of the lenders now are too young to remember the 80’s?

According to the article,

Of the $1.4 trillion of commercial-real-estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. And as the economic recovery sputters, owners of struggling properties are realizing a big property-value rebound isn’t imminent.

Not a bad time to be an appraiser…

Great article by Josh Barbanel in today’s Wall Street Journal. The title, Manhattan Gains as Housing Stalls, says it all. With all the buzz about national home sales falling 27% and at their lowest point in a decade, our little island is still chugging along oblivious to the woes around the rest of the country. Seems that just a couple of months ago, buyers around here declared the recession over and started visiting sales offices again. However as much as New Yorkers like to think of themselves as insulated from the rest of the country the news from the National Association of Realtors (NAR) will inevitably make many take a deep breath and jump to the sidelines again (especially considering the positive spin that NAR usually puts on such news…) The good news is that my new favorite show, Selling New York, just renewed for another season!

by Gleb Lerman

Harry Macklowe’s 350,000 square foot spec office building at 510 Madison Avenue was the subject of traunch warfare when SL Green purchased a first mortgage on the property and wanted to put Mr. Macklowe in default to foreclose on the property. As part of this battle both parties went out and got appraisals. Cushman and Wakefield, hired by SL Green valued the property at $180 Million around March 2010. Harry Macklowe hired Grub and Ellis who valued the property at $287 Million around April 2010.

Well, Boston Properties just reported that they are in contract to purchase the property for $281 Million or just 2% below Grubb and Ellis’ valuation. Note this price includes some back end participation by Macklowe so if adjusted for conditions of sale the price would be slightly higher.

Image Source: therealdeal.net

by Gleb Lerman

While not good for cats, curiosity is important to being a good appraiser. My question revolves around the recent purchase of a $300m mezzanine loan on Peter Cooper Village Stuyvisaint Town. This piece of the capital stack was reportedly purchased for $45 million which sounds like a grain of sand relative to the value of the property. Will the foreclosure trigger $86.6m in transfer taxes in addition to their $45m note acquisition price?

Overview:

A lot has happened since i last wrote about the Feasibility of converting Peter Cooper Village/Stuyvesant Town to Condominiums. The plan of converting tenants to buyers as a means of recapializing the property is becoming more of a reality with the involvement of Pershing Square and Winthrop Realty Trust. For those that don’t know these entities formed a JV and bought a $300m piece of mezzanine debt subordinate to about $3 billion of CMBS first mortgage debt. On the surface this transaction tells us that Pershing must think that PCV/ST is worth at least $3.045B.

Plan:

As owners of the mezzanine debt Pershing filed foreclosure proceedings to convert its debt into equity. Assuming the foreclosure proceedings goes well, in other words no junior mezzanine holders shows up and offer to make Pershing whole by paying them $300m in principal, Pershing will become the owner of PCV/ST. Once owners they will file reorganization bankruptcy and ask the first lien creditors to accept a reorganization plan under which the property will be turned into co-ops and the creditors will be paid back from the sale of apartments.

Question:

According to this article in the New York Law Journal a mezzanine foreclosure triggers New York City Property transfer tax which equals 2.625% on the value of the foreclosed note and any senior debt. In this case it looks like Pershing will be responsible for an additional $86,625,000 in transfer taxes. Calculated as the (3.0b + 300m) x 2.625%.

My question is, am i understanding this correct? and if i am does that mean that most mezz piece acquisitions with a loan to own strategy have the substantial added cost of transfer tax.

by James Dunne - The CREative Department

I’ve got to give Mayor Bloomberg and DOT Commissioner Janette Sadik-Khan credit for the Sustainable Streets campaign launched in 2007. They’ve added 90 miles of bike lanes and created the pedestrian spaces in Times Square and Herald Square among many other initiatives. Last weekend was the second weekend of Summer Streets, where Park Avenue gets blocked of for bike and pedestrian traffic from the Brooklyn Bridge to Central Park. I went jogging, and snapped the shots of the dumpster pools on Park and jogging through the tunnel under Grand Central - not something a New Yorker gets to do often.

Appraisers love talking cap rates. Cap rates (short for “capitalization” rates) reflect the ratio between a property’s net operating income and its value. The basic capitalization technique, therefore, calls for the property’s net income (I) to be divided by an appropriate cap rate (R) in order to arrive at an estimate of value (V); what we appraisers affectionately call IRV.

There are a number of methods that an appraiser can use to estimate a reasonable cap rate, but the majority of these are academic. What I like to emphasize in our appraisals is market extraction; that is, the rates reflected by sales of comparable properties. By looking at the NOI that a property was throwing off at the time of sale we can divide the Income (I) by the price (V) in order to get an indication of market cap rate (R). Simple, right?

There are several challenges in extracting a “real” cap rate from the market, but I believe that the effort is what often makes the difference between a “good” appraisal and a “bad” one. One particular challenge is understanding the operating expenses that the seller/broker/buyer used in underwriting their acquisition (and therefore resulted in the NOI that resulted in the cap rate). In other words, the cap rate reported by the selling broker on a particular deal may be based on a pro forma that does not have stabilized vacancy and credit loss deducted, nor a management fee. If it’s a small property there may be no payroll expense projected at all. The rate suggested by that sale would be too high when applying to subject property pro forma income, which does include those categories. Another challenge is understanding whether the reported gross income reflected income in place at the time of sale, or the broker’s estimate of income after some renovations of vacant units, etc. In recognizing these differences we often find that a broker’s reported 6% cap rate may, in fact, be equivalent to an appraiser’s 5% cap rate.

Yep, we appraisers love talking cap rates. More to come in future posts…

by James Dunne - The CREative Department

Growing up in Minneapolis, with it’s brutal winters, I became accustomed to using the Minneapolis Skyway System, which is an interconnected series of enclosed footbridges connecting many of the major buildings downtown, and is the largest such “continuous” skyway system in the world at seven miles in length (apparently the City of Calgary in Canada has a larger system, and is over twice the length, although it’s not continuous).

Having lived in NYC for many years now, I’ve always been curious about the single skyway on 32^nd Street between 6^th and 7^th Avenues. It was build the owners of Gimbel’s in 1925; they were an early competitor of Macy’s. They purchased an annex building across the street and had this skyway built to connect the two. What I find interesting is that it’s on the eighth floor, whereas all the skyways in Minneapolis are on the second or third floor - check out the picture below. Gimbel’s was apparently a lower cost rival to Macy’s – as you can see, the discount store trend has continued, there’s now a Jack’s 99-cent store in the building.

I’ve never been one for reality TV. I skipped the whole Survivor craze and never watched Jersey Shore (though I am curious..), but while channel surfing yesterday I was mesmerized by a reality show on HGTV, Selling New York. The show apparently follows a couple of power brokers around town as they show clients multi-million dollar apartments. In last night’s episode, one of the brokers was explaining what a “comparable” is…the lifeblood of appraisal. It was thrilling! Future episodes on “Cooking up a Real Estate Deal” and “Competing Real Estate Firms”

Selling New York may be one for the Tivo box. I always thought that The Appraisers would make a great TV show (more sitcom than reality TV)…with a show about brokers, The Appraisers can’t be far off!