The Real Deal New York

Building sales market has investors flipping

By Philana Patterson | November 26, 2007 01:11PM

Flippers are thinking big.

In a still strong investment sales market, the practice of rapidly turning over property typically associated with individual apartments or homes has spread to much larger buildings, for much greater profits.

A number of factors, including buyers taking advantage of off-the-market transactions and quickly reselling, have fueled the trend, but some industry players wonder if the term flipper shouldn’t be left to small-time turnover specialists and pinball machines. Flipping isn’t a term that everyone in the real estate industry is all that crazy about, and the question of how long an owner must hold on to a building for it to be considered a flip depends on who is asked.

Flipping, according to Adelaide Polsinelli, senior executive broker at Besen & Associates, refers to the practice of finding a property that is for sale, typically at a below-market price, and then reselling it, usually without closing on it, for a fast profit. Some people measure flipping as holding a property for at least one year in order to pay less in capital gains. Others are willing to consider flips as buildings owned by one entity for as long as two to three years perhaps even making some improvements and then selling them.

Regardless of the criteria, the list of larger properties that have been held for a relatively short time and sold at a substantial gain is significant.

In June, hedge fund mogul Angelo Gordon of Belvedere Capital, Irwin Cohen, and Young Woo Associates sold the former Nabisco factory in Chelsea at 85 10th Avenue for $300 million after buying it in 2003 the second time they’d purchased the property.

L & L Acquisitions bought 261 Fifth Avenue in February 2004 for $115 million only to sell it to a partnership led by the Feil Organization for $180 million last August.

In August of 2004, Tribeca Broadway Associates and Ritchie Capital Management sold Penncom Plaza at 132 West 31st Street to C& Properties and Zamir Equities for $91 million after buying it just eight months before for $63 million. By September of this year, C& Properties and Zamir Equities had already put Penncom Plaza back on the block, though they later took it back off the market and decided to refinance the property instead.

And in the biggest flip of them all, Extell Development Corp. and the Carlyle Group, the world’s largest private equity firm, bought more than 66 acres and three buildings from Donald Trump and a consortium of Hong Kong investors for nearly $1.8 billion in July. They then flipped the three rental properties to Equity Residential Properties for $816 million. Now, Extell and Carlyle are shopping around a portion of the land they purchased, and are getting interest from RFR Holding and Tishman Speyer Properties, for a price that could reach as high as $1 billion.

“Given the fact that the market has been doing what it’s been doing, it’s been a great opportunity to resale [large properties] at a meaningful price,” said Woody Heller, executive managing director at Studley and the broker who had been marketing Penncom Plaza. “It’s rare that the market gives people that opportunity.”

In some cases, buyers are fixing up the properties, getting tenants in or out, and making other improvements to make the buildings more valuable. Sometimes they buy a building with the sole intention of putting it back on the market as soon as possible.

“One of the things our clients like doing the most is calling us to say they just signed a contract for an off-market deal and asking how much more we can get for it,” said broker Robert Knakal, chairman of Massey Knakal Realty Service.

Those off-market deals are another part of what’s fueling the activity. Some sellers prefer private transactions, and that can give buyers an advantage, Knakal said. When the fact that a property is for sale isn’t widely marketed, sellers often get less than what they could if there was more publicity, he said. Knakal says many potential buyers have realized they can get off-market properties for less than well-publicized ones and are taking advantage.

“They know they got a deal that was not widely marketed. Probably the average bid we get [for a quietly marketed property] ends up being 15 percent less than what the property is worth,” Knakal said.

The people most likely to flip properties tend to have larger portfolios, said Polsinelli of Besen & Associates. Less likely is a single family or a group of five to 10 families who own a building, especially when it’s their first property and they want to use a 1031 exchange for tax purposes when it’s sold, she said.

Flipping is attractive for other reasons. Operating a building can be a time-consuming process. Few owners make money in their first years as landlords. Anyone who might be concerned about the viability of the building, or who would rather sell for a profit than manage a property long-term or who might be concerned about the economy may be inclined to sell fast.

“If you flip a property you are trading on the appreciation and you are betting that the dollars you are going to get for the property today are going to be greater than the dollars you’re going to get down the road,” Polsinelli said.

Higher fuel prices, rising interest rates and a slowdown in sales of high-end luxury apartments raise industry concerns that larger property sales could also decelerate. However, if conditions do result in a slowdown in flipping, that’s probably not around the corner, according to Polsinelli.

Still, there is some uncertainty. With Federal Reserve Chairman Alan Greenspan stepping down in January, it’s hard to predict the direction of U.S. monetary policy. And, while January is around the corner, it will take a while for the building values to change.

“The real estate world has a six-month lag time,” Polsinelli said. “It usually takes six months to affect real estate values.”

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