Unlike many residential developers in New York, Edward J. Minskoff is into rental development — but he recognizes the risks that keep most builders away.
His rental-condo-retail hybrid bordered by Greenwich, Warren and Murray streets in Lower Manhattan is funded, in part, by government Liberty Bonds. Minskoff, president of Edward J. Minskoff Equities, told The Real Deal in a recent podcast interview that he would have built the hybrid’s 163-unit rental component, at 89 Murray Street, without the bonds.
That would have put Minskoff even more in the minority: Very few developers are building city rentals without some government largesse.
Despite a slowing sales market, the economics of for-sale housing development in New York continue to make more sense for developers. Still, with developers like Minskoff willing to try their government-buoyed hands at rentals, the future may hold more such development.
The podcast can be heard here.
THE REAL DEAL: Can you explain to us the current economics of developing rental buildings in New York City?
EDWARD MINSKOFF: Any rental building in New York, whether it be commercial or residential, the rent is a function of replacement costs. And the determination of what that rent is is based upon the fact that you have a land cost and you have your hard costs, which are your building costs and improvements, and your soft costs, which are comprised of legal and accounting and architectural interests, etc.
All of these combined will be the determining factor as to what rents you are capable and able to charge in the competitive marketplace that we live in.
TRD: So why do rental development now in New York? Sales prices for new condos and co-ops still command at least $1,000 a square foot on average.
EM: Well, rental development has a long-term tax advantage. The holding period, the return on investment, the appreciation in the investment are materially important as far as value-added to the economics. Condominiums, on the other hand, are for-sale apartments that have significant disadvantages from a tax perspective. They are treated as ordinary income.
So, if you compare [rental and condo], the ordinary income is taxed at a much higher lever than you would tax rental housing, basically. It’s basically sheltered for the first number of years, so the income received is pretty much non-taxable.
Plus, there’s the fact of the permitted step-ups in rents and the long-term appreciation one would receive through the escalation in rents, and the fact that at incremental periods of time you can re-finance a rental building — and the refinancing proceeds are non-taxable or a deferred event until such time as a sale occurs.
TRD: Do you foresee a Manhattan where rental development outpaces condo development?
EM: The economics driving rental development versus condo development are significantly influenced by the cost of the land. The incremental cost of the land is going to drive up the economics significantly, forcing some developers to go the condo route.
TRD: 89 Murray Street got government incentives, correct?
EM: The rental housing and the retail qualified for Liberty Bond financing. The condos [at 101 Warren Street], of course, had conventional financing.
TRD: Would the rentals have been possible without the Liberty Bonds?
EM: I believe that the economics would have been potentially very compelling. The Liberty Bonds afford us the ability to get lower-rate financing. But I think the market would’ve supported a conventional loan. But, in order to encourage the development in Lower Manhattan, especially surrounding the World Trade Center site, and the city’s interest in building it into a 24-7 community, this enabled us to do the rental housing.
TRD: What are the rents in 89 Murray?
EM: We haven’t started renting the apartments down there. But I think they’ll probably range from $65 to $75 a square foot [annually].
TRD: What about the retail in the development at 270 Greenwich Street?
EM: There’s a 67,000-square-foot Whole Foods going down there. It will be the largest Whole Foods in the city, and probably the most outstanding of any of the Whole Foods. It will open probably no later than the third quarter of 2007. In addition, we have a 38,000-square-foot Barnes & Noble as well as a 33,000-square-foot Bed Bath & Beyond.
TRD: What is the future of rental development, in general, in the city, then? Is it a future that’s going to be tied to government incentives?
EM: Economics, at the end of the day, are the most compelling forces that dictate and determine what type of development you can build on a site. Zoning, on the other hand, creates certain limitations as well. Some sites have height restrictions, others don’t. There are all kinds of factors that will dictate the economics going forward as to what choice you make.