Paydirt: The ground beneath her feet, Trump & the taxman, no mezzin’ around … & more

The dirt on dirt: Mark Twain’s memo must have got lost in the mail. “Buy land, they’re not making it anymore,” isn’t a mantra Manhattan developers are abiding by. And judging from asking prices for sites versus what apartments are selling for, it’s easy to see why.

Over half the contracts signed in Manhattan’s condo market in Q3 were for pads priced between $1 million and $3 million, according to Halstead [TRDataCustom].  Judging from the new product hitting the market, that trend will continue: The total projected sellout of new condos approved for sale so far in 2016 is $10.92 billion, down 34.4 percent year-over-year from $16.64 billion.

In many senses, this is good for the market. Developers are coming back to earth; unlike in 2014 and the first half of 2015, they’re creating product for a segment of the market that has a deeper and more sustainable buyer pool. In Manhattan, the average sales price on closed deals representing contracts signed 12 to 18 months ago was $2,271 per square foot, according to Halstead. Pricing for recently signed contracts fell to $2,070 per square foot. But where does that leave dirt?

Because there are so few land deals happening, it’s hard to establish an average price for dirt in Manhattan — estimates vary between $600 and $700 a foot. But headline-grabbing deals have a tendency to mess things up for the rest of the market. Let’s look at two of the priciest major land deals of the past two years. In June 2015, Kuafu Properties paid over $1,000 a foot for a 280,000-square-foot site on the Upper East Side. A few months before that, Ziel Feldman’s HFZ Capital Group agreed to pay over $1,100 a foot for a massive site in West Chelsea off the High Line. Feldman is projecting sales prices of up to $4,000 a foot at his project. But that’s a stretch when average prices in the area are closer to the mid-$2,000 a foot range and new development prices are trending downward.

Kuafu has said it’s not even going to bother building this cycle. But very few developers have pockets deep enough to sit on bets that big. They’d rather not pay those prices. And sellers of land either haven’t got the message yet, or they don’t care. Just 48 land deals happened in Manhattan in the first half of 2016, compared with 79 in the same period last year, according to Ariel Property Advisors.

“Most landowners don’t have to sell,” Bob Faith, CEO of real estate fund manager Greystar, told TRD in March. “So capitulation typically takes a while.”

It could be a long wait. If developers can’t find condo buyers willing to pay top dollar, construction costs (materials, labor) aren’t falling, and banks are unwilling to finance luxury projects, then why would they buy land? There’s nothing in place to push sellers to act faster either — though Mayor Bill de Blasio vowed to crack down on land speculation by imposing a tax on vacant lots, nothing has come of that initiative yet.

No mezzin’ around: At HFZ’s High Line project, the mezzanine lenders include Vornado, Oxford and SL Green. At JDS and Chetrit’s supertall Brooklyn project, Kushner Companies is on the mezz. For these developers, mezz lending allows for a decent return at a lower risk than an equity investment. It also puts them in pole position to take over the property if the owner can’t make good on payments, as was the case with the Durst Organization at Ian Bruce Eichner’s 1800 Park Avenue. And having developers in the mezz makes banks a lot more chipper too, a top Citigroup exec said at EisnerAmper’s real estate private equity summit last week.

“We are brought deals from mezzanine investors, who say ‘look, we think this deal will be fine, we know the market, we know the asset, and if anything goes wrong, we’re the owners,’” said Marcus Giancaterino, Citi’s head of global CRE finance. “They may actually be our customer, and the borrower will not.”

Zell’s moderator from hell: Sam Zell isn’t known for being PC. The chairman of Equity Group Investments was caught on camera mouthing “fuck you” to one of his own reporters and is known admiringly in private equity circles as “the grave dancer.” But even he was prudent enough to demur when asked a shocker during a one-on-one chat at the EisnerAmper summit.

Zell’s interviewer was Wharton CRE professor Peter Linneman. The two got to talking about the one-child policy in China, when Linneman twice implied that perhaps people don’t want to have sex with Chinese men. He said: “Look at Chinese men, that may be your explanation.”

“That’s too heavy for me,” Zell replied. Someone in the audience stood up to protest Linneman’s remark, and the panel then ended abruptly. Linneman, after a day of radio silence, realized this wasn’t going away, and apologized for what he termed “a misguided attempt at humor.”

Real estate is a pretty homogenous industry, and racism is par for the course. People think they can get away with offensive statements because they do. This was the rare occasion when someone’s ignorance was called out.

A misguided attempt at humor and I am sorry for having offended anyone, especially those in the audience who experienced this firsthand.

— Peter Linneman (@P_Linneman) September 29, 2016

Trump’s $916M cushion: The NYT’s Susanne Craig checks her snail mail obsessively, hoping, like so many journalists do, that there’ll someday be an earth-shattering tip in there. On Sept. 23, she found in it what amounted to a piece of the holy grail in this presidential season: portions of Donald Trump’s 1995 tax returns.

The resulting Times story showed that in that year, Trump declared a $916 million loss from his business, a deficit so massive that it effectively could help him avoid paying taxes for up to 18 years. He did this by taking advantage of loopholes in the tax code that make real estate a pretty good industry to be in if you want to avoid paying Uncle Sam. These include 1031 like-kind exchanges, net operating loss and abandonments, as the Gray Lady’s James Stewart explained.

“He has a vast benefit from his destruction” in the 1990s, NYU Schack professor Joel Rosenfeld told the Times.

Former NYC mayor Rudy Giuliani, a key Trump supporter, described the developer’s tax gymnastics as illustrative of his genius. And as for Trump himself? Though he didn’t comment directly on the 1995 tax returns to the newspaper, a June remark he made to Politico gives one a sense of how he feels. When asked to comment by that publication on avoiding paying personal taxes for two years in the early 1990s, he said, simply: “Welcome to the real estate business.”

(Read more from Paydirt here.)