Commercial Grade

by Gleb Lerman, The Affordable Oracle

We all love Dubai’s real estate creations from a design and innovation perspective, but many of us scratched out heads on the region’s financial viability from day one. After all, one of the original claims was that Dubai will unseat NYC as the financial capital of the world.

A very interesting article on the front page of Bloomberg about the status of Dubai’s office market. Here are a couple of sound bites:

-One broker says that some of the buildings are so poorly built and located that they will never be occupied

-Some of the buildings command rents that are just sufficient to cover maintenance

-40% vacancy rate

-Highest office rents of around $95/SF are achieved in a rent free zone

-Office rents near the Burj building are around $54/SF

-Peripheral office buildings are renting for $11/SF

-There is an additional 28 million square feet of construction underway as of June 2010

And while much of the in-progress construction is better left abandoned, the local powers will not let allow skeleton buildings to act as a backdrop to the beautiful buildings already completed.

Sounds to me like NYC will live to see another year as the financial capital of the world…

by Gleb Lerman

Having appraised almost every property type in NYC it appears that the value erosion was greatest for hotels. In many cases hotels are worth less than half of peak pricing. Here are some factoids to support these value drops:

-Aby Rosen is reportedly buying back his first mortgage debt at 65 cents on the dollar. Assuming the first mortgage was originally issued at 80 LTV. This debt repurchase values the property at 51.4% of the original valuation. I know this is an overly simplified analysis and one would need to look at the loan terms: interest rate, term, the existence of cross-collateralization, or personal guarantees.

-In September 2010 the W in Union Square traded for $685,926 per room, that’s a 34.3% decline since its prior purchase in 2006 for $1,044 per room. Taking into consideration that prices for hotels continued to appreciate since 2006, in line with continued RevPAR increases through the 3rd Quarter of 2008 the recent trade is likely closer to 50% of its peak valuation.

Why such volatility?

Hotels are usually operated with very thin margins i.e. high operating expense ratios 70-80%. Also, a large chunk of these expenses are fixed so when your occupancy and ADR dips your NOI plunges. On the other side of the equation when your ADR and occupancy rise your NOI soars. Given that recent hotel performance has been positive, brighter days may be ahead for hotel owners.

The third quarter Prudential Douglas Elliman Manhattan Rental Overview was just released. Authored by my partner, Jonathan Miller (appraiser to the stars!), the study reports a couple of very interesting metrics: for example, the average rental price declined 8% to $3,460 from $3,759 the prior year quarter, while listing inventory fell 28.1%. Most notable though is that the number of new rentals surged to 8,593 units from 2,549 units in the prior year quarter. Explains Jonathan, this remarkable increase (237%!) is not a function of new renters coming into the market but rather the rental market’s equivalent of “musical chairs.”

With substantially lower listing inventory many landlords are no longer offering concessions and attempting to raise rents on existing tenants. Rather than pay increases that are often 10% or more of their previous rents, tenants are simply moving and looking for a better deal. Some landlords are still offering free rent for new tenants, but not renewals, so there are incentives to pack your bags and leave. The tenants are essentially fighting back with their suitcases.

An article in today’s Wall Street Journal, Home Slump? Not on Tax Bill by Josh Barbanel is the perfect sequel to my post last week on Deciphering New York’s City RE Tax Guidelines. Mr. Barbanel reports that NYC homeowners will be seeing on average a 5.8% increase in their tax bills, and that’s without an increase in the tax rate. With a flat tax rate the only way taxes can increase is with an increase in the assessed value. So, even though value declines have hit every corner of this city over the past two years, the assessments are on the rise. This defies logic and appears to be a function of a considerable time lag between the market decline and when the assessment actually goes into efect. Just one more reason why we as appraisers have a heck of a time figuring out where a property’s real estate taxes are going.

by Gleb Lerman, The Affordable Oracle

We all note that many older buildings (pre-1980) are organized under co-op structure while the newer buildings are organized as condos. If asked why this historic divide exists one might jump to the conclusion that condo ownership structure was not legal prior to the 1980’s. In fact the condominium act has been in existence since the at-least 1909.

Turns out the real reason was that developer’s lost a favorable tax treatment with the passage of the Tax Reform Act of 1986. Prior to the Act a developer could dispose of a co-op and the income would count as a capital gain rather than as ordinary income and would thus be subject to a lower capital gains tax rather than the ordinary income tax.

So there you have it, the real reason why co-ops are not as popular as the used to be.

I found the answer in a document titled Offering Plan Checklist produced by the Law Office of John P. Bradbury @ www.nyrelaw.com