Valuing a MF in New York City

[Alison Ostendorf]

All of you that have actually worked in NYC and have gone through any "works anywhere" training program know that NYC is a very specialized market and things are just done differently here.

I would like to know what you all consider the best way to come up with a current value and after repair value for a multifamily property IN NYC specifically.  Comps?  A cap rate?  If a cap rate, a cap rate based on what exactly?

Please indicate your experience in the NYC market in your answers.  THANK YOU.

[Travis Lloyd]

NYC in terms of valuation is no different than any other area in the world... when you're talking about the MATH that goes into those valuations. You still calculate a CAP rate, and cost per door, and NOI in the same formulas as any other place.

BUT? There is a difference. There is a big difference. In NYC there are factors that come into play that do not come into play in most other areas, things that you need to figure out and plan for, but have no spot in any of the "RE Analyzer" programs and excel sheets you will find readily available. As soon as I say this, there are going to be people chiming in that they have encountered similar situations, and I'm sure that's true! It is the COMBINATION of all of these additional factors that create the perfect storm that is NYC real estate. Navigate it well, and it can be a lot of fun!

I will preface the list below by saying that I have never even been involved in 2/3/4 unit properties in the city - so perhaps they are more akin to other places. My experience is in repositioning over a dozen properties in 4 of the boroughs (Manhattan, Bronx, Brooklyn, and Queens - sorry SI!) with 16 units minimum to over 100 units, both 100% res and mix use. So the following is a list from my experience, that you need to a) plan for and b) understand how to deal with if you're going to get into RE in the city.

Tenants (non rent controlled / stabilized): there is a massive shortage of affordable housing in the city, and a shortage in homeless beds as well. So when you visit the housing court to evict a tenant, there is a bench reserved for representatives from affordable housing agencies from across the city right in the court room. There will usually be at least 3 sitting there all day, and often more. These representatives are there for one reason - to keep people from being evicted. They have funding, but simply no place to actually place the evicted tenant. So as the case winds through the court, and just before the judge grants the eviction, one of these lovely representatives will stand up and offer to pay the past due balance - usually paying up to $5-6k per person, if the judge will dismiss the eviction case. And just in the blink of an eye, the judge slams the gavel and you have your non-paying tenant back. You can start the process again, but its going to end the same way. The only people that make any money in this madhouse are the lawyers. For this reason, if you want to legally evict in the city, you need to let their balance get to $10k or higher before beginning the process.

Rent Stabilized / Rent Controlled: the rules of converting one of these apartments to market rate are ridiculous, and take decades. This is because these units have two rents: legal rent and actual rent. Every year the legal rent can increase by a tiny percentage (plus there are tax incentives that MAY allow you increase in larger increments), but that is something that you as a landlord have to stay on top of. If the previous owner failed to properly increase the legal rent every year, you do not get to show up and claim all of those lost years of increases - you start with the LAST legal rent (could be from 20 years ago) and you get to increase it 1-3% if you can convince the tenant to sign a new lease. Good luck with that. How did we deal with these tenants? Simple. We paid them. Forget everything you have ever heard about cash for keys. If the buy-out amount had 4 zeros, my company was happy. Yes, 4 zeros, not 4 figures. And these were paid in cash. Actual cash. We regularly went into 5 zero territory -  but then we would use certified bank checks. I'd rather not specify amounts here, but it makes great bar stories talking about walking around the bronx at 2 in the afternoon with 60k in my messenger bag.

City Agencies: Like getting your buildings inspected? Bring cash. Lots of it. I have had inspectors count steps on their way up a building, only to stop a few steps from the top and say "union regs say I am not required to go past X number of steps if I don't want to". I asked - "then how do I get the top floor inspected?" to which he said that I could request another inspection (wait another month) and perhaps that inspector won't mind the walk. And 311? If you're tenant thinks its too cold in their apartment, they call 311. A DOB/HPD inspector will happily arrive within a day and write the building a violation. These violations add up quickly, specifically as you are in the process of turning the property. You can expect to pay thousands each month to the city in violations, plus the additional time/expense of remedying each one and getting it inspected (see above).

AEP: NYC rolled out a program implemented by HPD targeting the 200 worst buildings in the city, based on violations. My group purchased 6 of those properties. But the list is updated every year - so there are always 200 on the list. If you are lucky enough to make it into this "exclusive club", expect to be earning $30,000 a month in penalties until you are able to get enough violations removed to come off the list. This means removing 100% of C violations (mold, fire safety, mechanical), 80% of B violations (vermin, loose fixtures, broken tiles, smaller stuff), and 80% of A violations (really stupid items like a light bulb out).

There are more - so many more. I love working in NYC and would do it again in a heartbeat, but it takes a lot out of you. Vacating a building in washington heights until 4 in the morning? Ya, been there. Guns / knives held at me? Absolutely. But it is quite a rush.

Enough about me - tell me of other cities that have SO many things that you need to account for during your repositioning? I'm sure they are out there, as I said. I just think NYC has a particular blend of ridiculous things to keep it special.