With margins tight, rental projects need flexibility

By Steve Cutler | November 29, 2007 02:49PM

Even during one of the strongest rental markets the city has ever seen, the sky-high costs of land and construction make new rental buildings tough for developers to pencil out.

“We’re seeing monthly rents average $60 to $70 a foot,” said Daren Hornig, managing partner of development company Saxa, and former owner of Dwelling Quest. Though that hurts if you’re a tenant, for a developer, “the deals are [still] incredibly tight and lean,” said Hornig. “With typical land prices exceeding $300 a square foot, plus construction costs of $350 to $450 a foot, plus interest and carrying charges, it’s very hard to do a residential rental property.”

However, a spate of new rental buildings — from River Place II on the West Side to 201 Pearl Street Downtown to 1381-1389 Third Avenue — shows that developers are willing to tackle the challenge. Here are some of the various approaches:

1. I already own the land

Of course, a new project will cost $300 a square foot for land acquisition, which doesn’t work. David Pickett, president of the Gotham Organization, one of the largest rental building owner/managers in the city, put it this way: “If the average location in the city, neither great nor lousy, is probably high $60s or $70 a square foot, that supports no more than between $100 to $150 a square foot for land, and there’s nobody out there selling land for that price. You’re lucky if you can get land for $300 a foot.”

But what if you’re, say, David Walentas of Two Trees, who bought large swatches of Dumbo in 1979, paying $6 a foot (roughly $23 a foot in today’s terms)?

Then you might try building his proposed 16-story, 400-unit rental project, which faces community opposition because the tower would block views of the Brooklyn Bridge.

And Gotham is preparing to build a luxury high-rise rental at 72nd Street and Broadway, which makes sense financially, said Pickett, “because we’re partnering with a family that owns the site. And you have tremendous value in the retail at that location.”

2. I’m hedging my bets with a condo conversion

A 13-story building, Gramercy Lofts at 270 Park Avenue South, was emptied by its owner, Pan Am Equities, and put up for sale as a property easily convertible to condos. “But then almost a year went by,” said Daniel Baum, principal of The Real Estate Group, which is marketing the apartments, “and they changed their minds, pulled it back off the market, said, ‘Let’s keep it in the family, do a massive upgrade to the building and rent the units out for incredibly high rent.'”

The building’s 80 units, which include two floors of duplex and triplex penthouses ranging in price from $3,500 for a studio to $8,500 for a two-bedroom, went on the market in July and were leased within two months, an executive in the office of The Real Estate Group said.

On a smaller scale, Joseph Sbiroli, principal of Ventura Land Corp., is developing the Modern, a six-story luxury rental near the Meatpacking District, at 343 West 16th Street. “I’m in love with the area and want to have a stake in it,” Sbiroli said. “With all the new development going on over there, and with the High Line, we feel the location will improve by leaps and bounds in a couple of years.”

Currently, rents for the eight apartments at the Modern range from $3,800 for a small one-bedroom to $12,000 per month for the two-bedroom penthouse with a
private rooftop terrace, fireplace, stainless steel appliances and wine cooler. The units are marketed by JC DeNiro.

Sbiroli said he also wants to keep the building to test out some of the green technology he’s installing, including a geothermal heat exchange well that heats and cools the building without oil or natural gas. “We want to troubleshoot the technology to see how well it works so we can incorporate it into future projects. If we did it as a condo, we’d just be passing it off to a condo association or another manager.”

While Sbiroli relishes the thought of owning rental long-term in this burgeoning neighborhood, he is leaving his options open. “Going rental in the beginning,” he said, “doesn’t mean we can’t convert at a
later time to a condo.”

3. This is great tax planning

Converting to a condo after running a building as a rental for at least 18 months is a plan any accountant would love, as it allows the developer to pay taxes on profits at the long-term capital gains rate of 15 percent, whereas profits taken immediately on the sell-out of a new-construction condominium are taxed as regular income.

According to Orin Wilf, principal of Skyline Developers, which owns a slew of both rental and condominium projects in New York City, “If you look at who is doing rentals, it’s primarily family-owned private companies like myself. We’re going by the basis that it’s better to build rentals, spend a little extra money and be in for a lower return to begin with, than to pay all those taxes when you build a condo and sell it.”

Skyline has announced it will build a luxury high-rise rental building at Third Avenue and 79th Street once it has demolished the five existing buildings on the site. “But I’m still debating whether to go condo or rental,” said Wilf. “I could do a rental there and be fine with it, but everyone I know has been coming up to me and saying, ‘Build a condo, we want to buy all the units.’ The location sells itself. I probably have all the units sold already, and I haven’t even designed the building yet.”

Wilf purchased an office building at 1040 Sixth Avenue, at West 39th Street, just over a month ago. “We’re looking at possible conversion to rental there also,” he said. “It’s a little bit cheaper when you have a building that’s already erected.”

4. I believe in an edge neighborhood

“My fear is that new development large-scale residential rental buildings are going to go the way of the dinosaur,” said Hornig, whose development company is currently building the Prime, a boutique luxury condominium on West 14th Street.

However, major projects are underway on the Far West Side and Downtown, both rapidly gentrifying neighborhoods. On West 42nd Street and 11th Avenue, developer Larry Silverstein last month received reportedly the largest single construction loan for a residential project in U.S. history — $700 million For River Place II.

The 1,359-unit two-tower project will include 21,000 square feet of retail space, a 13,000-square-foot amenity center and 194 parking spaces. Approximately 20 percent of the units will be set aside as affordable housing. Costas Kondylis designed the towers, which will share a 22,500-square-foot Landscaped Park With River Place I, the first phase of the project that was completed in 2001.

Similarly, Downtown, developer Joseph Moinian, who had success with condos in the area at 20 West Street, chose rentals over office space or condos for his 507-unit project at 95 Wall Street. Amenities will include a fitness center, lounge and outdoor deck; occupancy is expected next year.