Warburg Blog

I feel it in my bones.  Looking out of my window at the vibrant city scene and my empty wooden flower box, I have happy thoughts of the herbs and flowers that will be filling those boxes in just a few weeks. What an easy way to help green the city, take a little pollution out of the air and add to my culinary creativity-home grown herbs and fresh flowers for the table. No room or ledge to grow flowers or herbs? Check out what a group of women in Brooklyn are doing with a couple of recycled plastic soda bottles and a window http://www.onearth.org/node/1339  to grow herbs and vegetable plants year-round with a hydroponic drip system which they suspend like photosynthesizing curtains in their apartment windows.

It’s an interesting time out there for co-op boards, to be sure.  While some are loosening their standards to attract more suitors, others are tightening them … the topic of this post.   

What does tightening actually look like?

Some are discounting buyer liquid assets based on market volatility and uncertainty.  This translates into shaving an existing equity portfolio down by 20-30%, and a bond portfolio by 10-15%.  For many Boards, cash has never been more important, with special attention being paid to income and truly liquid assets.   

In addition, if Boards are in any way uncomfortable with the financial profile of an applicant, some are now asking for up to 1 year of maintenance costs as a security deposit (versus merely in the bank).  Two years ago, these same applicants would have been accepted without this request. 

Why would co-ops tighten their acceptance criteria at this time?

1.      Many Boards are looking to their condo brethren who have had their share of troubles with people losing their jobs then becoming unable to pay their common charges.  They are seeking to avoid this fate.

2.      Carrying costs are increasing at a significant clip.  These are made up of real estate taxes, operating costs, mortgage interest and capital improvements.  Let’s see what’s happening to each:

a.      Due to N.Y. City revenue shortfalls, real estate taxes have gone up significantly for the 2009-2010 year, to the tune of 8-12%. 

b.      Operating costs are made of up labor, building maintenance/repairs, fuel, and insurance costs.  The latter two were skyrocketing in 2008 and 2009, and are now slightly lower.  That said, labor costs are anticipated to more than make up for that good news, based on current  early union negotiations.  The existing      4-year labor contract is coming up for termination this April 21st, city-wide for all co-ops and condos.  (Interesting fact:  the current union contract is valued at $70k per  union worker and the contract price per union worker goes up a preset amount each of the contract’s four years, which includes healthcare, salary and pension expenses.)  Boards are therefore “pricing in” a 4-5% increase in their labor budget, accordingly. (In anticipation of  year one of the expected new  four year contract.)

c.       Mortgage interest and capital improvements vary on a building by building basis, so there are no overarching trends to cite here. 

What should you take away from these trends? 

First, know what you’re getting into.  This means understanding that no two co-op Boards are alike.  While one might be getting stricter, another may be loosening its reins.   

Second, talk to your broker and make sure you have more than a “checklist conversation”.  Particularly when dealing with co-ops, it helps to have an agent who is adept with financials and can portray you in the best possible  financial light.  Does (s)he know what a front-end versus a back-end ratio is?*  Has (s)he asked more open ended question about your financial situation to fully understand it and potentially uncover non-obvious assets?  Lastly, now is not the time to get coy or tight-lipped.  Your agent is your partner and, as such, it is in your best interest to leverage this relationship to your advantage.    

If you walk in with your eyes wide open, realistic expectations and a good agent partnership, you should be able to navigate these ever-changing waters successfully.  Now let’s focus on the more fun question:  “china white or lily cream for the walls?”. 

*Front end ratio:  (maintenance + mortgage)/monthly income; 28% threshold.  Back end ratio:  (maintenance + mortgage + long term debt (s) )/monthly income; 35%% threshold. 

In the past two weeks we have had competitive bidding on many of our resale exclusives. Several buyers have confided to our agents that they fear they have missed the bottom. They have. Based on our data, the bottom arrived last June or July, and it was definitely past by the time the fall market began to warm up.

At the same time, sellers who had held off on marketing their properties during the slump of 2009 have been telling us that there are two reasons for them to sell now: a relative dearth of good resale inventory and the threat of an increase in capital gains taxes during the next year or year and a half. These sellers reason that even if the market goes up 10% over the next 12 to 15 months, they lose most of that if the Federal capital gains tax rates go up. What’s more, there are buyers out there today who are hungry for property and eager to buy before values trend up further.

There has been a lot of talk about a double dip in the economy. Certainly job growth has not picked up and credit is still tight. These days we urge our sellers to take not the highest offer, but the highest offer which doesn’t need financing (the buyer profile is less of a problem for financing now than the building profile - so many of the co-ops do not have the kinds of reserves and insurance the banks are looking for). But in spite of all the challenges our market is brisk and in some corners, even hot. We are not trying to predict the future. For today, we are busy and grateful.

I sent the following yesterday to Mann Report to appear in the April 2010 issue.  And I’m planning to send reprints to shareholders at the landlease building in question.  Hopefully, the board and landlord will come to an amicable agreement.  Read on…

Recently I was hired by the executors of an estate to sell an apartment in a ground lease building on the Upper East Side.  We’ve cleaned and staged the property, but as of this writing, we’ve chosen to wait before putting the unit on the market because there is too much uncertainty surrounding the renewal of the lease which expires June 30, 2010.  I’ve been in this business since 1980, have sold in several landlease buildings in the past, but I’ve never heard of an instance where the co-op board and landlord waited until the 11^th hour before coming to terms on a leasehold extension.   

“That’s a reckless tactic,” says attorney Dennis Greenstein who specializes in co-op and condo law.  “I’d have to read the actual landlease document to see what options are available to the co-op, but in theory, upon the expiration of the lease, it’s very likely that the shareholders’ tenancy will end, and their equity could cease to exist.”  Greenstein characterizes ownership in a leasehold as “a diminishing asset.”  As you move up in the years of the lease term and if no provisions have been made to extend the lease, then the property’s value actually depreciates.  If the lease is allowed to expire, the landlord can take the property back, and the condo or co-op would no longer exist.  The shareholders would revert to being renters and would lose their equity.  Could a landlord force tenants out of their homes?  That’s a very thorny question according to the attorneys I’ve surveyed. 

A ground lease co-op or condop[1]is one where the underlying land is owned by a landlord and is leased to the cooperative or condop which pays rent to the landowner.  Each leasehold situation is different, and each is governed by the lease agreement which spells out how much rent is to be paid and for how long—usually 50-99 years.  The document also contains conditions for extending the lease and for increasing the rent at specified intervals and may also include a provision to purchase the land.  Usually, the rent is calculated as a percentage of the property’s appraised value.  If land values go up, increases will follow when the rent is readjusted along with corresponding increases in each unit’s maintenance fees. 

There’s more uncertainty for apartment owners in ground lease buildings and also fewer tax advantages than for unit owners in fee simple co-ops.  When the corporation owns the land, shareholders can deduct that portion of their maintenance that represents the taxes paid on the building as well as the interest paid on the building’s underlying mortgage.  In a landlease building, the portion of the maintenance used to pay the ground rent is not tax deductible. 

It’s also more complicated to obtain financing in ground lease buildings because of the associated risk that a landowner might decide to sell the land or not renew the lease.  My bank sources say lenders generally want to see about 40 years left on the lease term.  Similarly, it’s more difficult for a ground lease building to borrow money itself for any capital improvements, because lenders usually want the mortgage secured by both the structure and the land. 

In the case of the co-op apartment owned by the estate that has hired me, there’s a dispute between the landlord and the shareholders about the value of the land and the term for the lease renewal—which is not a big surprise.  The landlord says the land is worth more than the shareholders’ estimate, and the landlord will offer a 30 year extension, while the shareholders want a 99 year renewal.  In all probability, this particular case will go to arbitration, and whatever the outcome, the shareholders will have to pay additional fees to attorneys, consultants and perhaps even bankers. 

Ground lease apartments are not for everyone.  However because of the uncertainties and limited tax benefits, apartments in landlease buildings cost considerably less than similar units in fee simple properties.  Taxes are also less because the landowner pays these. 

My colleague Susan Abrams, a shareholder herself at the ground lease co-op Tower East on 72^nd Street who has sold 13 apartments in the building over the years, says, “You get substantially more for considerably less in a landlease building.  You get to live in a grander apartment than you could otherwise afford, but you have to be comfortable paying higher monthly maintenance.”  In Abrams’ estimation, prices for comparable apartments in fee simple buildings are at least 30% higher.  For the apartment that she is currently listing at Tower East, she’s looking for a buyer with a high income who will be comfortable paying more in maintenance while giving up less liquid assets because of a significantly discounted price.  

In the end, it’s really all about making informed decisions.  It’s critical to understand the terms and conditions of a ground lease document.  What are the provisions for extensions?  How are rent increases to be calculated over the term of the lease?  Are increases tied to market appraisals or to regular escalation?  How stable are the building’s financials?  How healthy is the reserve fund? 

Hopefully the co-op board and landlord mentioned above will work past their current stalemate without going into costly and lengthy arbitration, and we’ll come to market and identify a ready, willing and able buyer who will pay a fair but discounted price.    

What makes a snowy day in Manhattan so special to me? New Yorkers smiling as they tramp through new white snow? Warm greetings by the doorman? Or just walking into my apartment, seeing the big snowflakes tumbling down in front of the windows and smelling the homemade (no-knead-no kidding) bread awaiting its final rise.  What a home sweet home greeting now! What  delight awaits at dinner!

No-Knead bread:  Whisk 3 cups bread flour, ¼ teaspoon INSTANT yeast and ¾ tablespoon salt in a large bowl.  Slowly add 1 ½ cups warm (110-120F) stirring with a wooden spoon until all ingredients are incorporated.  Cover with plastic and let sit for 12-20 hours (longer if necessary).  Using a wet spatula dump the wet sticky dough onto a floured counter, fold it over itself a couple of times, then place it on a non-terry floured towel seam side down and let it rest covered for 2-4+/- hours. One and ¼ hours before you want to serve your bread place a LeCreuset-type covered pot into a preheated 450F oven for ½ hour. Remove from oven carefully and roll your bread over into the pot, cover it and bake for ½ hour.  Continue baking uncovered for 15-20 more minutes.  Remove from oven. Cool on a rack. Viola! Perfect, non work, no fuss bread.  Serve with the best butter your budget will allow.

Tonight it was my privilege to sit around the big conference table in the Boardroom at the Real Estate Board of New York with 30 of the industry’s top professionals leading a conversation on ethics. I was impressed as I so often am when I teach at REBNY or elsewhere by the extremely high standards these agents set for themselves. Our business, like most businesses, isn’t black and white. But, in the wake of the excesses of the last few years on Wall Street, top agents in our business seem more concerned than ever about doing the right thing.

What, for example, do you do when a seller has accepted an offer, given a handshake as it were, but then receives a higher offer? Should that seller feel bound to stick with his deal? If you think the answer is yes, is it your obligation to tell him so? How hard should you push? Is the seller aware that often the higher offer disappears, but in the meantime he has alienated his original buyer so he ends up with nothing? And it is the broker, not the seller, whose reputation suffers when that takes place! 

Or how are we supposed to deal with the tension between fair housing guidelines and legitimate questions that our buyers ask us? At Warburg we now refer to “family” as “the F word” because we are not allowed to utter it when we are out with customers. If they ask “Are there a lot of children in the building?” we are not allowed to answer. If they want to know if a co-op has a demanding Board we are not allowed to answer. So how do we help our customers make informed decisions while making sure we do not break the law?

The goal of a class like this is not so much to provide answers (most ethical dilemmas do not have clear answers, otherwise they would not be dilemmas!) as to create a forum for open discussion and inquiry. And for three hours tonight I was proud, as I so often am, to be leading this discussion and to be a part of this industry.

Present day Tribeca still basks in the glow of its 19th Century Warehouse palaces, many designed by the leading architects of the day. In the last 30 years, butter and eggs have given way to one of the city’s most prestigious tight-knit communities blending a laid-back downtown vibe with upscale services and amenities.

Pioneered by artists, Tribeca is now home to people who flock to the wonderful open space of its trademark lofts and number of new luxury buildings - which have given Tribeca its first doormen and in-house gyms.

Today’s Tribeca is a residential gem. On Saturday mornings, parents shop at the Green Market beside Washington Market Park, while their kids play on the jungle gym. Whole Foods is a block away. Bouley offers up French pastry. World-class restaurants like Nobu rub elbows with brunch favorite Bubby’s. Hudson River Park anchors the Greenway, offering uninterrupted bike rides to the GW Bridge and Wall Street. Tribeca is home to unmatched public schools like PS 234 and Stuyvesant High, a downtown branch of the 92 Street Y, and hosts the annual Tribeca Film Festival. All major subway lines run through this hip enclave.

For beauty, convenience, comfort and a neighborhood feel, it’s unequalled.

Ken Krasnow the Managing Director of Massey Knakal’s Brooklyn Office (M-K being the Giant Squid of Commercial Real Estate in NYC) was the guest speaker and gave a presentation on current conditions and predictions to mid year at a meeting of the REBNY Brooklyn Committee late last week.  In M-K’s view the bottom was reached in spring 2009, the last 2 quarters of ’09 being about recovery and stabilization.  Residential Buildings with five or more units for sale are not flooding the market; that is not what they anticipated a year ago.  Cap Rates (usually described as the net profit on Commercial Property) are not rising to double digits.  They are holding at an average of 6.75% to 7.5% which is the normal level of return for these properties in “Brownstone Brooklyn” (e.g. Park Slope, Cobble Hill, Brooklyn Heights &c).  This is another marker for a stable market situation not a deteriorating one.  And there is considerably more demand than places to buy.  This is tracking with the Residential Sales market in resale of Coops and Townhouses.  It seems that Banks have not chosen to dump their troubled assets all at once, largely because the Taxpayers (= us) provided them with Capital.  They see these trends continuing through the year. 

The feeling of the presentation was one of “pleasant surprise” that this was how it was turning out and not a fulfillment of more dire predictions.  On the whole I found it mildly encouraging, nice to think about as the snow falls in New York. 

So as you can imagine the broker thought my buyer was hallucinating and no way would they consider the offer and advised if we were going to continue negotiations we needed to be in the ballpark and not in left field.  The property at the time was listed at $831,500 and Sally’s offer was $625,000 including an available garage space that was listed separately at $25K.  Let’s not forget there was a mechanics lien at the time of the offer and the amendments had changed giving the 12 signed contracts the option to rescind and 11 of them rescinded.  Sally actually spoke with the one buyer who remained and was still confident it was where she wanted to live.  Sally was also about to take a trip to Peru for her 50th birthday and decided to wait until she returned to pick up where she left off, since Sally had no intention of getting anywhere close to the asking price……………..

A sunny Sunday! The weather is frigid, but we dodged a blizzard and the City is getting ready for a New York-less Super Bowl. We held a 2 hour open house today for a new exclusive, a smartly priced 2 bedroom/1 bath on the Upper West Side. Walking briskly to the apartment, I was wondering what kind of turnout we would have! I got there early, moved the kitty litter out of sight, connected my netbook to the owner’s speakers and tuned in some appropriate background music (Sirius/XM Radio’s Coffee House - a good choice) and waited.

After 25 minutes, some despair set it as no one came — and then, a few at a time, the crowds arrived. By the time the open house ended, we have over 25 parties and 45 people come through the apartment! A few came and went quickly, but a surprising number of buyers spent quite a bit of time looking at the apartment, asking well prepared questions (how long has the apartment been on the market, what the Board was looking for in terms of income and assets, etc). One couple knew about the building - they had been interested in another apartment and just lost out to another buyer whose offer had been accepted.

I took the opportunity to ask most of our shoppers about their impressions of the market. Several had just started their search. Quite a few have been looking at apartments for a while. Most of the buyers were well prepared and knew their market - they knew what was on the market, what comparable sales were like, and they asked very intelligent questions. Some buyers commented that the price for the apartment “seemed right” - an indication that we had done our homework and priced the apartment correctly.

The common sentiment, however, was the seriousness these buyers displayed. These weren’t “tire kickers” out for a Sunday stroll, or window shoppers just looking around. Quite a few felt that the time to buy was now - there was a general feeling on the part of the most serious shoppers that the market had started to show signs of life and that the time to buy just might be now!

Within an hour after the open house, a few calls came in from people who had been to the apartment, asking for more information. And just a few hours ago, our first offer came in. While the offer was below the asking price, it was a strong offer by a pre-approved buyer! Not bad after just one day on the market. Reports from other Warburg brokers tell of strong turnout at other open houses. Several of our new developments have also had good turnout and offers.

We’ll see how things work out - our sellers are considering the offer and planning a counter offer. It’s often difficult to advise sellers when an offer is received so early in the selling process, especially when the market’s recent revival is met with skepticism by some in the press!

All in all, it was a good day for real estate and for Saints’ fans!