In the last newsletter, we walked through a deal that was announced in the local press for a potential office-to-residential conversion.
As a conversion, the deal didn’t look very attractive at the stated target price.
In this issuance, we’ll look at an off-market deal that looks a lot more attractive following a conversion business plan.
Because the deal was (truly) off-market, and involved in a delicate situation, we will intentionally obfuscate some of the details, but the overall economics are accurate.
The Deal.
The subject property is a 100kSF, half-empty office building located on an in-demand block just 300ft from a major retail corridor and surrounded by ultra-luxury condominiums that typically demand some of the highest prices/foot in Manhattan.
Because the property was built before 1961, it can be converted into residential condos as-of-right (under current zoning), and because of its proximity to what is the highest-priced retail corridor Manhattan, the property would also benefit from 8,500SF of ground floor retail (more on that later).
At a price of $800/ZFA (zoning floor area), or $80mm, the building value is more than enough to cover the existing debt on the property and give the existing owner a sizeable equity value to contribute to the conversion project.
For this project, we will assume a hard cost of $800/ft, as the business plan requires a major repositioning, and the finishes and design need to be in line with the upper end of the market. The unit mix calls for ~68 units, with ~80% of them being efficiently sized 1 and 2 bedrooms. The balance will be rounded out with studios, 3 beds, and a few larger penthouse units.
Given the premier location of the project, with a thoughtfully designed and executed business plan, sellout prices of $4000/ft are achievable, all while keeping 90% of the units in the $2 – $5mm range.
The Retail.
That brings us to the ground floor retail unit, with 40ft of frontage just a few hundred feet from the flagship stores of premium luxury brands.
At 8,500SF and $450/ft in gross annual rent, the unit is valued at ~$37mm, net of sales costs (using a 30% cost margin and a 6.25% cap rate).
All In.
Along with the residential units, this brings the total sellout value, net of sales costs, to $350mm. With $225mm in total cost, that leaves the project with a net profit of $125mm. At a conservative 65% leverage and $80mm equity capital required, the deal returns 19% IRR and a 2.6x equity multiple over a 6-year project duration from acquisition to final sell-out.
These types of deals may be hard to find, but they do exist. As more and more distressed office properties come up for sale – either publicly or privately – smart capital will have a chance to earn outsized returns.
Why We Liked It.
The complexity
From the strategy to the existing legal nuances to the required expertise in execution— all aspects of the deal that we felt comfortable taking on with our team.
The area
Aside from the site’s proximity to transit and public parks, its proximity to luxury retail makes it a high-demand area with not much supply within our target price point.
The product
This specific site is in an area with significant condo demand at relatively high price points.
It fit our market thesis
Based on the factors listed above. Most notably, it was an opportunity to properly design and size units as an underlying tactic to help avoid too-high unit price points and holding inventory for longer than is typical in the market, addressing one of the most significant risks in development.
How It Ended.
Like many complex or otherwise distressed deals, the lender ran out of patience with the existing sponsor and began marketing the loan. It was purchased near par by a large national shop.
Their plans for the site are not yet public.
We are currently working on other Manhattan deals as we prepare to publicly launch our fund in the next couple of weeks.
We are looking for long-term capital partners interested in a 5 to 10-year hold and looking for investment opportunities in the $10-$50mm range.
Most importantly, we want to meet and begin building relationships with people who are interested in what we are doing and who believe in how we approach the work, regardless of interest in our current deals.
Send us a note if you’d like to chat!
In addition to our development work in NY, MADDPROJECT provides fee development and professional project management services across the US.
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