Family Building Dillema

What would monkey's here do? I would appreciate anyone putting on their creative deal hat.

Let's say you have a building your family owned for 40+ years.  There is no mortgage, it is in NYC, in one of the top 5 neighborhoods. The building does not cash flow great, very low rents 60% rent stabilized. Buildings tenants are below market, even the Free Market ones, but this is in an area where on a cash flow basis as-is one could get maybe $5-$6.5mm. For perspective, NOI is like 150k.  Because of the location and special type of building vacant it would fetch $8-$12mm. (It could sell tomorrow for ~$5mm and maybe in a year for ~$11mm)

Would you try do the tenant buyouts, family has very good rapport with tenants, most have very good jobs, and the rents they are paying are very close to what they would pay for a mortgage for a 1-bedroom in this neighborhood. And then do the renovations yourself, because A+ neighborhood and building(bones and unique building). Or would you sell, then 1031x take on 50-60% debt and double your NOI without doing much work.

My proforma would get the NOI to maybe 450k on the current property. My experience is such that I am not really questioning its accuracy.

What would YOU do.

Bonus points, there is no more depreciation on the current building. Are we in the 9th or 11th inning in NYC?

Comments (16)

  • Principal in RE - Comm
1y 

Using aggressive numbers, a new buyer would likely model this to a 12-15% IRR, and they've done this before (you haven't). I'd contact the 4-5 known buyers of this strategy

1y 
Anon1235, what's your opinion? Comment below:

Which units are you buying out? Make sure you understand nyc multi family laws and the new laws that passed 1-2 years ago. 
 

You probably cannot get the RS tenants out and increase those to FM by renovating. RS/RC units were seen as as-is cash flow on an asset when I was a broker. 
 

Overall it may not be worth it to plow all that $$ into the building. Maybe see if you can refinance the building and take that cash to go buy one more and grow it.

  • NA in RE - Comm
1y 

really hard to take out a loan with a debt constant of 5% to use a equity, when cap rates are 4-6%.  The returns are small.

The risk mitigant in selling is that I don't take on the value add risk, and i buy into larger ("stabilized" deals with double the current cash flow.  That premise is slowly slipping away as rates increase.

Learn More

300+ video lessons across 6 modeling courses taught by elite practitioners at the top investment banks and private equity funds -- Excel Modeling -- Financial Statement Modeling -- M&A Modeling -- LBO Modeling -- DCF and Valuation Modeling -- ALL INCLUDED + 2 Huge Bonuses.

Learn more
Most Helpful
  • NA in RE - Comm
1y 

For those who commented, I'm well aware of who would buy this as is. The buyouts would be to renovate to floor thru units, and create a first rent.  The market for upper end units is very good.

There is a very big delta from either selling it vacant to a condo/co-op developer, as you(above) are correct since June 2019 we can't deregulate units.  A townhouse conversation would net the biggest sale numbers IF we can get the building vacant.

As a background I have 10 years experience in CRE, and it has been my second career after the GFC.  I've been on calls for my non principal companies holdings with Rosenberg and Estis, etc, when dealing with rent stabilization laws.

2mo 
Ozymandia, what's your opinion? Comment below:

For those who commented, I'm well aware of who would buy this as is. The buyouts would be to renovate to floor thru units, and create a first rent.  The market for upper end units is very good.

You better sell quickly, since HCR is trying to close that loophole

There is a very big delta from either selling it vacant to a condo/co-op developer, as you(above) are correct since June 2019 we can't deregulate units.  A townhouse conversation would net the biggest sale numbers IF we can get the building vacant.

Getting it vacant is exceptionally difficult, as I'm sure you well know.  It'll cost hundreds of thousands of dollars and even then you've got little guarantee of people actually signing the surrender agreement.

As a background I have 10 years experience in CRE, and it has been my second career after the GFC.  I've been on calls for my non principal companies holdings with Rosenberg and Estis, etc, when dealing with rent stabilization laws.

That is a good start, but what you can do in theory and what is allowed in practice are two very different things

2mo 
atlantis, what's your opinion? Comment below:

You don't mention what your (your family's) ideal scenario / exit is here with your dilemma. Do you guys want to increase cashflows and income generated? Do you want to dispose of the asset? Do you want to add value / transform the asset to better fit the property's best usage, say by modernizing the layout as you mentioned in terms of converting it into a single dwelling home or into (2) two-floor townhouses (no idea what the current property looks like, I didn't see it mentioned). 

Do you or your parents, any siblings, any family members live in any of the unit(s)? Why is this property attractive vacant? What do investors who buy up these properties vacant for a premium do to them? Convert them into single dwelling homes / "urban" cottages, develop them and sell them for a premium to families with $ looking to live the suburb life in a city setting? (This is popular in my neighbourhood right now - converting Victorian-Era duplexes/triplexes back into cottages for affluent "young professional" / 
"nouveau riche" couples/families) Do they convert them into multi-floor nightclubs / entertainment theatres, venues, etc. (this too seems to be a trend in my borough, which I could probably compare to Brooklyn/Williamsburg) Is there development potential? Is it built to its setbacks or theres room to add storeys, take advantage of low building to land ratios, etc. Do your parents want to dispose of the asset and collect a lump sum? Is this an heirloom in the family and they'd like to keep this asset for generations to come / it holds some sentimental value.

Goal (1) --> dispose of the asset to collect the highest returns

Goal (2) --> conserve the asset, but optimize it to be a better cashflow producing asset that isn't returning negative returns, makes it more attractive to future buyers or lenders if/when other opportunities come up that will require capital

  • 2
2mo 
ilove1caps, what's your opinion? Comment below:

Don't sell. Run the value add yourself. Maximize the NOI then refi at conservative ltv when rates come back to earth and use the proceeds to buy more real estate.

2mo 
Ozymandia, what's your opinion? Comment below:

ilove1caps

Don't sell. Run the value add yourself. Maximize the NOI then refi at conservative ltv when rates come back to earth and use the proceeds to buy more real estate.

So... you're in business school?  Because this is about the most generic and straight up wrong advice you could give.  I mean, it is difficult to be so broad and still be so wrong, so kudos

There isn't a ton of NOI to maximize here, according to the original post.  Especially now, the building has lost value, not gained, and it's NYC so even the games he can play to raise the rents pose plenty of risks.

  • 1
2mo 
atlantis, what's your opinion? Comment below:

He states current NOI as being around $150k, and based on his pro forma, he could get the NOI to $450k (he doesn't say exactly how, but I imagine it's the do the buy outs / get in a position to do major renovations/transformations/modernize layout and eliminate all the ltl by stabilizing with current market rents aka "value add" play - vs. running the entire development once he's managed to get the property entirely vacant). 

EDIT: just realized this is an almost year-old thread someone bumped. My apologies. But if OP can drop an update that would be cool!

2mo 
sweaty intern, what's your opinion? Comment below:

Et optio odio in rerum voluptate. Quo provident delectus corporis animi dolores dolore corporis. Tempora totam iste nihil sint nobis quisquam qui aut. Quo est ipsum ut harum ut. Eos similique magnam tempora id. Qui voluptate iure deleniti voluptas.

Repellat deserunt culpa qui maiores. Ea ut enim exercitationem. Doloremque ex ut cumque ut pariatur est quos.

Ab inventore unde tempora expedita est et aspernatur. Natus nesciunt corrupti alias rem quia. Non dolor ut aut et exercitationem. Debitis eveniet officia delectus harum accusamus. Voluptatem non id nulla est ipsum. Sint temporibus animi officia omnis.

Officia sed et autem dolores in iure atque. Neque consequatur impedit qui et error totam. Commodi illum placeat consequatur in dolores. Totam perspiciatis magnam eveniet. Quas aut numquam accusantium itaque sed distinctio cumque.

Start Discussion

Career Advancement Opportunities

January 2023 Investment Banking

  • Lazard Freres (+ +) 99.5%
  • Jefferies & Company (▽01) 99.1%
  • Lincoln International (▽01) 98.6%
  • Financial Technology Partners (▽01) 98.1%
  • William Blair (▲08) 97.7%

Overall Employee Satisfaction

January 2023 Investment Banking

  • Canaccord Genuity (▲04) 99.5%
  • William Blair (▲04) 99.0%
  • Lincoln International (▲09) 98.6%
  • Jefferies & Company (▲06) 98.1%
  • Financial Technology Partners (▲09) 97.6%

Professional Growth Opportunities

January 2023 Investment Banking

  • Lazard Freres (▲15) 99.5%
  • Financial Technology Partners (▲09) 99.1%
  • Lincoln International (= =) 98.6%
  • Jefferies & Company (▽03) 98.1%
  • William Blair (▲01) 97.7%

Total Avg Compensation

January 2023 Investment Banking

  • Director/MD (6) $592
  • Vice President (24) $418
  • Associates (136) $262
  • 3rd+ Year Analyst (9) $194
  • 2nd Year Analyst (80) $172
  • 1st Year Analyst (257) $171
  • Intern/Summer Associate (42) $166
  • Intern/Summer Analyst (185) $91