20.4.12
An Unusual Arbitrage in B'Burg
The Full Story below tells of a not uncommon event. Purchase of land by a developer with the plan to redevelop the site and consequently profit. What makes the story of 237-241 Bedford Ave in Brooklyn different, is that the value is being generated by the retail component of the site. Avid followers of the current state of NYC real estate or readers of the Cubed Advisory blog would know that it is almost always residential rental and not retail that drives the current market.
So what makes this one different?
The joint venture of RedSky Capital and Waterbridge has just picked up the site for $66M (33% in equity). With a low FAR of 2.0 on a site of 52,500SF, this works out to a rather shocking $628/SF buildable. Although eligible for FAR bonus from inclusionary housing, a quirk in the zoning for this particular site means that the required 20% of affordable housing can only glean a 10% SF bonus- obviously a non-starter. The project is therefore a straightforward $/SF vs. basic zoning and some simple math.
Waterbridge is planning a 50kSF ground floor retail development and 39 residential units. Given the sites FAR and a typical loss factor, the 39 units are likely to account for 46,500SF of revenue generating space. At a range of $45/SF to $55/SF for residential rental in the area, Waterbridge/RedSky should be easily able to pick up $2.1M to $2.5M. Our 'Cubed Advisory back-of-the-napkin-estimate' puts the cost of carrying the full project in it's entirety at around $5.75M a year. This leaves $3.25-3.65M to be covered by the retail rents to break even- or $65-73/SF.
With Waterbridge/RedSky getting $54/SF in place and an expectation to double or treble that, there should be no problem in having a successful development. But with the residential portion only accounting for around 40% of the required income and a 20% range of value, the income it provides can only move the projects bottom line by 8% up or down. At 60% of the project income and with a conservative range of value of 100% (up to 400% being seen as possible by Waterbridge's acquisition director), the retail portion of the project can move the bottom line by 60%.
It is that range of effect that makes the retail value the real arbitrage in this project and what makes it very different from most development currently taking place.
Full Story
So what makes this one different?
The joint venture of RedSky Capital and Waterbridge has just picked up the site for $66M (33% in equity). With a low FAR of 2.0 on a site of 52,500SF, this works out to a rather shocking $628/SF buildable. Although eligible for FAR bonus from inclusionary housing, a quirk in the zoning for this particular site means that the required 20% of affordable housing can only glean a 10% SF bonus- obviously a non-starter. The project is therefore a straightforward $/SF vs. basic zoning and some simple math.
Waterbridge is planning a 50kSF ground floor retail development and 39 residential units. Given the sites FAR and a typical loss factor, the 39 units are likely to account for 46,500SF of revenue generating space. At a range of $45/SF to $55/SF for residential rental in the area, Waterbridge/RedSky should be easily able to pick up $2.1M to $2.5M. Our 'Cubed Advisory back-of-the-napkin-estimate' puts the cost of carrying the full project in it's entirety at around $5.75M a year. This leaves $3.25-3.65M to be covered by the retail rents to break even- or $65-73/SF.
With Waterbridge/RedSky getting $54/SF in place and an expectation to double or treble that, there should be no problem in having a successful development. But with the residential portion only accounting for around 40% of the required income and a 20% range of value, the income it provides can only move the projects bottom line by 8% up or down. At 60% of the project income and with a conservative range of value of 100% (up to 400% being seen as possible by Waterbridge's acquisition director), the retail portion of the project can move the bottom line by 60%.
It is that range of effect that makes the retail value the real arbitrage in this project and what makes it very different from most development currently taking place.
Full Story
Labels: redevelopment, RedSky Capital, residential, retail, Waterbridge Capital, Williamsburg
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