Stephen G. Kliegerman
President of Development Marketing
By Sarabeth Sanders
In the depths of the recession, when it was easier to get a reservation at Per Se than to sell a multimillion-dollar apartment in New York City, stories abounded of real estate developers scrambling to cover their costs by leasing out unsold condo inventory.
It wasn't a perfect solution -- it's notoriously difficult to get buyer financing in a part-condo, part-rental building -- and in most cases, the strategy was never intended to be permanent.
Two years later, as many of those original leases expire and the market begins to reheat, some developers are once again ready to sell, reuniting these once-fractured condos.
Williamsburg's Olive Park, for example, hit the market as a full-fledged condo in the summer of 2008, but sales froze soon after closings began and the developer wound up leasing 32 of the project's 87 units. Earlier this year, when those leases began to expire, the units were sold off -- including two of them to their original tenants in rent-to-own deals. According to David Maundrell of aptsandlofts.com, the firm marketing the project, only two units are now left in the building.
The bankrupt developers of Central Harlem's The Lenox are hoping for a similar outcome. After renting out all 18 unsold units during the recession (the building has 77 residences in total), Lewis Futterman's Uptown Partners hired Halstead Property Development Marketing in November to help sell them off. Twelve apartments are currently up for grabs, but none have been off-loaded yet. The remaining six are expected to hit the market when their current tenants vacate, said Stephen Kliegerman, executive director of development marketing at Halstead.
"[Futterman] chose to wait the market out," Kliegerman said. "This was a strategy to cover [his] costs and to try to make more money in the future."
During the downturn, renting out unsold condo units made sense for developers who were able to get their loans extended, or who felt they could make larger profit margins by waiting for the market to meet the prices they'd originally hoped for. Additionally, there are capital gains tax benefits to hanging on to a few units for a period of time, so it's common for developers to do so with a few apartments, regardless of whether the market is up or down.
Not selling all the units off hurts those who actually did buy in the building, though. Having too many rentals in a condo building can hurt resale values and prevents the condo board from having full authority.
Other so-called fractured condos now slowly getting pieced together include Twenty9th Park Madison and the BellTel Lofts in Downtown Brooklyn. There are also plans to begin selling off the sponsor's rental units at 515 East 72nd Street, the former Miraval Living condo, according to the building's sales team.
More examples of this may be on the way. Maundrell said he got a call late last month from a developer looking for advice on buying the leased, unsold units in a fractured Brooklyn condo, letting their leases expire and flipping them in individual sales on the open market.
But don't expect a flood of new condo-turned-rental-turned-condo inventory coming to the market any time particularly soon: Units that will hit the market will be sprinkled out over time, and many sponsors are still content to let their property values appreciate for the time being.
"The rental market is hot. If you don't feel like you could get a number you're happy with, you might want to keep it as a rental and hold it for a while," said Andrew Gerringer of the Marketing Directors. "Everyone believes the market is going to continue to get better."
Sunday, May 01, 2011