Caveat Emptor...
...or why it pays to do a little due diligence.
Call it the Facebook IPO mindset or just some very optimistic marketing, but the development site described in the Full Story below, would appear to be over reaching what is reasonable.
Located at 79-89 Avenue D and currently occupied by a one story Rite Aid, Eastern Consolidated has put a price tag on the property of $22.5M.  The site clearly has a large footprint and a (locally) impressive buildable SF of around 72k.  This number swells to 96kSF buildable when 20% of the residential floor area is designated low income.
The problem is in the location.  Similar to 109 Gold Street that we previously blogged about, 79-89 Avenue D is sitting across the street from a public housing project.  In this case it is the Jacob Riis Houses.  These buildings will limit the rent potential of units built on the site and will kill all but the most bargain priced condo development.
We have been putting our 'Cubed Advisory back-of-the-napkin-estimate' technique to this one as a multifamily rental and just aren't seeing a $/SF rent that will make the asking price make sense.  With residential rents in the micro area facing the Jacob Riis houses struggling to get out of the $45/SF range, an all market rate building could expect to bring in around $2.6M annually or $2.9M with a blend of low income and market rate- an increase made less viable when the cost of construction is factored in.  With that kind of income backed up against a very rough construction cost, the land barely touches a useful value of $10M.  That is under $140/SF buildable, which is not coincidentally close to what Eastern Consolidated quotes as nearby comps (for properties not facing a housing project). But, it certainly is nowhere near the $234/SF buildable asking price for the bonused model or $311/SF buildable as of right.
What this site, does have going for it is it's footprint.  With typical lots in the area being 2500SF, the 13kSF footprint of 79-89 Avenue D has the ability to support a very large retail space.  In fact it currently is one and is probably making over $800k a year in rent from it already.  It is this potential for a large retail space/spaces that can command a higher rent than residential (~$62/SF on the block) and contribute a little over 30% to the rent roll that will allow bids for this site to approach what Eastern Consolidated is asking.  Again, the 'Cubed Advisory back-of-the-napkin-estimate' would figure the land could command a price of $20M as a ground floor retail development with housing above.  Still 10% below the ask.
All that remains to be seen now is whether the site languishes pending a market dictated price chop.  Of course if some smart developer with plans to change the micro market of Avenue D can find an underwriter willing to prop up the financial model, well- that could work too.

Full Story

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