Are 1031s in Danger?


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For decades, real estate investors have utilized the 1031 tax free exchange to reinvest sale proceeds for like-kind property, therefore deferring the capital gains tax due. It has encouraged investors to increase their real estate holdings, as opposed to taking their chips off the table. This has bolstered the real estate industry and been a bastion for real estate brokers. A 1031 buyer is a motivated one, who must act on a limited time frame. However, if President Obama’s 2015 budget proposal goes through, this could all soon change.

On March 4th, the Treasury released their 297 page 2015 Federal Budget. Buried in it was a proposal to limit the amount of capital gains deferred to $1,000,000, which would be indexed for inflation. According to Forbes, this could account for an additional $18 billion in tax revenue over the next 10 years. What is not being considered is the tremendous potential loss of tax revenue from the additional investment, which is a result of the current IRS code. If enacted, the provision would be effective for like-kind exchanges completed after December 31, 2014

My team has witnessed our clients regularly exchanging into other properties, mostly NNN leased properties nationwide.  Many of the premium prices achieved are a result of 1031 buyers pushing the envelope to qualify. Out of our last 20 investment sales, 11 involved an exchange.

Once a seller closes, they have 45 days to identify up to three properties (unless they qualify for the 200% rule, where they can identify more). Those 45 days take place within a180 day timeframe in which the replacement property must close.  Reverse 1031 exchanges are also feasible if a replacement property closes 180 days before the relinquished property is sold, but they can be more complicated and costly to do.


The Obama Administration does not seem to view 1031 exchanges as a positive for the economy, according to a memo circulated by the CPA firm Shanholt Glassman Klein Kramer & Co.  Deferred exchanges were originally driven by the difficulty of valuing exchanged property. Apparently now, taxpayers should be able to value the properties involved. The use of qualified intermediaries in complex three party exchanges highlights the fact that valuation is no longer the hurdle it once was. The greater concern seems to be that 1031 exchanges encourage “permanent deferral” by allowing taxpayers to continue the cycle of tax deferred exchanges.

A bipartisan tax reform group headed by Congressman Dave Camp (R-MI), Chairman of the House Ways and Means Committee is also examining Section 1031. They will likely oppose this proposal, but will offer ways to better regulate it. They have also put forth an interesting concept of modifying the rules to allow foreign real property to be exchanged for US real property, but continue to disallow the exchange of U.S. real property for foreign real property. Ultimately


Sandy Klein, a partner at Shanholt, believes that placing a cap on the amount exchanged is a long shot; however, he is closely watching the matter for his clients.

In all, I believe it is important to recognize that raising taxes or eliminating tax efficiencies doesn’t always produce more tax revenue.  The famous Cuomo tax was a great example of this when, according the NY Times in 1991, “the take has dropped sharply, as has the level of transactions. The slump in the market has thrown into bold relief the problems associated with the tax from the beginning.”

 Furthermore, as mentioned above, investors often 1031 into larger properties by investing more equity or taking on additional debt. When they improve these properties, more real estate taxes will inevitably be collected as will taxes on ordinary income. Cleary, virtually eliminating 1031 exchanges would be a huge detriment to the industry.


Hudson Yards: Manhattan’s Last Frontier


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Michael Bloomberg called the Hudson Yards, “The centerpiece of our plan for midtown Manhattan; a new epicenter of commerce, culture, and community. With a unique mix of uses, unsurpassed open space, transportation access and Image 

amenities like nowhere else, the Hudson Yards represents the best that New York City has to offer.”  Hudson Yards is New York City’s newest neighborhood that will reshape Manhattan’s west side and the infamous New York City skyline.  The neighborhood will be an exciting hub of connectivity, community, culture and creativity; and is expected to have over 24 million visitors every year.  The area will include 26 million+/- square feet of office space, 20,000 new residences, luxury hotels, and around two million square feet of retail.   In addition, there will be a 750-seat public school. According to Forbes, the Hudson Yards is the largest private real estate development in the United States and the largest in New York City since Rockefeller Center.

Rarely does an opportunity become available to build a city’s tallest tower, especially in New York City, which is known for its iconic buildings.  Massey Knakal has been exclusively retained to sell this Hudson Boulevard facing site at 435 Tenth Avenue, running block-through from 501-507 West 34th Street to 510-528 West 35th Street.  Dubbed as “The Hudson Spire,” it could one day become the tallest building in the United States surpassing One World Trade Center, thus making it the world’s fourth-tallest building after the Burj Khalifa in Dubai, The Shanghai Tower in China, and the Makkah Royal Clock Tower in Mecca, Saudi Arabia.  MJM+A Architects has determined this 37,026+/- square foot site could ultimately yield a building of 1,800 feet high soaring over 100 stories into the air. With the purchase of DIB and ERY rights, this mixed-use site would yield about 1,221,858+ SF in the heart of Manhattan’s most exciting district. The site would be suitable for retail, office/hotel, and residential. An observation deck would be the ultimate addition. 

Two major drivers in the area are the The High Line and the 7 train extension. The High Line’s third and final phase is expected to open later this year. It will loop around Hudson Yards as it turns to the Hudson River at West 30th Street, culminating at Twelfth Avenue and West 34th Street.  Hudson Yards will be the most accessible neighborhood in New York City with unparalleled connections to commuter rail, subway, traffic, and ferry system along the Hudson River.  Furthermore, the Jacob Javits Center, New York City’s largest convention center, sits on the northern periphery of the Hudson Yards neighborhood.

Tenth Avenue will soon be a major thoroughfare for retail, with area tenants as well as millions of visitors flocking to the neighborhood.  Related Companies has planned for a total of 1,050,000+/- SF of retail on their 26 acre site. They have annotated plans for a 750,000+/- SF retail podium structure that will run along Tenth Avenue. Their asking rents have been rumored to approach the Columbus Circle mall level, which is upwards of $1,000/SF.  A major component of this podium will be a massive high end food court which Danny Meyer is helping spearhead. They are also looking to secure a very upscale restaurant and a lounge similar to the Stone Rose in Columbus Circle.  The area will be bolstered by the arrival of Fairway which will open under the Highline off West 30th Street. News also includes the addition of a movie theater. 

Hudson Yards has already established itself as a highly sought after location for office tenants who desire to be in state of the art space amongst a well thought out urban plan.  Coach purchased a 740,000 SF condo in Related Company’s first tower, currently rising on West 30th Street.  L’Oréal SA, the Paris based cosmetic company, followed suit with a lease of 402,000 square feet. SAP AG also leased 115,000 SF in the top tower.  Most recently, Time Warner has announced it will move its 5,000 employees into 30 Hudson, which will be Related Company’s tallest tower at the southwest corner of Tenth Avenue and West 33rd Street. The tower will rise 80 stories to 1,227 feet. Time Warner will ultimately own 40% of this building.  Clearly, there is critical mass for cutting edge tenants in the area.

Business Insider ranked New York City the top city for US tourism.  Therefore, it is surprising to know that New York City does not even appear on the Top 50 list of largest hotels in the world. Besides the massive Casino & Resort Hotels in Las Vegas and Macau, several other global cities offer mega hotels to appeal to tenants and business travelers. Examples include the 7,500 room Izmailovo Hotel in Moscow and the 3,680 room Shinagawa Prince Hotel in Tokyo. Even Chicago’s 2,020 room Hyatt Regency is larger than any of New York City’s hotels.  To date, there are only 90,000 hotel rooms in New York City.  Hudson Yards will soon help bolster the New York City hotel presence. 

Observation decks will also be a centerpiece to Hudson Yards.  They are big business and an enormous profit center for the buildings they serve around the world. One World Trade Center recently announced that Legends, a partnership including the New York Yankees and the Dallas Cowboys, leased the building’s 100th floor for $875 million dollars over 15 years.  The Empire State building provides insight into the success of observation decks with their Public Offering. Their observation decks are on the 86th floor, at 1,050 feet high, and 102nd floor, at 1,250 feet high. It attracts four million visitors per year. Their estimated revenue for this space is about $85 million per year, which is almost 40% of the 2.7 million SF tower’s revenue. Attendance there is also on an upswing, rising an average of 16.4% per year from 2000 to 2011. Ticket prices start at $27 and increase by $17 to see the 102nd floor. Finally, Related Company’s observation deck will be the highest to date. If a developer looked to add an observation deck at The Hudson Spire, they would likely need a special permit to add above the residential portion. If successful, the Hudson Spire’s observation deck, at close to 1,800 feet, would be the highest in New York City, making it a destination for tourists from around

 The Hudson Yards will reshape New York City.  The 7 Subway line and final phase of the High Line are expected to be completed later this year.  The Related Cos. development is starting to take shape with major office tenants signing on, and other developments are beginning to break ground.  It is exciting to see the long talked about neighborhood finally start coming to life.  

2013 Recap and 2014 Forecast for the NYC Investment Sales Market


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2013 will exceed our expectations both in term of value and sales volume. The mass sell-off in 2012 was attributed to the rise in capital gains, and our company predicted that the number of NYC sales in 2013 would be off by 20-25%. We did believe the decline in total sales volume would be less severe due to large scale transactions. What we did not expect was the massive uptick in pricing for virtually all asset classes across the boroughs.


Beginning this year, our listing inventory was completely depleted after the record number of sales in 4Q12.  At the beginning of this year, we had 425 listings compared to 2007’s high of 750. This was woefully inadequate to satisfy the global demand that we track from 131 different countries. As a result, pricing shot up for existing buildings. Across NYC, pricing will likely end up more than 5% higher compared to 2012, with Manhattan’s increase far greater at around 15%.

The biggest story of 2013 is the rise in land values. As commercial sale inventory reached a low, so did residential condos. Many investors also sold apartments in 2012 to bank the low capital gains. As a result, the inventory of Manhattan apartments dropped from about 7,500 to under 5,000. With land making up only 3% of the Manhattan geography, there has been little for developers to build on and create new inventory.

In much the same way the office market also improved. The tech boom filled up Midtown South driving rents over $60/SF and sending many of the older tenants searching elsewhere. Office development, predominantly in Hudson Yards and at the World Trade Center, has only been built with tenants in hand, leading to single digit vacancy. These considerations have led to four sales of over a billion dollars in 2013, while there were none in 2011 and 2012. 

These strong fundamentals will end up driving close to $40B in sales in 2013. This will come very close to 2012’s $41.1B, but still off 2007’s high of over $62B. When all is said and done, we also expect close to 4,000 buildings will trade hands, which almost reaches 2012’s level.

With all this in mind, here are five predictions for 2014:

1)      Sales Volume –Listing inventory should double as discretionary sellers and funds, who repositioned assets from the down years, look to cash in. This product will be met with open arms by new buyers coming into the market. 2014 will produce a record number of total sales value for NYC, eclipsing 2007’s $63B in sales

2)      Foreign Buyers – will account for more than $15B of these sales. Real Capital Analytics tallied $10.5B in foreign purchases from 2013 and $6.5B in 2012. China, Singapore, Canada, Norway and Australia will continue to lead the charge. If the FIRPTA tax is lowered this could even have a more exponential impact.


3)      Pricing – Land in Manhattan will rise well above 2013’s average of $510/BSF. It will hit $750/BSF, as prime sites reach well into the $1,000/BSF. Meanwhile, cap rates for retail and multifamily will stay flat as buyers will refuse to take on negative leverage and remain fearful of increased operating expenses.

4)      The Outer Boroughs – will be even more sought after. This year, 79% of all NYC sales were in the outer boroughs, compared to 2011’s 68%. This figure will rise above 85%, as investors chase yield and these neighborhoods become more established for institutional investors. Brooklyn has already met that requirement.  Expect Long Island City to lead the way for Queens. Northern Manhattan and the Bronx are next up for investors searching for deal flow.


5)      Debt – will remain plentiful and cheap, but loan to values will remain in check. CMBS which totaled $80B in 2013 is expected to reach over $100B in 2014. The Fed will need to keep interest rates low to keep the machine going, but historically low rates will only last a year or two before a spike when the economy begins to recover. We are advising long term owners to lock in 5-10 year money now.

Here are the three major concerns moving forward:

1)      An Asset Bubble – Historically, low interest rates over a long period of time create these. Just as the extended period of time when interest rates were low during the Greenspan chairmanship of the Fed led to the housing bubble in 2005- 2007, we believe a strong case could be made that the low interest rate environment of today is creating the same type of asset bubble in the commercial property market.

2)      Increased Operating Expenses: Top line revenue growth is being eroded by the real estate tax increases that have been implemented by the City leaving net operating incomes flat. To the extent this condition continues and interest rates rise, cap rates will rise accordingly producing a lower value in the future. Given these dynamics, we believe that there is better than a 50/50 chance that property values for properties with stable cash flows could be lower in two years than they are today. Clearly, over the long-term, properties will be worth more in the future, but in the short-term we could be facing a condition where property values do drop, particularly if the City continues to use income producing properties as an ATM machine to plug holes in the budget.

3)      Core assets are overvalued – I have heard by many industry experts that the pricing of core assets in NYC is a direct result of new capital coming into the market. To the extent that the fundamentals change and investors search elsewhere for yield, core values could erode.  This would encourage an acquisitions focus on value-added plays and selling properties with stable cash flows. It will no doubt be a seller’s market to take advantage of these market dynamics.

These last few remarks may seem extremely self-serving; however, if you follow the points I outline above, you may agree with my conclusions. To the extent that there is anything in your portfolio that you would consider selling, or know of anyone who might consider selling a property, I would be more than happy to discuss these market conditions in more details. Please call me at 212-696-2500 x7710 or email me to discuss further. I look forward to being in touch.


A Conversation with Michael Stern


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I had the pleasure of conducting the keynote interview with Michael Stern of JDS at the recent Massey Knakal Multifamily Summit. Michael did a wonderful job answering every question in detail. He told the story of his humble start speculating single family homes in Florida to building one of the highest residential towers in NYC today.

Michael propelled himself into the spotlight by buying a property at 212 West 18th Street in 2009 for around $25 million. That project, which would come to be known a WalkerTower, has to be one of the most successful development projects of all time.

After finding extra FAR using mechanical deductions, Michael and his partner PNG raised the building even higher, towering over his neighbors. The loft style units ultimately sold around $3,000- $4,000/SF, combining for a total sell out of over one billion dollars. The units in the 200,000 square foot building were bought in 2009, so the hard costs ended up at only $400/SF while still providing the highest level of finish.

Michael parlayed these successes into assembling 111 West 57th Street which will rise up 1350 feet. He stated his blended purchase price was $900/SF. Clearly, on this block luxury condos are the obvious exit.

Although luxury condos have received the bulk of JDS’s press building, rental housing has always been Michael’s preference. He has built several projects in Brooklyn.


He built 202 8th Street in Gowanus, Brooklyn. He achieved $62/ft rents in a market that averaged $50 and below by delivering condo level finishes. Our firm was fortunate to sell the building this year for $37.75 million which is $755/SF.  Michael said selling a rental at this level has far more tax advantages, and provides for a quicker and safer exit.

JDS’s latest rental development is on conEdison’s site at First Avenue, between East 35th and 36th Street, formerly owned by Solow. Michael is building two 80/20 towers which will total 800 units.

Michael struck the deal earlier last year below $300/BSF. He said that at the time the site was large enough that it only attracted a limited amount of suitors. If marketed today, Michael said it would almost certainly go condo as the land is probably worth double.

Michael admits that it is virtually impossible to find land today in NYC priced for rental. On the opposite end of the spectrum, luxury development sites are also nowhere to be found, even at today’s exorbitant land prices as most great sites have already been assembled over the last ten years.

Michael is already looking into London, as well as other cities in the US, as he feels he might have to go elsewhere to keep up his astronomical pace.

The Tenant Protection Unit – What Landlords Need to Know

On February 17th of last year, Governor Andrew Cuomo announced the creation of the Tenant Protection Unit (TPU) within the state’s Department of Housing and Community Renewal (DHCR) to strengthen enforcement of tenants’ rights.  Additionally, they will proactively enforce landlord obligations to tenants, and impose penalties for failing to comply with state orders and rent laws. The governor said the unit would, “proactively enforce landlord obligations” and investigates owners who “may be involved in fraudulent schemes to deregulate apartments.”

According to the DHCR website, since 2009, thousands of units have been deregulated without notice or explanation. The TPU took a proactive outreach in 2012, notifying owners who have failed to register their units since 2009, and requiring them to either re-register or provide an explanation. As a result, more than 25,000 rent-regulated apartments have been re-registered and returned to Rent Stabilization.

The website goes on to say that last year, the TPU launched the first ever audits of owners who filed Individual Apartment Improvement (IAI) increases significantly raising the rent upon vacancy within the last two years. Additionally, letters were issued to owners who had provided inadequate responses to TPU’s initial audit and request, and—for the first time—owners who failed to respond were served with subpoenas for compliance. The unit now has 22 employees and says it has conducted 1,100 audits. This year, the division has a budget of $5.7 million.

As a result, owner groups have openly acknowledged a heightened level of scrutiny of their business practices, and have urged their members to update their business practices accordingly.  Furthermore, audited owners have, for the first time, entered into settlement agreements with the TPU agreeing to return money to tenants for overcharges, revise tenant leases and re-register tenant apartments with HCR under the current rents. 

CHIP director, Patrick Siconolfi, believes that the demands on landlords are unprecedented and far over reaching.  The paperwork now used to deregulate apartments from the rent-stabilization program was not routinely required before. He also stated that itemized receipts for work are often not available, as many landlords received invoices just for an entire job in an apartment or for a kitchen or bath. His greatest concern is the cost and time that these owners have to take on even when in the clear.

One owner I spoke with said these subpoenas go way too far by asking for every financial record, and their business strategies. Landlords take note! Organizations like CHIP and RSA, work with owners to advise them on how best to navigate these new challenges.


 ImageJames P. Nelson, Partner


James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at or 212-660-7710.


To follow James on Twitter, please go to or LinkedIn at



Are We in a Bubble or a Pocket?

It is starting to feel a bit like 2007 again, pricing has surged to a point where most buyers complain that nothing makes sense, bidding wars are the norm as buyers scramble for what little inventory exists, condos are selling out off of plans at record prices and although lending rates have crept up 100 basis points, debt is still plentiful. Private equity shops have raised billions to put out as LP capital. As a result, developers find themselves only putting in 5 to10% of the equity, which in many cases they further syndicate.

Since the market bottomed out in 2009, sales volume in NYC has almost doubled every year going from $6.2B in 2010, to $14.4B in 2012, to $28.8B in 2013. In 2012 it began to level off at $41B missing the all time high of $62.2B in 2007. That being said, 2012 did prove to be a record year for the number of transactions in Manhattan with 1,194 sales, which was above 2007’s 999 sales and quadruple 2009’s sales. This translated to 4.32% of the Manhattan properties turning over last year, which was unprecedented. 

Last year’s boost in activity was a result of the increased capital gains tax, as long term owners looked to avoid the federal capital gains increase to 20% from 15%, along with the Healthcare surcharge of 3.8%. Unfortunately, for many in Manhattan, the tax savings the sellers’ benefited from was more than erased by the 13% increase in prices from last year, as the average 1H13 price per foot (PPF) for Manhattan elevators, walk-ups, mixed-use, office, and retail was $1,020 PPF compared to 2012’s $901 PPF. Manhattan pricing today is up a whopping 55% on average from 2010.

The lack of inventory and increased demand is a major factor in why Manhattan pricing has risen to such an unprecedented level. In 2007, our company had 750 exclusive listings. This dropped into the 500s last year. After the mass sell off in December, we started 2013 with about 425 listings. With buyer interest from around the world, there is not enough product to satiate the demand.

Meanwhile, pricing in the outer boroughs has remained flat from last year, therefore those who sold properties located here benefited from the tax savings. The average PPF for 1H13 and last year is identical at $470/SF up 28% from 2009’s low water mark. Cap rates across the board are a healthy 6% on average throughout the boroughs, which makes for an attractive investment when you can still borrow at around 4% and get positive leverage. Investors were not as lucky in 2007 when there was negative leverage.

Thus, much of the market craziness centers around Manhattan where certain asset classes have well surpassed the 13% average. Land, in particular, is off the charts. We recently sold 239 Tenth Avenue, a corner development site in Chelsea, for $850/BSF. This was almost 50% above the last sale in the area. This pricing was in no doubt fueled by record condo prices, which are in rare supply. According to the Miller Cicero report, there are only 4,795 Manhattan apartments for sale today compared to 6,981 in 2012, a decrease of 2,186 or 31.3%. In much the same way, a great deal of the inventory was cleared out when owners, who held apartments as investment, also chose to sell to avoid the tax increase.


How long will prices continue to rise? Will the supply demand imbalance remain? Will rising interest rates be our downfall?


On the residential side, Leonard Steinberg, one of Douglas Elliman’s top agents, says we are about to be hit with a wave of new condo inventory. This new product could certainly slow down absorption and in turn soften the residential sales market.

Meanwhile, the office market’s supply of new office product should be kept in check. Hudson Yards and the World Trade Center are proof that developers will only build once they have a tenant in hand. Very little new office produce is being built elsewhere.

Luckily, the recent rise in interest rates has not been a major factor yet, but we are closely watching it. We seem to have hit a wall with cap rates for credit retail as buyers are unwilling to accept negative leverage. Historically, as rates rise, so do cap rates, but this change could be gradual. 

So it appears that we are in a pocket not a bubble, as the overall fundamentals are increasingly strong. As a result, buyers from around the world are drawn to NYC as a safe haven. Our returns and prices per foot are affordable compared to other top global cities. Although some discretionary sellers are listing properties again, it appears this new inventory is being met with open arms in the near term.

That all being said, the overall US economy could be the dark clouds on the horizon. The lack of job creation and risk of ramped inflation are major considerations. NYC has been lucky in that we have become a mecca for the tech industry, which has helped job creation. According to a report from Center for an Urban Future, there have been 486 new digital start ups in NYC since 2007, and was the only city to see an increase in the number of VC deals at 32% compared to Silicon Valley, which lost 10%. 

NYC is not immune if the US economy falls back into a recession. Currently, investors from around the world flock here for our safety, but that could quickly change. We are also closely watching the next mayoral election. The fear of additional taxation could drive away companies and top earners. NYC’s real estate taxes, which have covered half of the City’s massive budget, are already many multiples higher than other cities. Coupled with double digit increases in other operating expenses, they will continue to erase any gains from increased gains. None of these threats seem immediate, but they do loom in the future.   



James P. Nelson, Partner


James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at or 212-660-7710.


To follow James on Twitter, please go to or LinkedIn at





Hong Kong vs New York City – What’s the Best Value


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After my two week visit to mainland China, I spent a few days in Hong Kong. I was amazed by how cosmopolitan the city was and how much it resembled New York City. Its pristine office buildings are situated between the mountains and the sea, and the city is easily accessed by the subway system.

After seeing commercial and industrial real estate here, I remain in sticker shock. Hong Kong has the most expensive real estate in the world. According to C&W, its top office space leases for $248/SF, more than double NYC’s $114/SF. This makes NYC seem like a very affordable option for a global company to locate to, as we have only the 18th most expensive office space in the world, ranking behind London, Moscow, and Paris.

Office condo sales are also prevalent in HK. I toured a 1,885 SF office condo in Central HK with direct sea views. The price: $40 million HK which equates to almost $5,125,000 US or $2,720/SF. This is an amazing number considering office condos in NYC sell for less than a third of this.

I then toured some of the most expensive residential real estate in the world. According to Citihabitats, the average price of a HK luxury apartment is $11,000/SF, almost three times NYC’s $4,100/SF. NYC was only 6th on the list behind Tokyo, London, Paris, and Moscow.  Come again?  This makes NYC not only seem affordable, but a bargain.

As all new residential product in HK sells out of show rooms, we first toured Phillippe Starck’s Yoo project. The showroom was located on the ground floor of a very high end mall. Dozens of residential brokers were lined up and trying to sign potential buyers as their client before they entered.

Once inside, we went into a massive, empty room that soon went entirely dark. The walls doubled as giant video screens, showing models on runways and scenes from restaurants and the city as techno music blared. There was not one shot of the proposed building. They were clearly selling a lifestyle.

The Yoo project’s foundation is currently being finished so its completion date is scheduled for 2015. It will contain 144 micro units where a 1 BR measures only 355 SF. I was amazed by the efficiency of the layouts. Perhaps NYC developers could deliver this type of product to attract foreign buyers.

The Yoo sales office has been open for four months and has already sold 40 units where buyers placed 20% deposits, and wait for completion of the product. The prices achieved to date have been between $9,500,000 (HK) to $27,000,000 (HK) for a combination unit, meaning the US prices range from $1.2M to $3.4M with prices per foot from $3,500/SF to well into the $4,000’s. These apartments could be rented for returns of 2-3%, which is supposedly irrelevant to investors there as they solely focus on appreciation. This was similar to the mainland where values have increased ten fold, in some cases, over the last 5 years. But it seems this will not be sustainable.

Attempting to cool down an overheated real estate market, the HK government imposed penalty taxes of 20% if a unit is resold within a year, 15% if resold in two years, and 10% if resold in five years. This government plan is a real concern for local and foreign investors which could possibly bring more foreign investors our way.

After we toured the showroom, we headed out to see some of the most expensive apartments in the world. The most coveted HK apartments are located in the mountains on The Peak and in Recluse Bay. Here a 1980s, 2,500 SF apartment with views of the sea will sell for $10M US.  Single family homes trade for $100M or more. I must say the landscape was beautiful, as new homes were perched up in the mountains with views of the sea and beaches. However, most of the build outs were very dated and inferior to NYC construction.

HK has strong land use restrictions as most of the mountain land is protected, so new development is exceptionally rare. For the mountain sites available, they are very expensive to build on as the foundations required for the steep inclines can lead to hard costs exceeding $1,500/SF. One of the only new projects offered is a Frank Gehry designed opus where prices range from as high as $400-$500M/SF (HK) or $50M to $65M (US).  At 12 stories, it has only 10 apartments measuring 6,000 SF each. According to Bloomberg, it was built for $3,477/SF, including the land.

Additionally, almost all of HK land is leased from mainland China, which expires in 2047. Brokers said buyers were not too concerned with what happens on this date, and everyone seems to believe it will be extended. However, I would have concerns over where the ground rent would be reset. There are some rare instances of freehold apartments being sold on 999 year ground leases.

In all, my trip to HK made me realize the inherent upside that NYC has to offer global investors. Our quality of life is certainly comparable, and our residential and office product is of the same or better quality. With our values being two or three times less, we have plenty of room to grow. As our investment properties also provide double the returns in the interim, it is shocking to me that we have not seen more buyers come from HK, especially when they do not have the same restrictions of transferring money to the US as they do from mainland China.

While visiting HK I met with several local brokerage and law firms who said they had scores of investors eager to invest in the US, so it would not surprise me if we see them account for a larger percentage of NYC sales moving forward. I believe we have not even seen the tip of the iceberg yet.

EB – 5: China’s First Massive Step into U.S. Real Estate Investment


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I recently had the pleasure of presenting on the state of the NYC real estate market with the NYC Regional Center in six different cities across China.

The NYC Regional Center is the largest EB-5 investor in the U.S. They have raised $850 million dollars in the last 3 ½ years over ten different projects, including Atlantic Yards, Steiner Studios, and the GW Bus Terminal.

The EB-5 program has been in existence for decades, but only became widely popular in 2009 when the market collapsed and conventional lenders pulled back from the market.

The way the EB-5 program works is that foreigners invest $500,000 to create ten U.S. jobs, and in exchange they receive a green card. Although this is open to people around the world, the overwhelming majority have come from China.

This was my first trip to China, and I was blown away by the scale of newfound wealth. Cities such as Beijing and Shanghai dwarf New York City as their populations number well above 20 million people. I was advised not to discuss the returns NYC real estate has to offer as they are diminutive compared to the explosion of China’s property values. That being said, the Chinese are not searching for returns from their EB-5 investment which typically range from 3-4%. They are interested in the green card which affords all that the U.S. has to offer, namely the potential education and the lack of pollution.

Many Chinese who bought properties in their homeland years ago now find their investment to be worth many multiples more today.  For the EB-5 investor, refinancing to produce the funds necessary and the required proof of funds the Dept. of Homeland Security ultimately approves of, is quite common.

For the individual, transferring money out of China is easier said than done. Their government only allows a transfer out of $50,000 or less, otherwise, permission must be sought and a hefty tax must be paid. As a result, there is a lot of talk about money being illegally transferred out of the country.

The exception to the rule is the SoHo Chinas of the world who are well connected with the government. While I was in Beijing, it seemed like there was a massive SoHo China building on every other block. It is no surprise that they invested $1.4 billion for a 40% stake in the GM Building.

This is just the beginning for Chinese investment in the U.S..  I met with several attorneys in China who said they had clients with tens of millions of dollars who were looking to invest.

For these high net worth individuals, an EB-5 investment is usually the first step. Although there are 250-300 Regional Centers approved by the U.S. government they can potentially choose from, there is tremendous caution in China after a recent EB-5 scandal in Chicago where money was taken, but the project was not developed and green cards were never issued.

By contrast, the NYC Regional Center has an amazing track record. They have helped generate over 2,200 conditional green cards from over 1,600 investors. They also stress the track record of their development partner, and how well collateralized an investment is. Massey Knakal also assists by valuating potential properties to give extra assurance.

They differentiate themselves by providing mostly debt in public private partnerships, which provide the assurance that there will be a surplus of created jobs necessary to produce the green cards.

The NYC Regional Center provides the ultimate assurance by holding the EB-5 investors money in escrow until the conditional green card is produced. This is uncommon in the industry, where funds can sometimes be used before the project proves to be a success.

Raising money in China for the EB-5 program requires great coordination with local agents who bring in the potential investors and handle much of the immigration process. While in China, we presented in six different cities to audiences ranging from roughly twenty to a hundred people. After a two hour presentation on the EB-5 program, the NYC Regional Center’s track record, the specific investment opportunities, and my talk of the NYC market, many investors signed up on the spot to commit.  Investors need to act quickly as the NYC Regional Center projects tend to sell out quickly.

Developers should take note of the opportunity to bring in an EB-5 investment. Although the process to receive the funds can take longer, the interest rates are worth the wait, as they are typically below what conventional lenders will offer.

Because the EB-5 program hinges on job creation, projects with a city infrastructure improvement prove to be very helpful. Hotels or projects with large food and beverage components are also great candidates, as they usually create more than the needed number jobs required for the program.

As the financing market begins to loosen up and construction loans become plentiful once again, this could create competition for EB-5 investments. To become more competitive, some Regional Centers may begin to offer mezzanine debt or JV equity, as apposed to construction loans. Regardless, the EB-5 Program has been a true win-win as foreigners receive green cards, projects are being built and jobs are created. Above and beyond, there is no doubt that there is tremendous wealth from mainland China trying to find its way here to purchase NYC real estate.

7 Caps do Exist in NYC Today


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There has no doubt been a great cap rate compression for investment properties in NYC this year. This is thanks in large part to a major shift in the supply demand imbalance. In 2007, our firm had 750 exclusive listings. After a major drop in 2009, where the market was at a standstill, the inventory was never replenished. Even as of late last year, our firm was only handling around 550 listings, while maintaining a consistent market share to 2007. We found that many owners elected to hold onto their properties as there was little for them to reinvest into and alternative investments offered little but volatility.

This reduced inventory was decimated at the end of last year as long term owners looked to sell before the federal capital gains tax rates increased from effectively 15% to 23.8%. As a result, our office closed over 100 sales in December alone, with a third of those being contract closes. When all was said and done, we had 425 remaining listings come January.

What we found at the beginning of this year was the same amount of buyers were present from last year, if not more. With the volatility in the stock and commodities market, many global investors are aggressively seeking out real estate, as it is the only hard asset that cash flows. Evidence of this is that the Norwegian pension fund, Norges, which just paid about $600 million for a 49.9 percent stake in 5 buildings in New York, Washington and Boston.  Their first US acquisition is only the tip of the iceberg for this $6B fund. (Later this month, I will go to China to present to several groups of investors who are also anxious to find ways to invest here.)

This all being said, we have found that most of this foreign and institutional capital is focused on Manhattan alone, with a few exceptions in Downtown Brookyn. For many, NYC is Manhattan. Regardless of how great the opportunity, many buyers and brokers still say they are only looking south of 96th Street. With everything going on in the Outer Boroughs, this bias still amazes me.

There is so much growth potential in the outer boroughs. In addition, to the million new residents that NYC is expecting in the next 10 to 15 years, there are massive residential developments which are being built to accommodate them, many of which are on the waterfront. There is not enough retail to accommodate. I once heard the CIO from Vornado say that the average consumer has 30 SF to shop in the rest of the US, but in the outer boroughs only have 5.

So where are these 7 caps: outer boroughs with retail or industrial? I’m currently handling the sale of 132-05 Atlantic Avenue. It is a 196’ wide, 2 story, 72k SF warehouse building in Queens right of the Van Wyck Expressway. It’s NN leased to the City of New York for the next 17 years. It has an in place 6.9% cap. Granted, the City does have certain termination rights with penalties, but they have been at this location for decades. It’s also around the corner from Staples, meaning that one day it could be a big box opportunity.

If you like mixed-use, the Bronx also has plenty of 7-8% caps available. We have a corner building for sale, 3060 Third Avenue, at the corner of 157th Street. It has a laundromat and four apartments above.

Finally if you want in place yield, but want to remain in Manhattan, try the retail condo at 20 West Street. Boasting a brand new lease to the Learning Experience and offering a 5% cap, 20 West Street holds a lot of potential. Located only a few blocks from the World Trade Center, the coming years will bring plenty of transformation.

Don’t get me wrong, I’m not giving up on 3% caps for multifamily if there’s enough upside and if the price per square foot is right, but if you’re a yield buyer, then now is the time to act. Even though rates have crept up in the last few weeks, you can still lock in money that is below the 5, 10, and 20 year averages and benefit from positive leverage to increase your cash-on-cash return.  


James P. Nelson, Partner

James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at or 212-660-7710.

To follow James on Twitter, please go to or LinkedIn at



421a and Inclusionary Benefits for Market Rate Developers


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Although the 421a negotiable certificate program expired, there is still a small supply of grandfathered certificates that exist. There is also Inclusionary Housing Certificates, which can also benefit market rate developers.

Recently I had the pleasure of moderating a panel with Sol Arker of the Arker Companies, an affordable developer of over 5,000 housing units; Paul Korngold of Tuchman, Korngold, Weiss, Lippman and Gelles, LLP; and Alvin Schein of Seiden & Schein, P.C. Both Korngold and Schein are partners in firms specializing in the fields of the Inclusionary Housing Program and real estate tax incentive programs.

421a negotiable tax certificates provide 10 and 15 year tax abatements in Manhattan and the outer boroughs, respectively. Each apartment unit requires a certificate, and units must average 1,200 SF or less, otherwise additional certificates must be purchased. According to a chart provided by Paul Korngold, the abatement that one certificate can total up to is $71,429 in Manhattan and $174,771 in the outer boroughs over these time frames[MK1] . This is based on the present day abatement cap of about $75,353 in assessed value. Gold certificates, which allowed an unlimited abatement, are a thing of the past, as all projects today are subject to this cap.

The panel agreed that the savings were compelling for market rate rental developers, especially when current pricing is at about $40,000 per certificate. At a 7% discount rate, these certificates should be worth $53,741 in Manhattan and $107,644 for the outer boroughs, in today’s dollars. Developers need to act fast though as the panel believes that there are probably only one to two thousand certificates left in existence.

421a certificates are also a great selling point for condo projects. One residential broker in the crowd said end user buyers will take on a larger mortgage as a result of the savings, which in turn increases their buying capacity. Also, a 421a benefit can be the deciding factor between a competing condo project that does not offer this benefit.

Korngold also pointed out that the 421a program is not entirely dead. Only the negotiable certificates were ceased two years ago. Today, developers can get the benefit as of right in such neighborhoods as Bedford-Stuyvesant and Sheepshead Bay in Brooklyn; Astoria  and Bayside, Queens. Rental developers should take note.

Another opportunity for market rate developers is to purchase inclusionary air rights for an R10 or equivalent site. By purchasing these rights off site, a developer can raise his FAR to 12.0 from 10.0.

The rights can be purchased from an affordable development within the community board or within a ½ mile radius. Arker explained that he produces these rights by building affordable projects and then transferring 3.5x of what he builds. He has built several projects at the request of market rate developers when the inventory might not already exist. The market rate developers will post a letter of credit as security for this type of forward sale.

Depending on the community board, inclusionary rights typically trade at $250-350/BSF, but Arker made the point that these rights trade at a steep discount to land values, which today can reach upwards of $1,000/BSF. He added that these rights go straight to the top of the building where sellouts can reach $3,000/SF or more.

Schein explained that inclusionary rights could be transferred to non-R10 sites but then the multiplier [MK2] factor could be reduced to 1.5x instead of 3.5x. This, he observed, made it virtually impossible for affordable developers to produce these rights, especially in the most expensive community boards.

Schein also spoke to the benefit of developers building their inclusionary on site. He spoke to the “triple dip” effect which includes a 25 year tax abatement, additional FAR and the ability to sell these inclusionary rights off site. Additionally, the developer can benefit from tax-exempt bond financing. However, the time and expense of this program only makes it worthwhile for a developer of a larger site.

In all, there was much agreement that the elimination of the 421a negotiable certificate program has been a great detriment to the City. One developer in the audience believes that it has stopped the creation of thousands of affordable units being built.

As the cost of land continues to rise and real estate taxes for a new development can reach 30-35% of income, it is virtually impossible for rental developers to build without an abatement. As a result, there is no doubt that there are less affordable and market rate units being built. Although some politicians initially argued they were giving away tax dollars, their views are sadly short sided, as having new buildings on the tax roll would come back in spades down the line when the abatements burn off.

Market rate developers should capitalize on what’s left of these abatements.

James P. Nelson

Massey Knakal Realty Services

James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at or 212-660-7710.

To follow James on Twitter, please go to or LinkedIn at

 [MK1]What time frame?