15.3.12
No Land for You!
So says Gabriel Bullaro in the Full Story below as he represents the sale of a land lease for 216-222 West 30th Street. Bullaro suggests that the property would work well for a residential development or hotel.
He is half right.
Situated a couple of blocks from Madison Square Garden, in what remains of the Garment District, the neighborhood is not exactly 'move-in ready'. A luxury loft rental building on the same block is only able to eke out mid $30/sf to mid $40/sf. Rates like that work out to an approximate cap rate of 3-5% on a valuation based on estimated construction cost. This is not a bad number, but definitely one complicated by the land lease. Depending on the terms of the land lease, rent escalations could bite into the cap rate or the equity value of the building will diminish closer to the term date as refis become more difficult. Neither is appealing on an already slim margin.
Condos? Not likely. With a market soft for most product except high $/sf 'luxury' development, this location just won't cut it. Combined with NYC's ever diminishing appetite for land lease condo space- this is a non starter.
That leaves us with a hotel. Which starts to make some more sense when you look at the numbers. Bullaro's suggested annual rent of $1.2M would yield a 25 year mortgage of $17M. At 96,280SF buildable, that is an equivalent land cost of $183/SF buildable. Even factoring in rent for the expected full 50 year term, the equivalent land cost is $500/SF buildable- assuming a balance between escalations and inflation. It is cheap land and best and has an average price tag at worst. Either way, if you are basing your required return on the income rather than the equity or sell through value- it is a good deal. With current NYC hotel occupancies rates and ADR's, a gross income of $200/sf would not be unreasonable.
Hotel guests won't mind the possible land lease mandated check out time of 2062 either.
Labels: development, Gabriel Bullaro, Garment District, land lease
0 Comments: