When New York building owners turn sentimental

Nov.November 08, 2007 02:39 PM

Many New York City property owners who have held on to smaller buildings for as many as 50 years are taking advantage of high property values.

While price appreciation appears to have halted (see Building prices no longer on the rise, report says), you don’t have to look back that far to see why now might be a good time to sell if you are a longtime owner — the type of landlord who owns a property inherited long ago or whose building houses a small business they’ve run for many years, especially if prices are anticipated to go down.

Average price per square foot has increased to $622 in 2005 from $115 in 1993, according to Massey Knakal Chairman Robert Knakal.

“The market has increased 450 percent since 1993,” Knakal said. “That’s a market average. Land in Harlem has tripled in value in the last two years.”

Sales volume reached 3.3 percent in 2005, the highest level in 16 years, excluding 1998, which had a 3.5 percent volume of sales, according to Knakal.

A property purchased in the 1970s or 1980s could net the seller 25 times what he paid, said James Buslik, principal at Adams & Co. Real Estate. A 100,000-square-foot property that he sold for $23 million recently was purchased for about $800,000 in the 1970s, he said.

With that kind of appreciation it might seem like an easy decision to sell, but after so many years owning a building, some people get attached and it makes the transaction personal and even emotional. “It’s one of the biggest things they’ll do in their lifetime,” Buslik said.

Brokers define the small building market as buildings between $5 million and $10 million, but some stretch it out to include properties in the $1 million to $2 million range and some add in mid-size buildings that sell for as high as $20 million.

The strategy and reasons underlying the decision to sell varies. For some, a building might represent a retirement nest egg, Buslik says.

Some longtime building owners are looking to plug the money they get for their property right back into real estate.

In situations like these, sellers are typically taking advantage of 1031 exchanges — a provision in the tax code that allows a seller to delay capital gains taxes if he sells a similar property within a specific period of time. Still, even with the hefty savings associated with using a 1031 exchange, some sellers aren’t always so enthusiastic when they start looking for a new property to buy with the proceeds, said Deborah Gutoff, senior director at Eastern Consolidated. Even though they sell for a high price, they might have trouble buying for a high price, paradoxically enough.

“It’s sticker shock,” Gutoff said. “They’re selling at big numbers, but they’ve never bought at these big numbers.”

Sticker shock is just one element of working with many of the less-experienced property owners who are jumping into the sales market. Dealing with these sellers often requires more hand-holding. “They’re often on the fence for a long time deciding whether to sell or not,” Gutoff said. “They want an appraisal. They want to know if now is the time to sell — we don’t have a crystal ball, but it’s been an up market for a very long time now.”

In order to help clients make the decision, agents spend time educating them about the market and the process. Many clients ask for a lot of information before they even make a formal decision to sell.

“They want us to do a proposal to tell them what we think the property is worth and how the marketing process will work,” Gutoff said. “Some want us to market the property quietly and some want us to go to the whole market to get the best price. Some want to see other properties we’ve sold and we’re very happy to do that.”

Even more issues come into play when a family owns a building. “Often there’s more than one family member who has contrary points of view about what they want to do with these hugely appreciated properties,” Gutoff said.

Not all of the sellers are in the less-experienced category. There are some investors who bought properties in the last several years who have held them for one to four years and are now taking advantage of the appreciation in prices, Gutoff said.

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