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 (6)

  • Principal in RE - Comm
Jan 9, 2022 - 7:45pm

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

Jan 10, 2022 - 8:26pm

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
Jan 11, 2022 - 9:27am

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.

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  • NA in RE - Comm
Jan 11, 2022 - 9:25am

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