You’d think brokers who sell the new multi-million-dollar condominiums all over the city would envy the developers of these incredibly profitable buildings.
Well, yeah!
“It’s great to be a broker,” says Daren Hornig, founder of Dwelling Quest, a boutique brokerage firm employing 75 agents, “but you end up making everybody else rich.”
So Hornig joined the Harrys of the world (think Helmsley and Macklowe) who made the leap from brokerage to developing. He expects to open his first building, the Prime, an ultra-luxury loft condominium at the foot of the High Line, in less than a year.
“I think being a broker is an unbelievable entr e into the investment and development arena,” he says. “What’s better than having a residential firm with hundreds and thousands of clients every day telling you what they want and the locations they like?”
Hornig went into contract on the site for the Prime in February 2005, before the media seized on the High Line as the next big thing, paying a few hundred dollars a buildable foot — “an unbelievable price,” he says. “We knew it would be hot. We could sell just the land and make a tremendous profit.”
Though happy the market has rewarded the choice of locations for his first project, Hornig says of the building process, “I knew it was a tough business — but I didn’t realize just how difficult and time-consuming it is.
“When you’re building from scratch,” he says, “every single element, every corner — from the closet doors to the cabinets, hinges, doors, faucets, sinks and tiles — needs to be picked perfectly for your market and where your pricing is.”
The Prime, located on 14th Street between 8th and 9th avenues, will have nine floor-through lofts starting at $3 million, including a ground-floor duplex with garden and a $9.5 million penthouse with outdoor space.
Hornig needed to bring together several elements simultaneously before construction could begin. He bought out the tenants, acquired development rights from the co-op next door, secured the necessary air and light easements to put a premium penthouse on the property, applied for a 421a tax rebate, and won permission from the city to enlarge the ground-floor unit, a process that entailed digging through photo archives to produce a picture from 1938 of the areaway in front of the property.
“If you miss execution of any of these things,” says Hornig, “you’re talking about $1 million to $5 million swings in profitability.”
Precisely because of those huge stakes, Andrew Heiberger, another broker-turned-developer, warns fledgling developers, “I wouldn’t jump into Manhattan for the first time. Manhattan is the pro league. I would start off playing high school ball first. A more logical step might be investment units or maybe a small 20-unit apartment house.”
Also, few brokers have the financial wherewithal to break into the game. “Brokers,” observes Heiberger, “are not very deep-pocketed people. In Manhattan, even small-scale is millions. You need between 10 and 30 percent of the project cost to do a deal. “Even on a $4 million deal,” he continues, “You need between $400,000 and $1.5 million.”
A steep barrier to entry, but feasible for Heiberger once he sold Citi Habitats, the brokerage he founded, to the Corcoran Group in 2004 for $49.6 million.
Now Heiberger’s development company, Buttonwood Real Estate, has two large-scale luxury condominiums in the works in Manhattan.
While at Citi Habitats, Heiberger created a new development marketing division, which gave him greater exposure to the development process than most brokers have, but, he says, “there is absolutely no preparation for the scope of what you need to know in order to be in this business.”
“To be a developer,” says Heiberger, “requires investment banking skills, credibility and track record, construction expertise, some cursory knowledge of design and architecture, sales and marketing skills, vision and money.”
Particularly daunting has been the extreme variability of construction costs, something he’s learned to deal with by “contracting around the risk” — that is, paying general contractors extra for Guaranteed Maximum Price contracts. He says it’s more expensive, but worth it.
Before he sold Citi Habitats, Heiberger cut his teeth on 25 homes in the Hamptons and was a partner on two projects in the city.
Now, Buttonwood’s projects are high stakes. “The total project costs of the two jobs I’m doing,” reports Heiberger, “are $270 million and $100 million. A mistake in those jobs can cost millions.”
Rental deals were one of Citi Habitats’ specialties. If there was a mistake in a rental deal, notes Heiberger, it could be “a $5,000 mistake.”
By contrast, “if it’s a condo, maybe $60,000.”
The company has filed an offering plan for the conversion of 88 Greenwich, a 37-story Art Deco office building converted to residential rental in 2000. The project, called Greenwich Club Residences, will offer 457 condominium apartments, mostly studios and one-bedrooms, with 10-foot 6-inch ceilings, oversized windows and Harbor views.
In Murray Hill, Buttonwood was well on the way to opening the Sundari Lofts and Tower at 158 Madison Avenue when three neighboring properties came up for sale. The company commissioned architect Ismael Leyva to draw an expansive redesign of the Asian-inspired condominium to include a 26-story tower.
Assessing the shortsightedness of some fellow developers, Heiberger says, “It amazes me how quick developers are to conform, as opposed to putting out a unique product.” And many, he notes, “lack respect for curb appeal, even just on the exterior architecture.”
“Curb appeal is the first impression,” he says. He notes it’s also relatively easy to produce. “They can reposition the curb appeal by either removing the façde or installing plants or entry doors.”
Hornig says developers are often na ve when dealing with brokers. “They want to believe what brokers tell them. But brokers aren’t always right and a lot of brokers will mislead to get a job.”
For example, a broker might lead the builder to expect too much for a property, he says: “A broker might tell you, ‘you’ll get $1,500 a foot for that property.’ I’ll look at it and know there’s no way you’re going to get $1,500 for it.”
Heiberger and Hornig agree on one thing: Go for the top-of-the-line interior finishes. “People care,” says Heiberger.
“If you put in a SubZero, it’s $4,500 extra and maybe you won’t make $10,000 more, but you’ll certainly get your $4,500 back,” he says, noting that the brand will make the unit more saleable or rentable.
While top-end finishes are needed, Hornig is less concerned with building amenities. “The market isn’t driven by bells and whistles,” he says.
People want location, space and light, he figures. “In New York, everything’s at your doorstep. It’s not like you’re building in the plains of Iowa, where you can’t find a gym and a dog walker. Why pay $1,600 a foot when the same product is available around the block for $1,200?” Extravagant amenities, he says, add to maintenance costs and real estate taxes.
How are these budding developers bearing up to the stresses of bringing their products to market in an uncertain real estate climate?
“I’m OK taking risks,” says Hornig. “I find it exciting to change, rather than stay in a typical situation for years and years.”
“The numbers are huge,” says Heiberger. “At the end of the day, depending on how successful I am, I’ll determine how much I like it.”