Residential

Deal Book 44-46 Purves Street

In 2012 during my time in Grad School, the university let me play Real Estate Developer for the first time and sent me off in the world to try and make a deal. This is the first time I sought out my own development site, researched zoning, determined the highest and best use, sourced construction loans, talk through the deal with brokers and created a full development deal book that was reviewed by industry experts brought in by the University.

This was the cover photo of my investment memo, for a deal I named Thompson Lofts at 44-46 Purves Street in Long Island City. 44-46 Purves Street Marketing Photo

This site was on sale in the spring of 2012 at $130/buildable SF. I was going to create a project that would bring a unique residential loft product to this market at prices affordable to those who were working as local artists or at Silvercup Studios.  Not super luxury, but a great location, and no subsidy needed from the city. 57 units, and a total development cost of close to $13 Million, $387/SF after construction cost (yes, I realize now, that number was not realistic) .

But alas, most investors do not take on the risk of ground up development for mediocre returns to satisfy a social mission, without some incredible incentives or upsides. Which is why I believe the current owners waited out the LIC market, and will now deliver this product at rents 20% higher than what I proposing.

Here are some photos of my ideas:

 

This is what actually happened:

Fast forward a year, and the site is purchased, allegedly by an investor who plans a hotel. Deal goes quiet for a couple years, I research online every once in while and found nothing promising.

In 2015, the same owners scratched their hotel plan (LIC was completely over saturated with this product type), and envisioned a residential building that gave some honor to my my original idea. They’ve modified the plan to include a retail space on the Thompson street side, and fit about 33 residential units with a Purves Street lobby.

44-46 Purves Street

Looking Back

Now that I have solid experience with these deals, there are many aspects of my original proposal that I would change. Here are a few:

  • Construction costs at about $210/SF, they would realistically be upwards of $400/SF at that time
  • Operating expenses, too low, would bump them up to 45% of stabilized revenue
  • Exit cap rate today would conservatively land at 5.5%, and this would have balanced the increases above and leveled the returns.
  • Rents underwrote them at an average of $46/sf/yr, for a high end product they are likely upwards of $55/sf.

I’m excited to see the Jewel Liton, LLC venture develop this site, I cannot wait to report on the construction as it develops.

Want to see this student project and related return metrics? Link below:

https://1drv.ms/b/s!AohDHQmdRqtshgHsu4VfJtlL2vRE

 

 

 

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A Lesson From China’s Urban Villages

Urbanization on the outskirts of Shenzhen, China.

Urbanization on the outskirts of Shenzhen, China.

 

THE URBAN VILLAGE

In China, the issue of affordable housing is deeply connected to the rapid urbanization of cities in the past 20 years. Rural inhabitants are flooding cities like Shenzhen or Guangzhou and as a result these cities end up with these incredibly dense neighborhoods (pictured above) right outside of their central business districts.

The characteristics of those areas are generally referred to “handshake architecture”, buildings constructed so close together that someone can reach out and shake hands with the person in the next building. And while there are issues with this type of urban plan, it serves the cause of affordable housing in the following ways:

  1.  Instead of directly subsidizing housing developments, the government can spend tax dollars on funding energy efficient retrofits, better quality management systems for those developments and reducing the burden of rising operating costs for landlords as an incentive to maintain rent levels.
  2. Since the government owns the land, they can regulate pricing in awarding those parcels to developers. This allows for lower development cost and thus more economic feasibility.
  3. Where there are limits in residential building heights, this type of plan creates more housing units per block than would be allowable in traditional urban planning scenarios.

Similarly in the US, the idea of bending building codes to allow for micro-units as affordable housing apartments in central business districts will allow for many more housing units, while minimizing the amount of direct subsidy that the government must place into those projects.

COMPARING TO HOUSING POLICY IN THE U.S

Affordable housing is a topic that is tossed about in local politics all over the united states, as a social policy to address the rising cost of living for those on the edge of poverty. Its also a way to allow everyone across the economic spectrum to have access to major cities where there is better access to jobs and education. Here in the states the government moves that agenda along in the following ways:

  1. The Federal Government (IRS) issues a certain amount of tax credits to each state. Developers are awarded those credits and then sells them to investors to fund their projects, in return, the rents remains capped at a certain level.
  2. Housing developers can apply for a HAP contract through the Federal Government (HUD), where the government sets your rent, gives the landlord a  guaranteed payment  monthly, and tenants pay only a portion of that amount.
  3. Local Governments can also build their own housing (often referred to as the Projects), which is also subsidized through a contract with the Federal or State governments.
  4. Lastly, in the case where the Government owns the land, they may decide to give it away to developers for very little money, or lease the land at a low rate, and in return, the rents on some of the apartments remain capped at a lower level.

In Sum, there is almost no scenario where you can find low income housing in the CENTER of major cities like New York City, Chicago, San Francisco, without the help of some government subsidy. The economic feasibility just doesn’t work because land is so expensive in those areas.

THE URBAN VILLAGE LESSON

A better way to implement affordable housing in city centers is to implement a similar strategy for increasing density in central business districts in the form of what we are seeing as today’s micro-units. In our cities most desirable economic centers,  why not increase the number of micro unit developments, which will bring more low income households to those neighborhoods.  More units per square foot equals more revenue for the landlord and less direct subsidy from the government.

Ensure quality of those units by setting design standards, monitoring occupancy limits, creating a supporting infrastructure of public safety, schooling and community resources as a means to enhance the standard of living at the same time.

Buddha beads and traditional Chinese retail store the size of one of NYC's micro-units.

Picked up some Buddha Beads, in a Chinese retail store as small as one of the city’s micro-units

Coming Up on the Lower East Side

Hotel, Residential and Mixed-Use in the pipeline

Hotel, Residential and Mixed-Use in the pipeline

Have you been to the Lower East Side recently?  There’s a little neighborhood sandwiched between the south side of East Houston Street and the north side of Delancey Street, full of the most fascinating development activity.

Residential Rehab Site

Residential Rehab Site

The uniqueness of this area, I suspect is driven mostly by the large inventory of apartment buildings still very heavily under rent stabilization and the mom-and-pop feel of the retail spaces, many still available under $125/psf/yr.

So the price of land for development is still within feasible measures compared to neighboring Soho or Tribeca. A few development listings found through Cushman & Wakefield and Besen & Associates, came in within $400 and $900 per buildable square foot. These typically include certain FAR bonuses for exclusionary housing or low income housing tax credits.  This seems hardly like a bargain, from a neighborhood that has been transitioning in price and investment activity for years–but finally, has caught up as any new development will likely cost as must as most competing NYC neighborhoods. The value here is in the existing stock of real estate, both residential and commercial where the inventory of older spaces are abundant enough to offer a thriving economic environment for up-and-coming businesses.

Retail Landscape in LES

Retail Landscape in LES

Lastly, there’s a cool factor in LES that I have not yet seen replicated in other NYC neighborhood; it’s colorful, busy, full of style and hustle. The shot below was taken by a local butcher on a cigarette break outside of a graffiti-clad market, who volunteered to capture me in this scene because he could not stand to see such an artistic opportunity go to waste for my lack of a personal photographer. This sort of thing only happens in a place like this.

LES Graffiti Art