Property Grunt

Sunday, July 15, 2007

It's All About The Benjamins

It's all about the Benjamins baby
Now, what y'all wanna do?
It's all about the Benjamins baby
Wanna be ballers, shot-callers
It's all about the Benjamins baby
Brawlers -- who be dippin in the Benz wit the spoilers
It's all about the Benjamins baby
On the low from the Jake in the Taurus

"It's All About The Benjamins"
Puff Daddy

I would like to take this moment to talk about money. I mean real money. Not that broker's who think they are rich because they have a bunch of listings that are unsold. I am talking the type of fortunes that changes the lives for generations. I am talking 740 Park Ave money. There is a ton of this money being thrown around left and right in this market, particularly in commercial real estate in New York City. One example of this money being utilized is this article from the Real Deal.

Queens portfolio fetching $300M

One of Haros' properties in Corona Vantage Properties is in contract to purchase 47 residential buildings in Queens for approximately $300 million, sources close to the deal said today. The deal, which went into contract on Friday, is one of the largest residential real estate transactions ever in Queens. The transaction underscores that institutional investors are increasingly interested in older buildings in a borough with low vacancy rates and a growing population.

Vantage, a real estate investment firm created in 2005, will nearly double its stake in Queens by purchasing around 1,900 units owned by Nicholas Haros. Apollo Real Estate Advisors, which has provided financing to Vantage in the past, is expected to partner with the firm again on this deal, according to sources.

A spokesman for Vantage said the company would not comment on a transaction that has not been completed.

At around $300 million, or $160,000 a unit, the deal is likely to be one of the priciest portfolio sales in Queens history, according to brokers.

"I don't think it is a record per unit, but the number $300 million--I haven't seen that in Queens," said Massey Knakal Realty Services director of sales Rubin Isakharov. "That is an impressive number."

You know what is really impressive? The fact that this company didn't even use a broker for this transaction. They are that powerful that they did not need a broker.

The price eclipses what the LeFrak Organization is seeking for a portfolio it recently put on the market that includes a large number of Queens rental properties. LeFrak is looking to get $250 million for its 2,000-unit Kings and Queens portfolio, or $125,000 per unit.

Vantage and Apollo specialize in revitalizing distressed urban properties. The Haros buildings--which are located in central and western Queens neighborhoods such as Flushing, Elmhurst, Jackson Heights, Sunnyside and Woodside--have amassed huge numbers of housing violations. Last June the nearly 2,000 units in the Haros portfolio averaged almost three violations each, according to the Department of Housing Preservation and Development's records. Haros' largest Queens properties include the 90-unit 91-35 Lamont Avenue in Elmhurst, the 97-unit 37-52 89th Street in Jackson Heights and the 91-unit 139-06 34th Road in Flushing.

I would not classify this portfolio as distressed. In my opinion a distressed property is one that is losing money. Haros was not losing money.

Haros, who built up the Queens portfolio over the past two decades, managed the buildings in addition to owning them. He was included on a 2005 list of landlords the advocacy group Housing Here and Now called the 10 worst in the city.

Tenant groups took Haros to court to force repairs at his properties, and the city levied hundreds of thousands of dollars in emergency repair fees on the landlord.

But Haros' crumbling buildings are still a lure given that buildings in Queens--where occupancy rates often hover at around 98 or 99 percent--are seen as safe investments. According to city statistics, Queens' vacancy rate on rentals was only 2.8 percent in 2005.

"People are just going crazy for apartments [in Queens]," said Isakharov. "They are going for a premium."

Isakharov said proximity to Manhattan, relatively low interest rates and high gross rent multiples are among the factors attracting investors to the borough.

Remember, real estate can be illogical. The original owner probably kept his operating costs as low as possible because he wasn't spending money on repairs and maintaining the property. He probably spent a good chunk of change for his legal fees, but after doing the numbers, the seller probably determined that it would be cheaper to go to court.Yes. He was carpet bombed with violations from the city but he kept them at bay with a good lawyer who knew how to stall.

The industry term for this type of building, is a building "with a lot of hair on it." Which means it has its problems however once they are resolved, there will be a tremendous return in value.

300 million sounds like a lot of money for some buildings with a lot of hair, but as this article pointed out there is practically little to no vacancy rate. There is a ton of people out there looking for better value for their money and these buildings appear to have those attributes they seek. Of course, the issue of overpaying will come up especially if you factor in the repairs. However with the currents trends of the market in their favor, I would not be surprised if they triple their investment in the next decade.

Haros, who just a year ago owned and managed as many as 81 buildings in the Bronx and Queens, sold much of his Bronx portfolio to Urban American for $34.5 million last June.

Tenant advocates say residents in Haros' building will be cheered that the landlord no longer owns or manages their buildings.

Robert McCreanor, an attorney with Paul, Weiss, Rifkind, Wharton and Garrison who worked with the Catholic Migration Office to bring lawsuits against Haros in Queens Housing Court over the past two years, said that while tenants will likely see improvements in their apartments, they are also likely to see rent increases.

"Haros was a terrible landlord and lots of families who lived in his buildings will be happy to see new ownership," said McCreanor. "But they may be fearful of what is in store." By Adam Pincus

Robert McCreanor is correct. They should be fearful. But it will only affect certain parties.

Here's what is probably going to happen. Once the deal closes, the new owners will unleash a platoon of property managers, their mission will be to survey the following areas of the portfolio.

1. The property managers will examine with a fine tooth comb all the physical aspects of the portfolio. This includes the boiler room, laundry room, roof, common areas and anything that is under their jurisdiction. They will then unleash a series of fire teams of contractors, plumbers and other repair oriented personnel. These fire teams will also fix and replace anything they are legally obligated in the apartments of their tenants.

2. The property managers will also do a survey of the buildings staff. They will place all personnel on probationary status, it is during this period that the staff will be evaluated. The objective is to determine who stays and who goes and that is based on productivity. For instance, if the supers are productive they stay, if not they get a severance check and f**k you very much.

3. The property managers will also be looking over the books to see if any cooking has been and who has done it. Anyone playing games will be put out to pasture.

4. The last area to address will be the tenants. This is a very complicated area, particularly due to the past history the tenants have had with their past landlord. What most likely will happen is that the property managers will go through the leases to see who they keep and who they evict. The property managers will take the stack of of candidates of eviction and hand it off to the lawyers who will go to court. Lawyers will also have to determine whether lawsuits filed by tenants are meritorious or not. If they are they need to to determine what the best course of action is. This gets a little funky because the lawyers also have determine what the new owners are responsible for and what is unnecessary legal baggage left behind by the previous owner.

Will the new owners raise rents? Yes. Any place where they can squeeze out more cash they will go after. If a tenant leaves. Even better. They can be replaced.

This is how the high rollers play. This is how rich people with real money do it. These are the types of people who run with the Warren Buffett crowd. They do not associate themselves with the Casey Serins of the world or they sure as hell do not read up on the Robert Kiyosaki bulls**t. These people are armed with MBAs, law degrees, tons of experience and lots and lots of cash money.

You want to play on this team? You want to run in these circles? I am telling you that it is not about connections. Trust me. I know this from experience. It is about added value. Can you bring it? Are you that much of a badass to rise up to the challenge when they call you in the middle of the night and you can increase the bottom line?