The Real Deal New York

Shvo’s High Line deal a “make-or-break” second chance

High cost basis may prove too much for newly anointed developer, sources say
By Katherine Clarke | May 28, 2013 08:30AM

Michael Shvo, the bad boy marketing maven who made his name during the real estate boom by hosting celebrity parties and spearheading over-the-top marketing campaigns, posed for a Wall Street Journal photographer on the High Line earlier this month in a dark suit and a crisp white shirt, his hair slicked back.

In the background: a Getty gas station which sits on the West Chelsea parcel he just purchased in partnership with developer Victor Homes. The developers plan to bring high-end art-themed condominiums to the site, for which they paid a record price of $800 per buildable square foot.

While Shvo might be positioning himself as a comeback kid, one that has graduated from brokerage to development, some industry insiders are not persuaded that he has the savvy to cut it as a serious developer, especially given the hefty chunk of change he paid for the West Chelsea site.

Shvo is likely betting on his ability to convince buyers of value with a sophisticated marketing campaign, sources told The Real Deal, but given his cost basis, he may struggle to make the numbers work.

“He’s got to shoot for the sky on this,” said Andrew Gerringer, managing director of new business development at the Marketing Directors. “It’s a relatively risky proposition. If you look at the comps in the area, they really don’t show those kinds of numbers.”

Shvo and his partners paid a total $23.5 million for the site, according to recent reports, more than $4 million more than its last asking price; they will have to invest further in picking up the additional air rights necessary to build a project totaling more than 40,000 square feet. That investment will require Shvo to reach for prices of up to $3,000 a square foot, sources said, which would put the units at the top end of the market for the neighborhood.

Stephen Kliegerman, president of Terra Development Marketing, said he’d had some clients interested in the property but “after thorough research and evaluation, they weren’t able to wrap their arms around that kind of number.”

Kliegerman declined to name the clients.

While Shvo would not comment for this story, he previously told the Journal that he considered the land inexpensive.

“The vision for this property relies on the game-changing real estate mindset that I believed in and acted on previously,” he said, rhyming off words like “luxury,” “authentic” and “self-defining.”

But, ironically, it’s Shvo’s “game-changing mindset” that may lead him into trouble, some sources speculated, since he’s truly a child of the real estate bubble. Consumers have become more educated about the macro real estate landscape following the 2008 housing bust, growing savvier about deciphering value from the buzz that was Shvo’s specialty, they said.

“They’re trying to bring value to the parcel through the message and that’s antithetical to what we feel is a conservative way to develop real estate, commodity first,” said one developer who has been active in the West Chelsea market. “We start with really good dirt and then try to maximize the value of that with an appropriately designed message, product and overall development strategy. I suspect the market is a little smarter than [Shvo] is giving them credit for.”

The site itself, at 239 10th Avenue, was marketed by Brock Emmetsberger and James Nelson of Massey Knakal Realty Services.

It was challenging to put a price-tag on the lot, Nelson said, since there had been few recent land sales in the area. Nelson declined to comment directly on Shvo or his partners.

“We looked at comparable sales in the area and a lot of those were topping out at $500 to $600 per buildable square foot,” he said. “We thought when we were asking in the high $600s, we were giving room for buyers to reach for. We certainly weren’t trying to under-price the property.”

Still, the ultimate price Shvo and his associates paid surprised some industry experts.

“A lot of people expected this was going to go for a big number,” said Robin Schneiderman, director of business development at Terra. “I don’t know if people expected $800 a foot.”

The site itself has some quirks, sources said, given that it currently houses a gas station and may require some environmental remediation, elevating the cost basis further.

The partners could be “all in for north of $1,500 a foot easily,” before carrying costs and interest, one source estimated, making their break even cost a lot higher than some other developers’ in the neighborhood.

“Is this make or break for [Shvo’s] reputation? It probably is,” one broker said. “I don’t think you get a third bite at the apple.”

Another developer speculated that the flexibility of those providing the equity may only stretch so far.

“How much capital is he going to have to float into the building’s envelope when his land basis is $800 a foot?” this source said. “There is a ceiling to what partners and lenders will participate in.”

The “land value is going to be chasing [Shvo] through the entire process,” one developer said. “He may be able to make it work if everything lines up for him, but not if the market turns against him.”

The far west side of the Chelsea market is somewhat untested in terms of luxury product, some marketing experts said.

While buildings such as Alf Naman’s HL23 at 515 West 23rd Street have reached prices in excess of $2,000 a foot, at +aRt, a luxury building at 540 West 28th Street — four blocks away from Shvo’s site — prices have dipped as low at $900 a square foot. The penthouse at 245 Tenth Avenue, directly abutting Shvo’s site, sold for close to $3,000 a foot in 2012, but its lower-floor units sold for as little as $1,000 a foot. At the Jean Nouvel building at 100 11th Avenue, prices have exceeded $2,000 a foot.

Factoring in the cost of addressing the gas station site’s potential environmental issues, and the fact that the building’s second and third floors will be directly on the High Line where passersby can look right in, sources said it was unclear if Shvo will be able to justify his upfront costs.

“Beyond the remediation, they have to deal with the rock in West Chelsea,” said one person familiar with building in the area. “It’s a lot more expensive to drill in West Chelsea than it is in some other parts of Manhattan. At 100 11th Avenue, they had major problems when they started to drill.”

Unlike sites at 150 Charles Street in the West Village and 56 Leonard Street in Tribeca, Shvo’s site doesn’t have that wow factor, one person said.

“At 150 Charles, their intrinsic value is being a huge amenitized building on probably the last sizable developable lot in one of the most sought-after zip codes in the country,” the person said. Meanwhile, the site of 56 Leonard falls in between the east and west historic districts in Tribeca, allowing the developers to build taller than all of the surrounding buildings.”In this instance, there’s no hyper incredible factor,” one source said.

Shvo may also be forced to compete with several other projects currently in the pipeline in West Chelsea, such as developer Cary Tamarkin’s 10-story project at 508 West 24th Street and a 100,000-square-foot Condo Project Spearheaded By Hfz Capital Group On West 19th Street.

“Michael is not going to be building into a dearth of inventory. He’s going to have competition both locally and in the larger landscape,” said one person familiar with the market in the neighborhood. “He will not be the only show in town and that to me right off the bat is a red flag or something that would give me caution.”

Still, some warned it would be foolish to write off Shvo.

“The thing he’s very good at is getting people talking about him,” Gerringer said. “When you have a risky situation like this, when you hit it right the returns are there.”