Stephen G. Kliegerman
President of Development Marketing
With buyers scarce, leases provide way to generate needed project cash flow
BY WENDY DAVIS
WHEN DEVELOPER Michael Waldman put his new luxury apartments in East Harlem on the market last year, he expected them to fetch dose to $1 million apiece.
When buyers instead balked at the price, which worked out to roughly $600 a square foot, Mr. Waldman turned to Plan B. In May he put all 18 units up for rent.
"We didn't like the offers we were getting, but we didn't want to just dump the building and go away," said Mr. Waldman, president of North Manhattan Construction, developer of The Bridges North.
He is one of a growing number of developers across the city that are renting units that, in better times, they had hoped to sell. The phenomenon is especially pronounced in fringe areas like East Harlem and Brooklyn's Williamsburg and Greenpoint, where buyer resistance is most severe. Lower land costs in those areas also make such conversions easier for developers to stomach financially, as rents go further toward covering their costs.
Converting to rentals on a temporary basis is often smarter than allowing units to sit vacant, notes Steve Goldschmidt, senior vice president at Warburg Realty Partnership Marketing Group. "Developers don't want to own a ghost town," he says.
Repayment in 3 to 5 years
SOME DEVELOPERS, however, may have no choice. Lenders typically expect repayment of construction loans in three to five years, which might be impossible in more expensive buildings without the hefty upfront income generated by sales, notes Carl Schwartz, a partner in the real estate department at law farm Herrick Feinstein.
Of course, lenders get even less money if the units fail to sell, which is precisely why some creditors are cutting deals allowing developers to switch to rentals to at least generate some cash flow.
One of the lucky converters is Henry Zilberman, principal developer of the Mynt, a 72-unit luxury condominium on Myrtle Avenue in Brooklyn's Bedford-Stuyvesant. The developer hoped to get around $600 a square foot, says David Maundrell, president of Brooklyn brokerage Aptsandlofts.com.
When buyers failed to materialize last year, the building went rental—at rates of around $2,100 a month for an 800 square-foot one-bedroom, with Aptsandlofts.com as the broker. The company is also renting apartments at several other Brooklyn buildings originally positioned as condos, mainly in Williamsburg and Dumbo.
Waited long enough
AT ONE OF THOSE, 99 Gold St. in Dumbo, the owners kept their 88 units on the market for nine months at prices averaging more than $800 a square foot. After drawing little serious Interest, they hung out the "For Rent" sign. A 760-square-foot one-bedroom there is now being offered for just under $2,800 a month. Nearby, at 133 Water St. in Dumbo, the developer didn't even try to sell his 52 condominiums. Instead, they are being marketed as rentals. The asking rent for a 912-square-foot one-bedroom apartment is $3,000.
At The Bridges North in East Harlem, eight units had been rented by last month, including three that were taken under four-year leases by the New York School of Podiatry for use as student housing. Rents are in the $40-a-square-foot range, or around $4,000 a month for a two-bedroom unit.
North Manhattan Construction's Mr. Waldman says he is prepared to wait up to 10 years for market conditions to turn around.
"Another cycle will come and go," he says. "The market will come back to me."
Monday, October 06, 2008