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Turbocharged Marketing To The Lowest Common Denominator

April 5, 2006 | 12:01 am |

Buy a house and get a free Ferrari. Its a compelling presentation and I don’t have enough time to dig further but it gives me the creeps. They list offering prices by the developer (I assume) but show no closing prices.

You know the old saying, if its too good to be true, then it usually is…

Next property to move:

Swampland in Florida that comes with a free RV.

thanks LS!



Common Areas: Value at the End of the Hall

Habitat Magazine Logo

The sale of unused common area can be a win-win transaction for both buyer and seller. The buyer is likely an individual apartment owner or purchaser. The seller would be the coop corporation (or condo association). As operating costs continue to rise, boards are considering other sources of income to operate their buildings and keep maintenance increases and assessments to a minimum. The sale of common area to in-house residents has become more commonplace in recent years and provides an opportunity for additional income. At the same time, apartment owners have had fewer purchase options as a result of the limited housing inventory in the Manhattan real estate market over the past five years. It may be easier for a shareholder to fulfill an immediate housing need by purchasing common space to enhance their apartment.

A typical scenario might go like this: A couple is expecting their first child and currently occupy a 1-bedroom coop apartment. They search for 2-bedroom apartment but cannot find any suitable choices in their price range with the level of amenities they currently enjoy. With the time constraints and inconvenience of moving, they approach the owner of the studio apartment across the hall. Since both apartments in this example are situated at the end of the hallway and the layout would be enhanced if the hallway is incorporated into the layout, the coop board was contacted.

The coop corporation would benefit from the capital infusion from the sale. The re-allocation of shares would result in increased revenue from higher maintenance charges paid by the shareholder in perpetuity. Both parties should seek out legal advice for matters such as the potential modification to the certificate of occupancy, zoning considerations, architectural integrity of the project, and approvals needed. Associated costs are usually paid by the purchaser. Our firm has seen include the end of a hallway between two apartments, basement storage room, a small closet adjacent to an apartment, double-height ceiling space over a basement garage, unimproved roof area, former elevator shaft and an unused rooftop water tank. How can market value of so many types of space be estimated?

Market value is defined by the Appraisal Institute as “The most probable price in cash, terms equivalent to cash, or in other precisely revealed terms, for which the appraised property will sell in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.” The sale of common area is not based on its market value, since it is not exposed to the open market and the buyer and seller are captives by its location. It usually has no practical use to any parties but the owner of adjacent apartment and the corporation. The space would not be sold to purchasers that do not own an apartment in the building or to an owner on another floor. Therein lies the problem since there is no “market” for the property. The value of the space is therefore termed “value in use” defined by the Appraisal Institute as “the value a specific property has for a specific use.” It is essentially the establishment of a reasonable relationship between the price and size of the space between the two parties.

The challenge to the board is to be fair to the purchaser yet responsible to the shareholders. The challenge to the apartment owner is to establish whether the finished result will provide additional value to the apartment, both in a financial and functional sense. As is often the case, there are usually no recent sales of common area within the subject building to use as a basis for comparison. Data on common area transactions are often not released because they are not representative of market transactions in a given building, although the release of such information would not impact market values in the building. In addition, these transfers are often combined with the purchase of an adjacent apartment.

A reasonable method of valuing common area is to abstract the relationship between actual common area sales and apartment sales within that same building on a per square foot basis. Although such transactions do not indicate market value on their own, they establish a relationship with the sales in their respective buildings. This ratio can then be applied to a representative price per square foot indicator in the subject building. This value indicator is based on the market segment the newly configured apartment will fall within.

It is important to note that the estimation of the common area value should not be subject to the actual condition of the adjacent shareholder apartment, but rather the typical condition of an apartment in the building. In other words, a shareholder should not pay more or be allocated more shares for adjacent common area based on the condition of their apartment. This is an important point and is consistent with allocation methods at the time of the conversion of the building.

Unlike the estimation of “value in use”, the share allocation should be made as if the space were incorporated into the adjacent apartment. The shareholder benefits from the additional space in perpetuity. Shares per square foot are the determinant factor because the space is usually incorporated into the existing apartment indefinitely and the shareholder enjoys an ongoing benefit. The original share allocation at conversion varies by many factors including floor level, number of bedrooms, square footage, outdoor space and view. The share per square foot ratio of other similar sized apartments on the same or similar floor levels should be analyzed and compared to the subject space.

The sale of common area can be a win-win scenario for both the coop corporation and the individual shareholder. The corporation benefits from a capital windfall and additional revenue in perpetuity. The shareholder benefits from an expanded apartment and additional value. Who says there isn’t value at the end of the hall?


The Most Pampering, the Highest Fees

After paying $15.5 million last November for a 3,000-square-foot apartment at the Carlyle, you would think the Hollywood power broker Brad Grey could rest easy knowing he had bought into a hot Manhattan luxury market.

But there is the little matter of the $455,352 a year that Mr. Grey, the chairman of Paramount Pictures, will have to cough up in maintenance charges. The storied co-op hotel on the Upper East Side, where President John F. Kennedy kept a penthouse suite, charges more per square foot in monthly fees than any other residential building in New York, according to Miller Samuel, a property appraiser.

Still, when you want the best pampering Manhattan has to offer, you find the money. Mr. Grey hasn’t been heard complaining about the $37,946 a month he has to pay to maintain his four-bedroom apartment.

After all, for the price of a new BMW each month, he gets the prestige and prized location of the Carlyle, at 35 East 76th Street, not to mention twice-daily housekeeping service, daily newspapers, and use of Frette bathrobes and 600-count Yves Delorme bedding. There are discounts on laundry, personal training sessions and room-service food and drink.

Sound like a bargain? That depends on what your priorities are.

For those willing to put down millions to own an apartment in Manhattan, a high tolerance for some of the highest monthly charges in the world is almost a prerequisite. Imagine the privilege of paying the equivalent, on an annual basis, of the cost of a new home in many parts of the country — all to ensure that you can get a cup of coffee, or a shirt ironed, at all hours of the day.

“It is a way of life that people really appreciate whose lives are quite busy and full,” said Kathy Sloane, a broker at Brown Harris Stevens who has sold apartments in the Carlyle. “They want everything to be organized for them, and they don’t ever want to question the standard.”

Aside from the Carlyle, which charges monthly maintenance fees of $10.23 per square foot on average, the buildings charging the most every month include the Sherry-Netherland ($6.03), the Lombardy ($4.24) and the Pierre ($3.37), according to Miller Samuel.

Then there are the condo hotels like Trump SoHo, which charges $7.60 per square foot, with Trump International, charging $6.72.

Some condops also rank high among the buildings whose residents are cutting the biggest monthly checks. The Mark charges $4.47 a square foot. At 995 Fifth — formerly the Stanhope Hotel — you’ll be paying $4.32.

By comparison, Manhattan co-ops charge an average of $1.70 per square foot in maintenance fees, while condos charge $1.57 a square foot on average for the common charge plus real estate taxes, according to Miller Samuel.

So what else do you get for the more than $10 a square foot you would pay at the Carlyle?

Well, there’s window-washing, heavy cleanings, bath amenities, cable television and telephone voice mail. Discounted services also include preferred pricing on treatments at the hotel’s Sense spa, and 20 percent off on parking rates in the garage.

But don’t delude yourself that you’ll get services like dog-walking, couriers and personalized flower arrangements. Those are all extra, said Jennifer Cooke, a spokeswoman for the hotel.

The full-time staff of 400 people — for the 187 hotel rooms and 51 residences — make the maintenance charges palatable to buyers, brokers said.

“You are really looking at buyers who, in order to maintain a staff in any residence that could deliver all of the things that are deliverable at the Carlyle, would have to look at spending hundreds of thousands of dollars a year on that staff,” Ms. Sloane said.

Brokers say they have to price apartments very carefully at the hotel co-ops. Emily Beare, a broker with CORE, said she had had clients looking to spend $10 million or less who had turned down the Pierre because of the monthly maintenance. But she said she had never had a well-heeled buyer looking to spend more than $10 million reject the idea of hotel living simply because of high monthly charges.

When a prized apartment in one of the hotels becomes available, “there is a very immediate market for it,” Ms. Sloane said. Before selling a unit in the Carlyle a few months ago, she invited a group of brokers to help her price it. “We settled on a price, but everyone said that with that maintenance, the apartment is bound to be there a long time.”

She sold it in four days, she said.

How does the Carlyle justify charging more than three times, on average, what the Pierre charges its co-op residents? Christopher Burch lived in the Pierre for about 20 years and headed the co-op board before his divorce from the fashion designer Tory Burch. He later spent more than a year at the Carlyle as well. He sees a comparable level of service at the two hotels, but says the ownership structure is different at the Pierre, allowing for lower monthly fees.

“The Pierre is a tremendous deal,” Mr. Burch said. “It’s a steal.”

Ms. Cooke said the “manner in which we charge at the Carlyle has been the same since the co-op was first formed in 1970.”

For many buyers the Carlyle’s Upper East Side address is simply more prestigious than the Pierre’s, closer to Midtown, brokers said. And some brokers claim that the elevators at the Pierre are not attended 24 hours a day, seven days a week, as they are at the Carlyle, though a spokeswoman at the Pierre says they are.

You buy into an iconic New York experience at the Carlyle. Where else can you hobnob with world leaders, rock legends like Mick Jagger and Hollywood aristocracy like Woody Allen, who performs with his jazz band at Café Carlyle?

President Kennedy was said to have sneaked Marilyn Monroe into the hotel for visits — most famously through a series of tunnels under the property — after she sang “Happy Birthday, Mr. President” at his birthday gala at Madison Square Garden in 1962, according to the author Nick Foulkes, in the book “The Carlyle” (Assouline, 2007). Ms. Cooke said nobody currently on staff was there in 1962, but “that is the rumor that has been passed through the years.”

That lore has value. The pampering tradition at hotels like the Carlyle has inspired developers to try to emulate much of that service experience in new condo developments like 15 Central Park West and the yet-unfinished One57.

It’s hard not to see those buildings as a bit of a deal compared with the Carlyle. The steel magnate Leroy Schecter has listed two apartments together at 15 Central Park West for $95 million. The common charge and taxes (with a 10-year tax abatement helping out) come to about $1.86 a square foot.

“Why not be in a building that is giving you everything you want and yet your monthlies don’t have to be astronomical?” asked Ms. Beare, Mr. Schecter’s broker.

Elizabeth Sahlman, a broker at Corcoran, can understand why that wouldn’t work for some.

At the hotels, “it is the twice-daily housekeeping that a lot of residents just love,” she said.


Manhattan: City of Sky-High Rent

Gary L. Malin, the president of Citi Habitats, New York City’s largest rental brokerage firm, has seen the real estate market at its giddiest heights and its deepest despair. There should be little that surprises him. But when Mr. Malin’s company was preparing its latest analysis of the rental market, he was taken aback.

In March, the firm found, the average rent in Manhattan — now $3,418 a month — surpassed the all-time high set in the real estate frenzy of 2007. “Right now, landlords can go for pie in the sky — why not?” he said. “But when are people going to say enough is enough and look at other options?”

The last time rents shot up in a similar fashion, they were tied to a strong economy, low unemployment and booming business on Wall Street.

But this spring, Manhattan rental prices seem to be divorced from the larger economic picture. While the city has added jobs in recent months and growth in businesses like technology has helped make up for losses in the financial sector, much of country is still struggling.

That disconnect has only increased resentment levels among many tenants, already reeling from a year or more of rent increases.

“I felt trapped,” said Jaclyn Barrocas, who was recently hit with a big rent increase on her East Side apartment. “It was too expensive to move and too expensive to stay. And it feels like I am not even a person to the landlord.”

There is evidence that rising rents are driving prospective renters into the sales market. But for those who find buying a home in New York City is not an option — whether because of bad credit, tougher lending standards or lack of a down payment — the choices are limited and often unappealing.

Landlords and brokers say more and more young people are sharing, even if it means sacrificing a living room to add a bedroom or two. There has also been a surge of interest in the other boroughs, with many neighborhoods reporting record rents of their own.

Some tenants may be able to negotiate with their landlords, especially if they are long-term renters with good track records. But property owners have little reason to cut deals, because the vacancy rate in Manhattan is hovering around 1 percent.

And just 2,229 rental apartments are scheduled to be added to the market this year in Manhattan, a 30 percent drop from the average number over the last seven years.

The uncoupling of the national economy from New York rents is not typical, said Jonathan J. Miller, the president of the appraisal firm Miller Samuel. “When you see rents rising, it is usually reflective of a strong economy,” he said. “That is not the case now.”

Instead, he said, prices are being driven up by a tight credit market that forces people to stay in the rental market and limits new construction.

Some renters feeling the squeeze have resigned themselves to paying more for less.

When Ms. Barrocas, 26, first found her one-bedroom apartment with views of the East River on the 19th floor of a Murray Hill apartment building in 2010, it cost $2,550 a month. She and her boyfriend quickly signed up for a two-year lease.

With the lease set to expire in June, she recently received word that her landlord wanted to raise the rent by more than $500 a month. “I started freaking out,” Ms. Barrocas said. “It is a huge increase.”

She was not ready to buy, but she could not afford to stay in her current apartment. The landlord would not negotiate. But moving, even if she found a cheaper place, would most likely force her to shell out around $5,000 for broker fees, security deposit and moving costs.

Fortunately, a cheaper apartment was available in her building. It was smaller, had little natural light and lacked river views. But at $2,745 a month it was in her price range, and there was no broker’s fee. She made the move.

Ms. Barrocas says many of her neighbors feel similarly trapped. “People just want to leave,” she said. “I would have preferred to leave.”

Landlords like to have leases signed in the spring, when they can command the highest rent because so many people are moving for work or school. So across the city, thousands of renters are facing a similar dilemma.

Rental averages are up in every category, with one-bedrooms rising the most, by 6.5 percent over the past year, to $2,747, according to the Citi Habitats report. Studios rose 3.6 percent, to $1,953; two-bedrooms climbed by 6.1 percent, to $3,865; and three-bedrooms rose 4 percent, to $5,107.

Surveys by the other major brokerage firms show similar leaps in pricing.

Mario Gaztambide, the vice president for residential asset management of the LeFrak Organization, said interest in lower-priced neighborhoods had surged. In Queens neighborhoods like Rego Park and Forest Hills, rents are surpassing peak prices from 2007, Mr. Gaztambide said, adding that newly renovated one-bedrooms are commanding around $1,700 a month.

“The amount of rental supply that has come on the market in the last two to three years has simply not kept up with demand,” he said.

It is important to remember that New York’s rental market is not monolithic. Although the rental averages calculated by the brokerage firms are based on market-rate units, the majority of apartments in the city are rent-regulated in some fashion and are not included in the averages.

Similarly, it is hard to get an accurate snapshot of the rents that small landlords are charging, since many do not use the services of a major brokerage. Renters often find that small landlords are more willing to negotiate because they do not want to have an apartment sit vacant for a prolonged period.

Joseph Rosati, 25, and his roommates adopted a different strategy: Pay more for more.

Last year, Mr. Rosati and two friends were living in Murray Hill, paying $3,700 for a two-bedroom apartment that they had converted to three. When the landlord decided to raise the rent to $4,300 last July, Mr. Rosati decided to shop for a new place.

The group could not find anything acceptable for under $4,700. They decided that if they were going to shell out that kind of money, they might as well spend a little bit more to be in a neighborhood they liked better.

They found a two-bedroom apartment with an office at 37 Wall Street for $5,400. Although they are paying more, they are happy in their new quarters. They signed a two-year lease, fearful that they would get hit with another increase if they did not.

“I did not move to New York City to live in Hoboken or Jersey City,” Mr. Rosati declared.

Jonathan Wilf, a principal of Skyline Developers, which owns 37 Wall Street, says landlords looking to get top dollar must set their properties apart. That means renovated apartments and lots of amenities. His company also owns the building at 75 West Street. But prices there are more stable, he said, because the building is older and has not been renovated to the same degree as 37 Wall.

What would bring a halt to spiraling rents? It took a financial meltdown in autumn 2008 to topple the last rent peak. After the fall of Lehman Brothers, big landlords, able to pivot on a dime, started offering incentives like two months’ free rent on a one-year lease. Those incentives lingered until 2010.

Barring a similar event, experts say it may simply be an issue of supply and demand, and woes will ease once developers start to bring more new units to market. But for now, more pain may lie ahead: Mr. Malin of Citi Habitats said he did not expect relief for renters anytime soon. “This summer,” he said, “everyone is gearing up to push their rents until tenants say, ‘This is just too much for me.’ ”

Of course, one escape from the gut-twisting rental market is to leave it entirely.

Kimberly Kreuzberger and her husband, Bryan, both 32, were thrilled when they first moved into their loft studio at 666 Greenwich Street in March 2009.

The rent was $3,200 a month, but with the two free months they were offered, it worked out to just over $2,800. Last year, when the rent was bumped up to $3,450, they reluctantly signed on for another year. It was a lot to pay, but they loved living in one of the rare doorman buildings in the West Village.

Then they got word that the landlord was planning another increase this June. The rent would rise to $3,795.

“We were furious when we got it,” said Ms. Kreuzberger, who works in advertising sales. In the elevator, the increase was the sole topic of conversation among neighbors. “People will be like, I got hit for 13 percent, someone else 7 percent,” she said.

The couple made up their minds to move; but rents for the kinds of two-bedrooms in elevator buildings they desired would be at least $6,000 a month.

Their broker, Scott Elyanow of Citi Habitats, urged them to think about buying an apartment, and to look in neighborhoods they might not have considered.

At first, the idea of leaving the Village “was like a death to us,” Ms. Kreuzberger said.

But the more they saw of the rental market, the more convinced they became that the time had come to buy.

The couple settled on a two-bedroom apartment at 100 Jay Street in Dumbo, Brooklyn. They paid just over $1 million, putting 25 percent down, and recently moved in. Their monthly outlay is $4,250, which covers their mortgage, common charge and taxes.

“It was such a leap,” she said. “But we could not be happier.”


The City of Sky-High Rent

Gary L. Malin, the president of Citi Habitats, the city’s largest rental brokerage firm, has seen the real estate market at its giddiest heights and its deepest despair. There should be little that surprises him.

But when Mr. Malin’s company was preparing its latest analysis of the rental market, he was taken aback.

In March, the firm found, the average rent in Manhattan — now $3,418 a month — surpassed the all-time high set in the real estate frenzy of 2007.

“Right now, landlords can go for pie in the sky — why not?” he said. “But when are people going to say enough is enough and look at other options?”

The last time rents shot up in a similar fashion, they were tied to a strong economy, low unemployment and booming business on Wall Street.

But this spring, Manhattan rental prices seem to be divorced from the larger economic picture. While the city has added jobs in recent months and growth in businesses like technology has helped make up for losses in the financial sector, much of country is still struggling.

That disconnect has only increased resentment levels among many tenants, already reeling from a year or more of rent increases.

“I felt trapped,” said Jaclyn Barrocas, who was recently hit with a big rent increase on her East Side apartment. “It was too expensive to move and too expensive to stay. And it feels like I am not even a person to the landlord.”

There is evidence that rising rents are driving prospective renters into the sales market. But for those who find buying a home in New York City is not an option — whether because of bad credit, tougher lending standards or lack of a down payment — the choices are limited and often unappealing.

Landlords and brokers say more and more young people are sharing, even if it means sacrificing a living room to add a bedroom or two. There has also been a surge of interest in the other boroughs, with many neighborhoods reporting record rents of their own.

Some tenants may be able to negotiate with their landlords, especially if they are long-term renters with good track records. But property owners have little reason to cut deals, because the vacancy rate in Manhattan is hovering around 1 percent.

And just 2,229 rental apartments are scheduled to be added to the market this year in Manhattan, a 30 percent drop from the average number over the last seven years.

The uncoupling of the national economy from New York rents is not typical, said Jonathan J. Miller, the president of the appraisal firm Miller Samuel. “When you see rents rising, it is usually reflective of a strong economy,” he said. “That is not the case now.”

Instead, he said, prices are being driven up by a tight credit market that forces people to stay in the rental market and limits new construction.

Some renters feeling the squeeze have resigned themselves to paying more for less.

When Ms. Barrocas, 26, first found her one-bedroom apartment with views of the East River on the 19th floor of a Murray Hill apartment building in 2010, it cost $2,550 a month. She and her boyfriend quickly signed up for a two-year lease.

With the lease set to expire in June, she recently received word that her landlord wanted to raise the rent by more than $500 a month. “I started freaking out,” Ms. Barrocas said. “It is a huge increase.”

She was not ready to buy, but she could not afford to stay in her current apartment. The landlord would not negotiate. But moving, even if she found a cheaper place, would most likely force her to shell out around $5,000 for broker fees, security deposit and moving costs.

Fortunately, a cheaper apartment was available in her building. It was smaller, had little natural light and lacked river views. But at $2,745 a month it was in her price range, and there was no broker’s fee. She made the move.

Ms. Barrocas says many of her neighbors feel similarly trapped. “People just want to leave,” she said. “I would have preferred to leave.”

Landlords like to have leases signed in the spring, when they can command the highest rent because so many people are moving for work or school. So across the city, thousands of renters are facing a similar dilemma.

Rental averages are up in every category, with one-bedrooms rising the most, by 6.5 percent over the past year, to $2,747, according to the Citi Habitats report. Studios rose 3.6 percent, to $1,953; two-bedrooms climbed by 6.1 percent, to $3,865; and three-bedrooms rose 4 percent, to $5,107.

Surveys by the other major brokerage firms show similar leaps in pricing.

Mario Gaztambide, the vice president for residential asset management of the LeFrak Organization, said interest in lower-priced neighborhoods had surged. In Queens neighborhoods like Rego Park and Forest Hills, rents are surpassing peak prices from 2007, Mr. Gaztambide said, adding that newly renovated one-bedrooms are commanding around $1,700 a month.

“The amount of rental supply that has come on the market in the last two to three years has simply not kept up with demand,” he said.

It is important to remember that New York’s rental market is not monolithic. Although the rental averages calculated by the brokerage firms are based on market-rate units, the majority of apartments in the city are rent-regulated in some fashion and are not included in the averages.

Similarly, it is hard to get an accurate snapshot of the rents that small landlords are charging, since many do not use the services of a major brokerage. Renters often find that small landlords are more willing to negotiate because they do not want to have an apartment sit vacant for a prolonged period.

Joseph Rosati, 25, and his roommates adopted a different strategy: Pay more for more.

Last year, Mr. Rosati and two friends were living in Murray Hill, paying $3,700 for a two-bedroom apartment that they had converted to three. When the landlord decided to raise the rent to $4,300 last July, Mr. Rosati decided to shop for a new place.

The group could not find anything acceptable for under $4,700. They decided that if they were going to shell out that kind of money, they might as well spend a little bit more to be in a neighborhood they liked better.

They found a two-bedroom apartment with an office at 37 Wall Street for $5,400. Although they are paying more, they are happy in their new quarters. They signed a two-year lease, fearful that they would get hit with another increase if they did not.

“I did not move to New York City to live in Hoboken or Jersey City,” Mr. Rosati declared.

Jonathan Wilf, a principal of Skyline Developers, which owns 37 Wall Street, says landlords looking to get top dollar must set their properties apart. That means renovated apartments and lots of amenities. His company also owns the building at 75 West Street. But prices there are more stable, he said, because the building is older and has not been renovated to the same degree as 37 Wall.

What would bring a halt to spiraling rents? It took a financial meltdown in autumn 2008 to topple the last rent peak. After the fall of Lehman Brothers, big landlords, able to pivot on a dime, started offering incentives like two months’ free rent on a one-year lease. Those incentives lingered until 2010.

Barring a similar event, experts say it may simply be an issue of supply and demand, and woes will ease once developers start to bring more new units to market. But for now, more pain may lie ahead: Mr. Malin of Citi Habitats said he did not expect relief for renters anytime soon. “This summer,” he said, “everyone is gearing up to push their rents until tenants say, ‘This is just too much for me.’ ”

Of course, one escape from the gut-twisting rental market is to leave it entirely.

Kimberly Kreuzberger and her husband, Bryan, both 32, were thrilled when they first moved into their loft studio at 666 Greenwich Street in March 2009.

The rent was $3,200 a month, but with the two free months they were offered, it worked out to just over $2,800. Last year, when the rent was bumped up to $3,450, they reluctantly signed on for another year. It was a lot to pay, but they loved living in one of the rare doorman buildings in the West Village.

Then they got word that the landlord was planning another increase this June. The rent would rise to $3,795.

“We were furious when we got it,” said Ms. Kreuzberger, who works in advertising sales. In the elevator, the increase was the sole topic of conversation among neighbors. “People will be like, I got hit for 13 percent, someone else 7 percent,” she said.

The couple made up their minds to move; but rents for the kinds of two-bedrooms in elevator buildings they desired would be at least $6,000 a month.

Their broker, Scott Elyanow of Citi Habitats, urged them to think about buying an apartment, and to look in neighborhoods they might not have considered.

At first, the idea of leaving the Village “was like a death to us,” Ms. Kreuzberger said.

But the more they saw of the rental market, the more convinced they became that the time had come to buy.

The couple settled on a two-bedroom apartment at 100 Jay Street in Dumbo, Brooklyn. They paid just over $1 million, putting 25 percent down, and recently moved in. Their monthly outlay is $4,250, which covers their mortgage, common charge and taxes.

“It was such a leap,” she said. “But we could not be happier.”


June 24, 2016

Be Sure to BREXIT Any Thoughts of Rising Mortgage Rates

I did a lot of reading this week, plus we proudly attended my youngest son’s high school graduation and his college orientation. As a tradition, my wife gives each of our sons a copy of Dr. Seuss’ “Oh, The Places You’ll Go” on their graduation day. Of course plenty of eye-rolling ensues. And there are other ways to interpret this book.

For some reason I read a lot of music related stuff but all along I paid short shift to the Brexit actually happening – I just didn’t think it would. I was wrong or just too lazy to think of the housing or economic repercussions. So this week’s Housing Note was a mad dash to the finish line on Friday morning after the overnight results came in. I pushed a bunch of what I planned to cover to next week. The Brexit is our new reality.

For loyal readers of Housing Notes, you’ll remember this tweet as homage to the topic of a prior post on Boaty McBoatface:

another quick aside

The biggest news of the week: a court found that Stairway to Heaven wasn’t plagiarized. That might have had bigger repercussions to the zeitgeist than the the Brexit, no? And imagine if the song was called “Hairway to Steven?”

The Brexit Actually Happened. Now What Happens To U.S. Housing?

Great Britain voted to leave the European Union last night and their Prime Minister resigned as a champion of the #remain campaign. The Brexit is one of those global events we’ll be talking about for generations to come.

What does Brexit mean to the U.S. housing market?

Here are some first impressions, even though I don’t think anyone really knows the extent of the global impact yet.

Low interest rates will remain in place, probably for years, keeping credit conditions for bank mortgage lenders tight. The Federal Reserve has been working hard to change the market psychology in order to normalize mortgage rates and spur more economic growth with normalized lending conditions. It hasn’t worked as planned. The Fed has reduced forward guidance for future rate increases already and I think this event prevents such an increase for a number of years. Economic conditions don’t seem to be hurting the existing home sale market which showed the most U.S. home sales since 2007.

New York City will crush London as the world’s financial capital. Ok, thats an exaggeration, but it should give NYC further competitive advantages in the financial sector which could translate to jobs and profits. A number of years ago I attended a friendly debate at Columbia University between then NYC mayor Mike Bloomberg and then London mayor Boris Johnson (who attended Columbia). There was no winner in the debate then (although it was enormously entertaining), but there is a winner now: New York City.

The USD is now even stronger against the GBP. It is more expensive for the Brits to purchase NYC housing than it was yesterday. With about 15% of their economy connected to the EU, I suspect it will be a number of years to untie the connection, providing a continual drag on their economy. It is not realistic to think that UK investors will surge towards New York City tomorrow. It is now more expensive for them and many may have less disposable income on hand in the short term as the economy weakens.

Super Luxury housing in NYC may see tiny upside. I do think there is some benefit to the super luxury segment in NYC since London as a competitor is probably off the table for many global investors. New York super luxury remains challenged by over supply – with more supply coming – but its still a better outlook for the NYC market, if only a a nominal amount.

and finally,

lindsaylohanbrexit

Actress Lindsay Lohan is my new favorite economist. Let me get this out of the way. Yes, Actress Lindsay Lohan is my new favorite economist, specializing in the Brexit. After all, her twin sister in the ‘Parent Trap‘ was from London! Lindsay has since deleted all her Brexit rant tweets but her 9.3 million followers got some great insights last night.

Remaining Challenges to Foreign Buyers of Real Estate

Over the past few years, the narrative about foreign buyers of real estate has been at full volume. Vancouver has continued to see a tremendous amount of Chinese buyers of real estate. In fact 90% of sales in that market are in excess of $1 million. In Manhattan, that number was (only) 53.8% in the first quarter of 2016.

But with the heavy volume of speculative investment world wide, many governments are beginning to push back, perhaps out of concern that such activity is making housing costs more expensive for locals. I linked out to this Mansion Global article last week on times getting tougher for foreign buyers but it is worth revisiting now. In the case of Vancouver, if the province, British Columbia, doesn’t act, the city is proposing a tax on empty or under utilized homes.

And it appears that talk of a Canadian housing bubble is back. The Bank of Canada issued a review of the financial system with some significant regional concerns. British Columbia and Ontario post the highest risk due to a sharp rise in housing prices and an increased use of leverage.

canadaprices6-2016

And now with the Cavs win over the Warriors a few days ago a distant memory with the Brexit news, here’s the Russian’s take on LeBron’s #TheBlock


Manhattan Housing Price Growth Heaviest At Bottom

In the past month I’ve returned to writing my Three Cents Worth column again on Curbed I seem to be obsessed with the mix of what is selling. This week I looked back over the past 5 years to show how housing prices have risen much more in lower priced markets than the upper priced markets. Here’s the chart:

2016-6-23Mquintileindex

Appraisers Remain Under Siege

The banks have won and the appraisal industry has lost. At least for now.

Here is a series of feedback from Rob Chrisman in his must read newsletter on the mortgage industry. It is a heavily read source of in-the-trenches mortgage insights that I subscribe to. He gave me permission to share his recent content on the appraisal industry and will share more of it in the coming weeks. I inserted my thoughts following each quote:

And appraisals are always a hot topic. I received this note from an originator. “Our appraisal environment is out of control. Appraisals we used to get in 1-2 weeks have quickly gone to 3-4 weeks. Appraisals that were just $400 are now $550 and sometimes up to $1,100 for FHA and conventional appraisals. With the rules regulating appraisers on how to become an appraiser and how appraisers have to monitor everything an apprentice appraiser does, it is causing our homebuyers hardship. With the appraiser’s current workloads and the amount of appraisers we have lost in recent years, there is no motivation to bring apprentices on (due to those regulations), leaving the current appraisers working night and day to keep up with their workloads. That is also causing them to keep moving up the appraisal fees (basically rush fees to keep pushing who can pay the most up the line).

It’s called “market forces” and because the AMC movement has gutted the industry, there are much fewer competent appraisers left. And please lay off the “hardship” angle. It’s tired and worn out. Mortgage rates are at historic lows and with the Brexit they will likely stay that way for a while. As I have said before, there is not a shortage of appraisers, there is a shortage of appraisers willing to work for half the market rate.

“I don’t say this to be negative against the appraisers; they are doing what they can to keep up but we are left with $700 appraisal fees for our 1st time homebuyers on top of the other closing fees that are steadily climbing. Something has to be done. Either make becoming an appraiser a stringent faster process or make it where current appraisers can bring people on to help without having to monitor every process. Any thoughts?”

If you keep thinking of appraisals as a commodity rather than a profession and this will continue as the industry is gutted.

And this one. “The appraisers in my area are so buried, with turn times of 1+ months, they rarely consider training a new appraiser and eventual competitor. Are there ways we can start any program in our area to begin to train new appraisers without their help? Most real estate agents don’t care that LOs are struggling with this issue – they just want their transactions closed in a timely manner and rightly so. Borrowers, especially 1st time homebuyers, are struggling with the increasing appraisal costs. There should be discussion with Fannie Mae and Freddie Mac regarding going back to more appraisal waiver options from DU & LP approvals. We used to have more of those (800 credit score borrowers, 40% equity loan to values, rate/term non cash out refinances where we could get an exterior appraisal or even an appraisal waiver to get the loan completed) but now most automated approvals are requiring full interior/exterior appraisals. That is also burdening the system and the appraisers.”

With AMCs taking half the fee for appraisals, we can no longer mentor and train new appraisers. Established and reputable firms are going under and loan officers wonder why turnaround times in some markets are so slow. Look at the cause, not the effect.

The appraisal situation isn’t simple since a) nearly every home loan requires one, and b) the supply and demand of appraisals and appraisers is off-kilter in many areas of the U.S. I asked Michael Simmons, SVP of Axis AMC, a nationwide company. “Your reader raises several timely questions. Has the cost of appraisals risen? Yes, they have. Have the number of appraisers declined in the last 5-10 years? Again, yes they have. Have the rules governing the qualifications for becoming an appraiser changed? Not really – unless you count needing a 4-year college degree now to even be eligible to work toward certification – but then that’s part of the problem; we haven’t adapted qualifying criteria to the times.

As Warren Buffet famously said “Never ask a barber if you need a haircut.” The decline in appraisers is due to the influx of AMCs taking half of their fees. It’s an economics principle commonly known as “supply and demand” and since AMCs do not bring any “value add” to the appraisal process, the extra fees being charged are not bringing in more expertise.

This isn’t communism or socialism. The banking industry has promoted the AMC system to cut costs. They forgot about the part where appraisers have to make a living and are not widgets on an assembly line. Appraisal fees cannot be pigeon-holded into a flat fee across the U.S. Does it cost me, an appraiser in Manhattan, New York, the same as someone operating in Manhattan, Kansas?

Watch LA Dodger announcer Vin Scully take down socialism in between pitches.


NYC’s Population is Growing Rapidly

Yes, it is.

censusnyc

If you need something rock solid in your life (particularly on Friday afternoons), sign up for my Housing Note here. And be sure to share with a friend or colleague. They’ll feel like Brexit, you’ll feel bigger than LeBron’s Block and I’ll channel my inner Leavey McLeaveface.

See you next week.

Jonathan Miller, CRP, CRE
President/CEO
Miller Samuel Inc.
Real Estate Appraisers & Consultants

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March 18, 2016

Housing SOUNDS Good, But It Doesn’t FEEL Like It

Last December there was a tremendous amount of hand wringing in the housing market about rising interest rates. The Fed felt the improving economic news was strong enough to move the federal funds rate up a notch to keep potential inflation in check.

The future of the economy seemed to sound something like this.



Mortgage Rate Growth SOUNDS Limited

Despite the upbeat economic messaging last December, the housing market faced a double edged sword. Economic conditions, while improving (or the world around the U.S. is falling), have been offset by tepid gains in wages by current and potential homebuyers. Tight lending conditions have persisted.

Yes, the U.S. economy is improving but wages have been lagging all through the financial crisis and have only recently began to rise.

wagegrowthfortune

In other words we can see things improving but we can’t feel things improving yet.

For most of the U.S. housing market, rising home prices, limited inventory and tepid wages are not a great match for rising interest rates. As it turned out, that car sounded great, but it never got out of the garage. The 30 year rate has since slipped below the December rate at the time of the previous Fed announcement.

At this week’s FOMC meeting, they decided to hold off:

Federal Reserve officials dimmed their view of the economy and said they likely won’t raise interest rates as swiftly as they had previously anticipated, a nod to lingering risks posed by soft global growth and financial-market volatility.

And here is an always awesome Fed Statement Tracker – sort of like the “review” function in MS Word to track changes. Over many decades, the FOMC release documents are perhaps on of the world’s most scrutinized.

Within the Fed Statement Tracker, the partial sentence about the housing market near the top: “and the housing sector has improved further” has remained unchanged since the September 17th letter. Yet I wonder what the basis of “improved” means? Are they referring to sales? Pricing? Both? Something else entirely?

Another way to FEEL about the New York new development market

There was an amazing Bloomberg News article this week by Oshrat Carmiel and David Levitt that helps us understand how the world is beginning to realize there is a new development supply overhang.

All those super smart MBA, Wall Street master of the universe types armed with HP-12C calculators missed another overheated cycle.

A mentor of mine once told me (paraphrased) “never rely on an MBA with a HP12C, it’s the basis of all financial engineering.”

The article describes a deal by Extell, one of the most prolific NYC developers, to bring in a partner to help out. The article detail that jumped out at me was the way investors are pricing the bonds that were used to raise money for new condo development. It’s actually quite amazing:

The firm’s 6 percent bonds were trading at a yield of 9.4 percent on Tuesday, a sign that investors view the debt as risky. Extell has raised 1,650 shekels ($424 million) in Israel’s corporate-bond market.

Since there is no transparency of new development contracts IN NYC, this is a new way to understand the perception of risk by the investors of these new projects. All those anecdotal accounts of a slow down have been validated.

Here are some of the recent articles on the most talked about topic in real estate circles these days:

  • Cracks in the market: Is New York’s real estate boom over? [Crains New York]
  • At Dizzying Heights, Prices of Luxury Apartments May Have Found Ceiling [New York Times]

Speaking of ROI…

SOUND advice: How should a homeowner measure ROI?

Aside from Waffle House having their own record label with songs like “There are raisins in my toast” – nothing is more confusing than calculating the return on homeownership. Especially when those returns are compared against other asset classes like stocks. In NYC, home of Wall Street, we LOVE to compare housing to stocks for no particular reason other than proximity.

4q15Manhattan-DJIA

But that’s the wrong way for most homeowners and would be homeowners to think about housing as an asset class.

The majority of U.S. homebuyers use leverage to purchase a home via a mortgage. Aside from the value of their use of the home and tax deductions, a return on investment of a home should be based on the downpayment, not the original purchase price.

leverageinfographic
[click to expand]

But in the condo market, the use of cash is more common than for the majority of U.S. homebuyers This is one of those “perfect storm” elements behind the recent new development condo boom. The consumers of super luxury real estate generally did not use or need leverage at a time when credit conditions remain unusually tight.

4q15Manhattan-cash [click to expand]

New York Development Looks Good, But Hasn’t Been SOUNDING Good Lately

Yesterday I had a great conversation with James Nelson, Vice Chairman at Cushman & Wakefield for his monthly “Nelson Report” where we spoke about the shift in the new development market over the past year. My key points were:

  • It’s not about building too many new development units…it’s about too many units at the upper end of the price spectrum.
  • The super luxury condo space has been overbuilt and probably has a 4-6 year absorption period ahead of it.
  • Sales volume has fallen sharply as the global economy around the U.S. falters and the horizon fills with rising towers.
  • There are a lot of buyers out there but there is not the same sense of urgency as 1-2 years ago.

A Canadian AMC FEELS it has a bright future ahead.

But it clearly doesn’t feel that way to this appraiser. In a Bloomberg News analysis of an upcoming IPO Real Matters Deal Said to Set Stage for Canada’s Next Tech IPO, there was a golden nugget of a quote by a large investor in the firm. It was hilarious because it speaks to the disconnect that the public and banks have with the AMC industry.

The U.S. housing crash put pressure on mortgage providers to have a better understanding of the homes they were financing, said Thomas Caldwell, chairman of Caldwell Securities Ltd., who invested in Real Matters in 2013 through investment firm Urbana Corp. “Real estate appraisals are a big, big deal since 2007, 2008,” Caldwell said. “You’ve got to start having real numbers.”

LOL. “You’ve got to start having real numbers.” Think about how insane that comment really is. And the idea that numbers were bogus in 2007 and 2008 and somehow they aren’t now. Numbers are less reliable now than during the bubble but instead of being high, they are simply more random as the appraisal ranks are filled with non-mentored form fillers.

I’ve written about this a lot in the past and some of these posts went viral within the AMC and appraisal industries (hopefully for their accuracy and candor).

The parent company known as Real Matters has an AMC known as Solidifi and is perhaps one of the best AMC’s out there because they pay the appraiser the market rate and charge a fee to the bank on top of that instead of take half the fee as is commonly done in the AMC industry. We dealt with them once because a client wanted us to do the complex appraisal and we had to go through them.

Perhaps saying that Solidifi is one of the best is technically correct. But when adding context like the consideration of the entire AMC industry, is like qualifying it as on the top of a large steaming pile of cow manure. You’ve got the elevation but it still stinks. The AMC industry has worked hard to commoditize a profession and the mortgage system as a result remains deeply flawed.

Crayola Crayons SOUND good as a chart platform but doesn’t FEEL as professional

crayolasnapshot

I’m not sure why I’m more comfortable using the Crayola color palette other than as I like to say – I took band instead of art in high school and I’m making up for lost time using a non-serious format for serious presentations.

The opposite of this was apparent in a commercial property listing sent to me the other day. Notice the former tenant in the description section. I’ll stick to drawing charts with crayon colors.

Long Island

4q15LI-absorption

4q15LI-Supply-Demand

4q15LI-median

4q15LI-luxNlux

4q15LI-DOMdisc

Los Angeles

4q15LA-DOMdisc

4q15LA-condoSF

4q15LA-AVGnos

4q15LA-AVGmed

Miami

4q15miami-sharebytype

4q15miami-DOMdisc

4q15miami-DOMasp

4q15miami-distressedVnon-dis

4q15miami-ASPnos

4q15miami-ASPdisvnon

If you need something fascinating in your life (particularly on Friday afternoons), sign up for my Housing Note here. And be sure to share with a friend or colleague. They’ll draw with crayons better, you’ll sound better and I’ll feel better.

See you next week.

Jonathan Miller, CRP, CRE
President/CEO
Miller Samuel Inc.
Real Estate Appraisers & Consultants


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November 6, 2015

Spidey-Sense: Housing Market Precision That Doesn’t Exist

I think it’s fair to say that most humans are driven to be accurate when it suits them. Forget daylight savings time and how we turned our clocks back last weekend as well as the usual discussions about why we should or shouldn’t go through this twice a year.  Let’s even skip leap year and get down to business with something more important, the leap second and the relationship to the Earth’s rotation. Even that methodology is now being argued by many people (especially the tidy-minded types who run national standards organisations) dislike the leap seconds’ hackish nature.

20151107_woc922

Now look at the precision expected in real estate values and trends.

  • Does the fact that someone upgraded only the doorknobs in the master bedroom change the value of the house?
  • Does the “Zestimate” result that drills down to $1 increments confirm there such a granular a level of precision to a home’s value exists?
  • Do national housing market reports provide any relevance to your local market?
  • Does NAR’s report on pending home sales actually look forward?
  • Did Tony Montana (Scarface) price his mansion correctly?

If you confidently answered “no” to all of the above, then you have the ability to process proper context in your real estate life – just make sure your watch is adjusted for the time change.

sopologo

SuperStorm Sandy’s Three Year Anniversary

There was no precision involved when Superstorm Sandy hit the east coast on October 29, 2012. The storm was a blunt, brutal force. Thousands of homes were destroyed and damaged. My town in Connecticut lost power for 5 days and parts of Long Island lost power for 3 weeks. It was devastating. All of Manhattan lost power south of 39th Street for days. As luck would have it our office was located one block south of the line and so were shut down as well. In fact someone dubbed this powerless new neighborhood (within a city that loves neighborhood acronyms like SOHO, TRIBECA, FIDI, MEPA, etc.) as South of Power or SOPO.

Newsday published a nice housing related summary piece for the anniversary. In the aftermath, foreclosure rates for Long Island, while falling, still remain unusually higher despite the areas improving non-distressed market. However the south shore of Nassau County, the area hardest hit by the storm, seems to be leading the housing recovery in Long Island. But part of the price trend story is that some of the damaged housing stock has been rebuilt or upgraded.

Using our data, Brick Underground provided some graphics using price changes in hard hit areas against a larger control group. The impact to price and sales in the region varied significantly. One of the key takeaways from these articles is that the affordability of coastal living has been diminished. The housing stock is undergoing upgrades and the cost of homeownership will be permanently higher through property upgrades, building code changes and significant insurance increases.

BU4sandy

BU1sandy

BU3sandy
Source: BrickUnderground

Aspen Ski Housing Is Warming Up

We published our research on the Aspen and Snowmass Village housing markets a few weeks ago. It’s a surprising small market with a significant range of housing prices, not unlike a market like Manhattan, hence the trends can be precision-challenged. Not unlike the other 17 U.S. housing markets I cover, Aspen and Snowmass Village have skewed towards luxury housing as well. I also see these changes at other mountains I’ve skied: Stratton, Vail, etc. that largely began during the bubble a decade ago. I just began covering Aspen at the beginning of the year and have been steadily compiling an archive of housing data back to 2004. This week I got around to charting the market a number of ways. Here’s the library and I’ve inserted a few of my favorites below.

3q15aspenSV-median 600 3q15aspen-aspNOS 600 3q15aspen-luxNONlux 600

Polarization: Manhattan Absorption Rates 2015 and 2009 Compared

While we are on the topics of cold and precision, I’ve been tracking the absorption rate of the Manhattan market by property type and price range since the summer of 2009. It’s been fascinating to watch the pace of the bulk of the market speed up as it continues to be challenged by inventory and the upper end of the market slow down as development continues to target it, necessitated by record land prices. I’ve placed the October 2009 chart against the October 2015 chart. Incidentally, this is a pattern I am seeing across most of the housing markets I cover.

October 2015
10-2015Manhattan600

October 2009
10-2009Manhattan600

Other Precise Stuff

NeighorhoodX
Now lets compare New York City neighborhoods to L.A. neighborhoods using the insights of NeighborhoodX (launching soon) because we can:
lanycneighborhoodx600

Checks from China
And lets get to the bottom of how the Chinese extract money to invest in U.S. real estate. It’s actually quite simple, they use checks. Here’s the schematic.

chinesemoneyexport600

The WSJ Uses Local Brooklyn Dialect (and our data)
shmooklinWSJ600

spidercar

Halloween Epilogue; Arachnophobia Edition

Yesterday morning I was rushing to work – I jumped into my car parked in our garage and a huge spider, the size of a giant bumble bee, had weaved a thick web a foot away from my wide-eyed stare. I grabbed some papers to swat it away but it scurried off in my car nowhere to be seen. I was running late and made the drive with my “spidey-sense” on full power.

Fast forward to the evening hours. I opened my car in a dark parking lot and there it was again, inches from my face with a heavy duty web nearly completed. I swatted it away but the door light suddenly turned off. I fumbled for my keys to prompt the door light to turn back on. When it did, I looked down at the giant spider crawling up my leg. I swatted it again and it was nowhere to be seen…

If you need something stronger than a spider web in your life with lots of lights turned on, sign up for my weekly Housing Note here. And be sure to share with a friend or colleague. They’ll feel good, you’ll feel better and I’ll be more relaxed.

See you next week.

Jonathan Miller, CRP, CRE
President/CEO
Miller Samuel Inc.
Real Estate Appraisers & Consultants

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Manhattan Penthouse Co-op Sold For 2nd Highest PPSF in History

June 9, 2014 | 2:57 pm | Milestones |

960fifthFP

Real estate reporter Katherine Clark at the New York Daily News got the scoop on the $70,000,000 penthouse sale at 960 Fifth Avenue, the highest price ever paid for a Manhattan co-op apartment. Curbed New York lays out all the (pretty?) pictures.

The previous record was held by David Geffen, who paid $54,000,000 in 2012 for the Penthouse at 785 Fifth Avenue. Although the Geffen penthouse was renovated, it was 12,000 square feet, more than twice as large as the 5,500 square feet within the penthouse at 960 Fifth Avenue – that just sold for a record price of $70M.

To further illustrate how much more expensive this new record price actually is, take a look at the two highest Manhattan co-op sales prices achieved, but on a price per square foot basis:

David Geffen paid $4,500 psf for the penthouse at 785 Fifth Avenue for the then record price of $54,000,000.

Nassef Sawiris paid $12,727 psf for the penthouse at 960 Fifth Avenue for the new record price of $70,000,000. On a sales price basis, the new record is 29.6% higher than the old record of 2 years ago.

On a price per square foot basis, the record sale was 182.8% above the previous record sale price set two years ago.

With all the attention focused on the newish or new development residential condo market, the all-time price per square foot apartment record was set 2 years ago, around the time of the Geffen purchase.  A Russian oligarch paid $88,000,000 for Sandy Weill’s penthouse condo that works out to $13,049 per square foot. That record breaking sale was largely viewed as a market outlier, that the buyer overpaid as part of a larger divorce strategy – since it was 31% higher than the previous record in the year prior within the same building.

Some other oddities about this new record co-op sale at 960 Fifth Avenue:

  • The 960 Fifth Avenue co-op board is old world and I’ve heard it is fairly tough. As a general statement, it is not that common to see a foreign buyer at the high end of the market approved by a co-op board.
  • The news coverage suggested the buyer was slow to pay his taxes and negotiated a reduced amount with the government. This would be a concern for most co-op boards in terms of collecting maintenance charges in arrears from a foreign national if they stopped paying.

Since these conditions would probably make any high end co-op board nervous, perhaps this is a sign that shareholders (board members are also shareholders) are concerned about damaging potential property values by limiting the universe of people that would be able to afford these types of prices in this new market condition.

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Combinations: Creating a Larger Manhattan Co-op or Condo

April 20, 2014 | 5:58 pm |

1q14MATRIXcombos

[click to expand]

Over my career, I’ve have observed a higher frequency of combination apartments (ie co-ops or condos) when inventory is tight.  A combination apartment is simply the connecting of 2 or more adjacent apartments (to either side, above or below).  It may be easier and/or less expensive to buy the apartment next door to create a larger space (even if you have to overpay for it) than to brave the tough market searching for a larger place to live.

A few years ago I started to track this during the preparation of the Elliman Report: Manhattan Sales. I looked at the actual apartment numbers and counted those that suggested they were combined. I am clearly omitting apartment nomenclature that is not so clear ie 7AB is renamed 7A, so my results are conservative.  The above chart reflects the recent trend of more combinations being sold but doesn’t necessarily equate to more being created, so new combinations would only be considered a subset of this data.

I’ve dubbed the phenomenon “1 + 1 = 2.5” because there is a premium for larger contiguous space.

I’ve always thought co-op or condo building that allow combinations (nearly all do) as providing a potential way for shareholders to realize value upside, thereby enhancing the price structure of a building ie higher values rub off on other apartments in the same building.

Some top line ideas about combinations

  • No shares are lost and in fact, many combinations  result in the acquisition of dormant common hallway space providing additional revenue in perpetuity to the corporation and a cash infusion from the purchase price.
  • Larger units sell for more on a ppsf basis (ie my formula above) potentially influencing higher values for other units.
  • A few less apartments in the mix is a non-issue (ie risk) in a building this size, unlike, say a 4 unit brownstone.
  • I’ve always thought it wise to keep the stock certificates separate to give the buyers and co-op more flexibility, but I see this done both ways (and admittedly don’t understand any legal nuances on this point.)

Some other more granular thoughts

Some layouts don’t work
– Not all combo layouts make sense or provide value upside.
– Layouts tend to work better in pre-war and new developments than post-wars.
– 1980s condos often often the least combinable layouts – ie a side by side 1 bedrooms.
– Over the last decade, developers have kept this in mind during construction to give them more flexibility during the sales process.

Higher value per square foot
– Creating larger apartments creates value upside to existing space ie “1+1=2.5”
– Sometimes large combos can be oversized for the building and there is no ppsf premium for the larger space.
– When a an owner of a large unit buyers the adjacent unit, the mere fact that the same unit owner owns both usually results in a ppsf premium before renovations are made to connect.
– The upside in value for a smaller apartment, means that a buyer can overpay for the unit as an individual sale but the addition of the smaller unit to the large unit adds value to both units on a ppsf.
– The highest value is realized when the buyer can’t tell the layout was comprised of two different units.  Simply creating a door between two apartments would realize the least upside.

That second kitchen
– The biggest “tell” on a combo is the existence of a second kitchen.
– They are often converted to a laundry room or bathroom, taking advantage of the utility connections.
– Buildings might object to the removal of the second kitchen because it may impact the building Certificate of Occupancy – I defer to lawyers on this point.

What do lenders think?
– Some banks are scared of combinations and others are not.
– In my experience banks require financing on the whole apartment – if they have a loan using collateral of one of the apartments, they will require that it be replaced with a new mortgage to cover both apartments.
– Banks often get confused on the value of a combo asking the appraiser to provide a value for each of the separate apartments before they are combined. The problem with that position is that the combination is usually worth more as one apartment (even before considering improvements) – in other words, the sum of the parts is less than the whole and the bank will incorrectly assume the collateral is inadequate.

Maintenance fees
– Many agents tell me it is assumed that maintenance charges are skewed higher for combos. I can’t prove this, all other things being equal.  When it occurs, it’s probably for reasons other than simply combining the units.
– A combo in a small building, ie a 4-unit brownstone co-op, raises the risk to the remaining shareholders if the combo shareholder stops paying their maintenance charges. Risk exposure to a mid to large sized building should be nominal.

Common Area
– Quite often hallways are purchased and incorporated into a combo layout for a better result.
– The co-op wins by getting a cash infusion for the purchase and income in perpetuity for the additional share allocation from the common area purchase.

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The Climbing Cost of Condo Care

…Building expenses are then passed on to homeowners in annual fees, known as common charges or homeowner-association (HOA) fees, says real-estate appraiser Jonathan Miller of New York-based Miller Samuel. The homeowner association sets the budget for a building…

According to Mr. Miller, Manhattan common charges, including real-estate taxes, were $1.72 per square foot for the third quarter of 2013, up almost 9% from $1.58 per square foot last year…


Ask an Expert: “How much should maintenance fees affect the price of an apartment?”

Is there a formula or rule-of-thumb for adjusting the sales price of an apartment to offset high monthly maintenance fees or common charges?

When a condo’s common charges (or, in a co-op, the monthly maintenance charges, which include property taxes) are higher than average, you’ll need both a calculator and a grasp of psychology to figure the right price adjustment, say our experts.

Begin by calculating the amount by which the apartment’s monthly charges exceed the average.

In Manhattan, average monthly fees in a co-op are $1.68 per square foot, says New York City real estate appraiser Jonathan Miller of Miller Samuel. (In a condo, add common charges plus property taxes.)

“That means that a 1,000 square foot apartment might be expected to have a monthly maintenance of $1,680,” he says. “However, this is just an average and apartments vary greatly by their amenities, property types and financial condition.”

Agrees real estate broker Gordon Roberts of Warburg Realty, “I’d look at recent sales in the building in relation to comparable sales in the neighborhood and see if there was any discernable differential….There may be other factors, such as condition, views, or architectural qualities that could compensate for a higher maintenance, so it needs to be judged on a case-by-case basis.”

Say that you determine that the monthly charges are about $500 higher than average. Now calculate the amount of money that could be financed with a monthly payment of $500 and apply that to the purchase price, says real estate broker Deanna Kory of Corcoran.

For example, at today’s mortgage rates of around 4% for a 30-year-fixed loan, a $500 monthly payment would enable you to borrow around $100,000. Looked at this way, says Kory, the apartment should cost $100,000 less than a comparable unit with an average-sized maintenance.

In addition, says Kory, “it’s important to note that the formula above does not account for potential tax deductible portion of each. Mortgage payments have a much higher deductibility percentage in the initial years. And while maintenance charges in a co-op include property taxes and mortgage interest for the underlying mortgage payment, the tax deductible portion is usually between 30-50%.”

Now it’s time to factor in psychology.

“Small deviations [from average monthly charges] are tolerated by purchasers without adjustment but large deviations may require an even larger adjustment than a dollar for dollar figure, as the market punishes high maintenance and common charges and rewards low maintenance and common charges,” says asset manager and real estate broker Roberta Axelrod of Time Equities.

Higher monthly charges can and often do affect value far more than the actual real cost equation, says Kory. The amount can depend on whether the real estate market overall is hot or not.

“In a strong market, the concerns of high maintenance or high common charges are not as evident, but in a weaker market, buyers consider maintenance levels more carefully,” she says.

Desirability of the apartment, its location and supply and demand factors can all be influential, she notes.

“Right now, with interest rates so low, people would rather pay more in a mortgage than have a higher monthly fixed cost–if they have a choice,” says Kory, who notes that buyers often say to her, “you can pay down your mortgage, but maintenance rarely goes down.”