Affordable Housing Institute : US

[Continued from previous Part 1 and yesterday’s Part 2.]

 

Yesterday’s post calculated a post-conversion value for Stuyvesant Town in the range of $7.5 to $9.0 billion — what would possibly motivate MetLife, not exactly a doofus in finance, to offer it for 33% to 45% less than that?

 

“Ah, geeze, I dunno.”

It’s all about the as-is-value equation:

 

The economics of conversion

+ Value after conversion (full market)

– Hard costs of conversion

– Soft financial costs of conversion

– Soft political costs of conversion

– Profit to the sponsor/ developer team

= As-is value (price paid to seller)

For reference:

· Hard costs = amenities, appointments, structural rehab.

· Soft financial costs = carrying period interest, lost rent in transition (vacancy and turnover), professional fees to sophisticated consultants J .

· Soft political costs = concessions to rent-regulated residents (which themselves may stretch over many years), relocation payments (mandatory or encouraging), legal fees of managing the exit from rent stabilization (apartment by apartment), and time delays mandated by political exigencies.

The conversion equation is similar to the land value equation; in both cases, the tangible asset’s as-is value is what is left over by working backwards from success and subtracting all the costs.

 

Let’s all start from start and work back from there

The hard costs will be very large. As the New York Post’s Steve Cuozzo, who owns up to living in Stuy Town for three years in the 1970s, not-so-fondly remembers and observes the place:

 

Yes, the windows have been modernized and air-conditioning has finally come to Stuy Town. There’s better landscaping and new finishes.

But it’s unclear how much tenants will pay for non-doorman buildings still reliant on security buzzers.

Stuy Town’s two-bedroom apartments have only a single bathroom. The walls of my place were so paper-thin, I got to know everything about my neighbors’ family feuds and sex lives.

 

The property is functionally obsolescent, so any buyer will put in very substantial capital improvements. These in turn will fuel the buyer’s compulsion to turn the apartments to market — otherwise the buyer will be unable to recoup the equity yield — and most likely to sell a large fraction of them to the current residents. Some other aspects of obsolescence will be harder to cure:

 

Much of the complex lies far east of bus and subway stops and stores.

Still, it’s lower Manhattan! As another Times piece quotes:

 

Already there are signs that bidding will be feverish. As one executive involved in the sale put it, “This is the ego dream of the world: 80 acres, 110 buildings, 11,000 apartments, covering 10 city blocks in Manhattan.”

It’s not just ego (though never underestimate the power of ego!). It’s entirely possible that more property could be developed on the site — particularly more retail. And the world is awash in capital, and much of it wants to own property in New York City:

 

An executive of one company among the prospective bidders said that “in a normal market,” those weaknesses could seriously lower the price - “but we’re not in a normal market.”

 

No wonder some of real estate’s biggest names are prowling around the prospects:

 

According to several bidders, the list of buyers who have signed up includes the most active developer in New York City, the Related Companies; one of the largest landlords, Glenwood Management; Tishman Speyer, which controls Rockefeller Center; two publicly traded real estate companies, Archstone and Vornado; the international bank UBS; and the Blackstone investment firm, as well as the Rudin, Durst and LeFrak real estate families.

 

Of the 11,232 apartments, the Times says ‘nearly three-quarters’ are rent-regulated. What are their positions worth? Let’s do more simple math:

Market rents in lower Manhattan are said to be in the range of $3,500 a month. Assuming that current rent stabilized rents are half that (as the Times suggested), that’s $1,750 per month. Then let’s assume that market rents rise 3% a year, while the rent stabilized ones rise 10% per year. (We’ll ignore early-move-out scenarios on the presumption that these will occur when the resident receives an economic benefit roughly equal to the inherent time value of staying in place.) The result is a transition benefit schedule like the following:

In this not-very-difficult analysis, the typical rent stabilized tenant has an expected bargain period of 11 years, with a net present value (even at the developer’s high yield rate of 12%) of $103,200 per apartment.

Multiply $103,200 per apartment of resident rent concession value times 7,850 apartments (70% of the 11,232 total), yields a net present cost to the developer of coping with the rent stabilization of $0.8 billion — that is, $810 million.

Definitely enough to say grace over.

And plenty to negotiate. Consider the following little table illustrating a range of growth rates for market rents and stabilized rents:

Somewhere between $0.6 and $1.5 billion in inherent incumbent-tenancy value, to be negotiated into insider discounts, relocation overtures, and secondary or tertiary inducements, blandishments, coercions, and political schemes.

 

It will be fascinating to see just how abnormal things get.

Indeed it will.

Will it be the evil alternate-universe Spock who buys Stuyvesant Town?

[Continued in Part 4 and 5]

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