Annals of anonymous analysts, NYC real-estate edition

By Felix Salmon
August 16, 2011
4,700-word article on the complex dynamics at 55 and 61 Delancey Street, in downtown Manhattan.

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Back in April of 2010, Elizabeth Dwoskin of the Village Voice, with the help of two reporter/translators, put together an excellent 4,700-word article on the complex dynamics at 55 and 61 Delancey Street, in downtown Manhattan. There was a new landlord, Madison Capital, which was better than the old landlord, but was still harassing rent-controlled tenants. There was a lot of mutual incomprehension between the mostly-Chinese old tenants and the mostly-white new tenants paying market rate. And nobody really had a full grasp of the facts.

So it’s a bit weird, 16 months later, to find the NYT’s Michael Powell put together something much less nuanced and much more one-sided on the same issue — with one of the worst abuses of the “analysts say” construction I’ve seen in a long time:

Madison Capital bought these two tenements, at 55 and 61 Delancey, in 2008 for $20 million total. (The same buildings sold for $6 million in 2003.) The tenants of the 45 apartments, predominantly Chinese and Dominican, generally pay $1,000 or so each a month. Newer arrivals, N.Y.U. students and post-college kids, pay $3,000 or so. To turn a profit, analysts say, Madison needs a minimum of $6,500 per apartment.

Which leads suspicious souls — I plead guilty — to suspect Madison’s real long-term play is to demolish the tenements and build one of those blue-glass condos where no one ever thinks of putting up a curtain.

Powell doesn’t mention that the buildings come with eight retail units, housing glamorous market-rate tenants like the Berkli Parc cafe and James Fuentes gallery. I’m no expert on retail rents on Delancey Street, but let’s be conservative and put them at $5,000 each, for a total of $40,000 a month. On top of that add $6,500 per apartment in residential rents — the “minimum” that Powell thinks Madison needs to make a profit on the buildings. The total comes to a nice round $4 million per year.

I really don’t think you need to be making $4 million a year in order to turn a profit on a $20 million investment. Let’s say that Madison took out an 80% mortgage at 5% interest: then its annual interest payments would be about $800,000. Add on a couple of hundred thousand dollars in management costs, and you’re still talking about costs in the $1 million range for the two buildings. That’s a quarter of the kind of money that Powell thinks Madison needs to turn a profit.

And frankly it’s pretty silly to think that Madison wants to tear down two perfectly good old tenements and replace them with glass condos — especially since it would be much easier and cheaper to take the existing buildings and convert them to condos over time. At a purchase price per apartment in the $400,000 range in what is now one of the most overheated property markets in America, there’s definitely potential profit there — and it’s a lot easier to sell apartments to their existing tenants than it is to try to vacate two huge buildings with 53 different tenants so that you can tear them down and build something else.

I would dearly love to know the identity of the “analysts” Powell talked to in order to get his crazy $6,500-per-apartment estimate. What’s the minimum qualification needed to be considered an “analyst” for the purposes of the NYT? On the basis of this article, simple numeracy would seem to be lacking.


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You’re almost getting too complex. Forget the math (of which your calculations are, if anything, a Worst Case).

The new tenants pay a market rate of “$3,000 or so.” The owner needs =more than twice that= “to turn a profit”?

Either the owner or the analyst is clearly an idiot. End of story. And the reporter who quoted that without thinking about it is just more proof that the NYT is dead meat, having forced its real reporters out.

Simple test: would you see that piece in the NYPost or the Daily News? No, because no one there would be stupid enough to include that paragraph of “analysis” in the first place.

Posted by klhoughton | Report as abusive

Property tax?

I’m not 100% clear on the rates, but it looks as though the tax on these buildings would be in the neighborhood of 1 to 1.2 million/yr, which would more than double your cost estimate. (That assumes a 38-45% assessment ratio — if recently transferred buildings are assessed at 100%, as they are some places, the taxes would be 2.7 million/yr.)

Posted by AlexR | Report as abusive

Property taxes are likely significant, though they seem to be weird on residential buildings in New York, with lots of categories and abatements. I also expect that maintenance is a bit higher than you’re guessing. Still, klhoughton has a good point, and your numbers leave a lot of room in the middle. It would be interesting to know what these anonymous analysts were doing to come up with their numbers.

Posted by dWj | Report as abusive

It’s tough to value mixed residential and commercial real estate. I think rents might be $100 pst. A few seconds of searching found listings for that for raw space and asking rents of $125 psf as well. Commercial space is sold on a net income basis, but the cap rates for NYC are very low so you wouldn’t need much net rent to hit this kind of price.

Apartments tend to be sold more on the come; because NYC is such an odd market, you pay somewhere between the unrenovated and renovated price for crap.

Doesn’t sound like they’re seriously in over their heads on this one, but they haven’t been able to get profit out of it.

Posted by jomiku | Report as abusive

I was assuming the $6,500 applied just to the market-rate apartments. If the tenant mix is still what it was in 2010 (28 regulated, 17 market-rate), using your retail rents results in $1.4 million in income at $3,000 market rents and $2.1 million at $6,500 rents, which is plausibly the difference between profit and loss.

Posted by mrblandings | Report as abusive

Also, the existing stabilized tenants are almost assuredly not buyers of the condos. After a conversion, assuming the developer could get enough sales among the market-rate renters for the plan to be effective, they would continue to be stabilized renters for as long as they cared to, serving as an ongoing drain on the building’s finances. On the other hand, it is legally permissible (I don’t do residential development, so I don’t know how high the bar is in practice) to evict rent-regulated tenants for a demolition if you relocate them appropriately.

Posted by mrblandings | Report as abusive