Felix Salmon

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.

How much would you pay for an empty lot in a highly desirable location? If you fancy moving to southern California, Pimco’s Bill Gross might have the perfect place for you: an 18,150-square-foot bayfront lot in Harbor Island which he’s selling for $26.5 million. According to Redfin, the buildable square footage on the site is 9,734, which puts the price at $2,722 per buildable square foot or $1,460 per raw square foot.

It’s instructive to compare, here, the most famous sale of an empty lot in Manhattan: the area bounded by Central Park West, Broadway, 61st Street, and 62nd Street. The lot eventually became 15 Central Park West, where the apartments ended up selling for a total of $2 billion.

The price on that lot was $401 million: a record $690 per buildable square foot, or roughly a quarter of what Gross is asking. On a raw-square-foot basis, a bit of fiddling with Google Maps and the Photoshop Measure tool puts the lot size at about 63,000 square feet, which means that the lot was sold for about $6,365 per raw square foot — and remember that 15 Central Park West has 201 units and rises as much as 35 stories.

The difference is partially a function of construction costs: 15 Central Park West cost a good $1 billion to build, while a California mansion can be put up for a small fraction of the value of the lot. But still, in the context of property values continuing to slump across the country, it’s striking that the top end of the market seems to be immune to such pressures. While everybody else is hurting, the plutocrats — whether in Manhattan or Newport Beach — just go on accumulating their millions, blithely unaffected by any downturn.

(Via Carney)

Back in June 2004, the penthouse apartment at 115 Allen St, on a dingy corner of New York’s Lower East Side, was briefly listed at $2.85 million. But that didn’t last long: by September, that number had risen to $4.5 million, a number designed to scare off any potential buyers and ensure that Seth Tapper, the developer, could justify keeping it for himself.

Which he did: the NYT profiled Tapper and his apartment in January 2006, in inimitable NYT style:

When Ms. Kanaaneh and Mr. Tapper installed countertops, a Russian handyman looked out of a north-facing window and saw the statue of Lenin that sits atop the Red Square building on East Houston Street. The handyman wept…

For now, [Tapper] said, he is focused on enjoying his home with his family and never failing to appreciate that view – all those views, really.

His biggest goal, he said, is never to get tired of looking out the window.

Well, it seems that Tapper did tire of looking out the window after all: his apartment is back on the market, this time for $5.5 million. Broker Irene Lo might have moved from William B May to Corcoran, but her brokerbabble remains untouched: back in 2004 we were told that the apartment “resonates the rich texture of the neighborhood in a private sancutary setting”, while today a Miele dishwasher “spills into the sleek, stylish living area that awes you any time of day or night”.

In any case, as Curbed notes, if the apartment sells for anything near its asking price, I’ll have to eat a certain amount of crow: I said in 2004 that “if the penthouse does go for $4.5 million, I’ll just hop on one of those flying pigs and leave a bottle of fine Scotch on the new owners’ terrace.”

According to Case-Shiller, a New York apartment worth $4.5 million in September 2004 should be worth about $4.2 million today: prices are meant to have gone down since then, not up. And I thought the place was overpriced at $2.85 million.

But two things are going on here: massive price inflation at the very top of the market, fueled by record Wall Street profits; and the continuing gentrification of the Lower East Side. And so this apartment is now valued at 1X the new benchmark — Nouriel Roubini’s own penthouse apartment a few blocks north.

All of which means that I’m still waiting for the shoe to drop, and Manhattan prices to return to reality — but I know I might be waiting a long time. And in the meantime, if you have any leads on flying pigs, I’d be much obliged.

Alexandra Berzon has an enjoyable piece in today’s WSJ about the Cosmpolitan, the new $4 billion casino, fully paid for by Deutsche Bank, which is opening up in Las Vegas next month.

Berzon gets the obligatory isn’t-Wall-Street-a-casino-anyway shot in at the beginning of the piece, and then walks through the chain of events which resulted in a $60 million loan to a Las Vegas developer somehow morphing into ownership of a $4 billion project. But I would have loved to see a bit more detail on the finances:

Deutsche was originally just funding the project, pumping in a loan of $1 billion to build the soaring two-tower development. But its original developer, Ian Bruce Eichner, defaulted on Deutsche loans in 2008…

By the time the Cosmopolitan holds its grand opening next month with a New Year’s Eve party featuring Jay Z and Coldplay, Deutsche will have spent an additional $3 billion from its own coffers. That makes it one of the most expensive resorts in Las Vegas history.

Already, Deutsche has written off nearly $1 billion of its Cosmopolitan investment, according to securities filings…

After Mr. Eichner left the development, the bank was still uncomfortable about getting directly into the casino business. It tried to cut deals with more established players, including Hilton Worldwide and MGM Resorts International, but the deals didn’t come through.

Several other potential investors declined because they weren’t confident the Cosmopolitan could cover its loans, according to people involved in the talks.

What’s missing here is any explanation of its decision from Deutsche itself, beyond a bland statement that Thomas Fiato, the bank’s head of corporate investments, made to Nevada regulators. Berzon has talked to “people involved in the talks”, and there’s nothing about Deutsche refusing to comment, so I assume she talked to Deutsche executives off the record. But after reading her article I’m left with a lot of questions.

For one thing, how did Deutsche come to the decision that the best thing to do with a construction site in the middle of Las Vegas was spend $3 billion of its own money turning it into a new casino? I can see how it might have been a bit overoptimistic when it lent $1 billion to Eichner in the first place. But when Eichner defaulted on that loan and Deutsche defaulted, clearly there were problems in the Las Vegas real estate market. And when big casino operators took a look at the construction site and walked away, that was obviously a sign that Deutsche’s sunk costs were never going to be recovered.

And yet, somehow, Deutsche decided that the smart thing to do was to throw $3 billion of good money after its $1 billion of bad money. Why? What made them think that they could see a healthy return on that $3 billion even as no one else showed any interest in the deal? And given that casino investments are always risky, what justification did they have for adding such a big one to Deutsche’s balance sheet?

Furthermore, when did Deutsche take its “nearly $1 billion” write-off? If Deutsche knew that it was going to write off substantially all of its initial loan in any case, then wouldn’t it have been just as expensive and much less risky to just give the entire construction site away? And if Deutsche has now put $4 billion into the development, does that mean that the Cosmopolitan, which has yet to host a single paying guest, is valued at something north of $3 billion on Deutsche’s books? What would a reasonable valuation be, in this market?

Finally, what does Berzon mean when she says that other potential investors walked away “because they weren’t confident the Cosmopolitan could cover its loans”? What loans? Wasn’t Deutsche the owner of the project at that point, perfectly capable of selling an equity stake unencumbered by any debt?

The tale that Berzon tells is entirely consistent with Fiato and his team getting so caught up in the Cosmopolitan concept when they agreed to finance it that they simply couldn’t let go, wanting to retain at least a substantial debt-finance involvement and ultimately deciding to finish themselves what Eichner was unable to do, placing valuations on the Cosmopolitan that no one else was willing to ratify. But we don’t quite get there: we get hints of that story, but not enough detail to see it clearly. Let’s hope there’s a follow-up.

(Cross-posted at CJR)

There’s all manner of delicious irony here: a company called Antedon bought the European headquarters of Goldman Sachs for £355 million ($562 million) in 2007, complete with a lease to the bank which runs until 2026. Yet somehow Antedon has contrived to default on the loan, and the buildings have now been seized by Antedon’s lenders, a group led by Landesbank Berlin.

The details are unclear, not least because the original story is behind the notorious Sunday Times paywall. But on the face of it, it seems that Landesbank Berlin agreed to a deal whereby Antedon would have to pay them more money than it was receiving, in rent, from Goldman Sachs. And what’s more, since the lease runs until 2026, there was no way for Antedon to increase Goldman’s rent payments. (And yes, Goldman Sachs has rented out all of the two buildings in question, except for a tiny slice of retail.)

I can’t see any other explanation of what’s happened here. Even if Antedon was in deep negative-equity territory on its investment, it wouldn’t gain anything from defaulting on its loan so long as Goldman’s rent payments covered its mortgage obligations. After all, Antedon has now lost all of Goldman’s rent payments, and title to the buildings.

Did Antedon really commit to pay its lenders more money than Goldman was contractually obliged to pay in rent? Did it think that it could make up the difference by jacking up rents sharply in 2026? And what were the lenders thinking? It’s all very odd, to say the least. But this might be a great opportunity for Goldman to buy Peterborough Court and Daniel House outright. They’re very beautiful buildings, although Goldman might have outgrown them at this point: the two buildings have only 318,439 square feet of office space between them, compared to 2.1 million square feet in Goldman’s new NYC headquarters.

Which makes me wonder: if it’s impossible to implement size caps when it comes to banks’ balance sheets, can we maybe at least cap their square footage? It’s surely a more sensible idea than Antedon’s 2007 real-estate deal.

There are two reasons why it’s hard to report clearly on things like the foreclosure auction of the W Union Square. The first is that there is a very complicated capital structure, which journalists have difficulty explaining. And the second is that it’s really hard to resist ledes like this, in the WSJ:

Dubai World’s private-equity arm ponied up about $282 million in 2006 for the trendy W Hotel Union Square in Manhattan. At a foreclosure auction Tuesday, the winning bid was $2 million.

This is the kind of thing which is literally true, but in all other senses false. Dubai World has not lost $280 million on the hotel, the hotel is not worth $2 million, and indeed the two numbers refer to entirely different things: the first is the total value at the top of the market for the mortgage, mezzanine debt, and equity combined; the second is the amount of mezzanine debt that an investor is swapping into a new equity tranche.

The Real Deal, has less color and much more detail — detail which is great for debt-market professionals, but which just gets confusing for the rest of us. Bloomberg, meanwhile, spends a lot of time talking about Dubai, which tends to obscure the details of what’s happening with the hotel. But if you put them all together, you can work it all out.

Basically, Dubai World (or its investment arm, Istithmar) paid $282 million in total for the hotel, and took out a $115 million mortgage. Istithmar put down $50 million of its own money, and borrowed the rest in what’s known as a “mezzanine” transaction: $117 million of high-yielding debt which isn’t secured against the property.

The mezzanine debt itself is broken into three tranches, which needn’t concern us right now. Suffice to say that what happened yesterday was a debt-for-equity swap. LEM had $20 million of mezzanine debt, and swapped $2 million of its that into 100% of the equity in the hotel, which was valued in the auction at $2 million. So Istithmar’s $50 million of equity has been wiped out, and LEM now owns the hotel, and is responsible for servicing the $115 million mortgage and also the $115 million $97 million of remaining mezzanine debt, $18 million of which it owns itself.

If you want to put a value on the hotel, it’s probably $115 million of mortgage plus $115 million $97 million of mezzanine debt plus $2 million of equity plus an unknown amount of past-due debt: call it somewhere in the $240 million $215 million range. That’s about a 15% 24% decline from the top of the market: a significant drop, but nothing particularly out of the ordinary. And most of the hotel’s lenders will be made whole, at least for the time being; the only exception is LEM, the new owner.

Lots of people are extremely worried about commercial real estate at the moment, saying that it’s the next shoe to drop. But a $240 million valuation still works out at almost $900,000 $800,000 per room, which is still a lot of money for a hotel which no one likes very much. The W Union Square is one of those creatures of the boom years: glossy and expensive, with no real soul. My guess is that its value has quite a bit further to fall yet.

Update: I’ve had second thoughts about how this deal works, and have updated the numbers accordingly. But the broad gist is unchanged.