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Monday, January 03, 2005

232 Broome Street

I just got off the phone with a friend of mine. "You know everything, Felix," she said, perspicaciously. "Instead of buying a loft, would it be cheaper to buy a loft building and then convert it into lofts?"

The answer, like the answer to any question, is "it depends". Certainly, some developers do seem to have made out very well that way. But let's consider a specific building on the Lower East Side of New York. Lofts around here are rare beasts, but look at the sale prices at 7 Essex: none of them seem to exceed $700 per square foot. Let's be generous, and say that in the wake of recent trend-seeking developments, the going rate for LES lofts is now $800 per square foot.

And let's say you're interested in this good, solid loft building, constructed in 1920, on the north-west corner of Essex and Broome. The building is 37 feet wide by 81 feet long, which means that it has just under 3000 square feet of gross external square feet per floor.

Let's put the ground floor and basement – the 3,600 square feet of retail space – to one side for the time being. There are then three floors for apartments. A standard real-estate rule of thumb states that to work out what the gross internal square footage of an apartment is (excluding things like the stairwells and the width of the walls), you take 85% of the gross external square footage. If you decided to build floor-through apartments, that would give you three apartments at about 2,550 square feet each. At $800 per square foot, that would value each apartment, when fully converted and kitted out, at about $2 million.

Now, it's worth noting that no apartment has ever sold for anything like that amount of money on the Lower East Side, let alone below Delancey Street. But let's be generous and say that if you converted this building into swanky residential lofts, you could get $6 million for them. Then there's the retail space – let's add on another $2 million for that. (I have no idea who might spend $2 million for retail space on Essex Street, but there's gotta be a sucker out there somewhere, right?) Total, once all the work is done: $8 million. So if you bought the building for $5 million, say, and spent another $1 million doing it up, you might stand to make some money by selling it off as lofts.

Then again, maybe you're the Eisner Brothers, owners not only of the eponymous sporting-goods store presently on the ground floor, but also of the entire building. It turns out that they bought the building from the City of New York in 1985 for $330,000. (Here's a PDF of the sale document.) Buying for $330,000 and selling for $5 million after 20 years? A tidy profit right there, in anybody's book.

Maybe the Eisners want more, however. Should they perhaps do the loft conversion themselves? No – they should rather find someone willing to spend even more than $5 million on this building. And the way they can do that is by using a wonderfully recondite number known as Floor Area Ratio, or FAR. The Eisners' building, it turns out, is on a lot which measures 51 feet wide by 96 feet long, or closer to 5,000 square feet. You can take that total square footage and multiply it by the lot's FAR to find the total square footage allowed for a building on that lot – and since the FAR for the lot is 6.0, if you tore this building down and put a new one in its place, you'd be allowed to construct just shy of 30,000 total square feet on the lot. (At 3,000 square feet per floor – ie, if you didn't increase the size of the present building at street level – that would mean a nine-story building, plus basement.)

This is where my expertise runs out. I have absolutely no idea how much it would cost to demolish the present structure and put up a new one, and I also don't know how feasible it might be to try to add some kind of residential tower on top of the building which is currently there. All I know is that if you go to weichert.com, you can find this building on sale for the eye-popping price of $25 million – or about $2,450 per usable above-ground square foot. And that's before it's converted into anything.

What kind of return does that give the Eisner brothers, you ask? Well, if you buy at $330,000 and sell at $25 million after 20 years, you're making more than 24% per annum annualised – and that's before getting a penny in rent or store profits. Even by New York standards, it seems that the Eisner Brothers made themselves an astonishingly good investment back in 1985. In comparison, $330,000 invested in the S&P 500 on August 14, 1985 would be worth just over $2.1 million today, again disregarding income. Looks like Lower East Side property is ten times better, as an investment, than the stock market!

Then again, I can't imagine who would be interested in buying the building for anywhere near $25 million. Let's say demolition and construction costs are zero, and you build the maximum allowable 29,376 gross exterior square feet. Conveniently enough, that translates into, realistically speaking, an absolute maximum of 25,000 usable interior square feet. So anybody buying for $25 million would be spending exactly $1,000 per hypothetical square foot, before spending a single penny on actually building those apartments.

Back when there was a bubble in oil exploration companies in the 1970s, it used to be said that oil was worth more in the ground than it was in the barrel: a hypothetical unextracted barrel of oil which might not even exist was valued by the stock market more highly than an actual traded barrel of oil today. The same thing seems to be going on here: unbuilt apartments are being sold for more than real, built ones. Looks like the days of converting Manhattan loft buildings and making a fortune are, unfortunately, far in the past.

Posted by Felix at 19:38 EST

Comments

wow! i was just wondering what the eisner brothers (michael?) were going to do with that. it's a nice bldg. seems like only time before the city sells the parking lot behind it to a developer. but $25 million? they might be able just to add floors on the top of the existing instead of demolishing the complete bldg.

thanks for the legwork

Posted by: cs at 10:40 EST, January 04, 2005

I'm a little confused. FAR is the ratio of the floor area of a building to the area of the lot on which the building is located (from this site here: http://www.albanyca.org/dept/design_review_floorarea.html).
So, for this building the floor area is about 3,000 sq. ft. There are four stories, and the lot size is about 5,000 sq. ft. Therefore, wouldn't the FAR be about 2.4 (3,000 x 4 divided by 5,000)? Also, how do you know that you can take the total square footage and multiply by FAR to find the maximum square footage allowed for a building on a lot? Don't you also have to consider zoning regulations, height regulations, etc.? Also, it seems like at least some apartments on the LES have sold for more than $2 million. You link to an article on 115 Allen St. where asking price for a 2,610 sq. foot apartment is almost $3 million. I'm genuinely curious about these questions so I would appreciate if you would help me out with answers. Thank you.

Posted by: Josh at 11:15 EST, January 04, 2005

Yes, Josh, the FAR for the building right now is 2.35, but the allowable FAR on the lot is 6.0. As for zoning and height regulations, a lot of those are built into the FAR, but yes, anybody buying this building would need to double-check those as well -- my guess, however, is that you can build a residential building just about anywhere in Manhattan.

As far as I know, no apartment on the LES has sold for anywhere near $2 million. The $3 million apartment at 115 Allen is being deliberately overpriced, as I understand it, because the developer wants to keep it for himself. I'm pretty sure that if the top floor at 142 Henry sells for $1.675 million or anywhere near, it will set a record for the neighborhood. But if you know of any LES apartments which have actually sold for $2 million, do let me know!

Posted by: Felix at 11:27 EST, January 04, 2005

Thank you very much.

Posted by: Josh at 12:27 EST, January 04, 2005

jeezus Felix, you thinkin' of buying a building? it's a good year for giant steps, but rather than kit out 3 loft floors, why not just make a grand b&b for all the bi-coastal media types, and penthouse out the top floor for yourselves?

Posted by: bafc23 at 12:52 EST, January 04, 2005

My understanding is that construction costs for residential (just for bare walls and floor, and zero kitting out) runs in excess of $175/sqft for actual construction and will be more costly than that in terms of zoning permits, legal fees, etc. Actual costs will probably be more than $300/sqft. I know that costs for increase of building height in a landmarked building (which this probably is not) start hovering near $500/sqft actual (this was for construction of 2 additional floors on top of a landmark building on the UWS).

Building in NYC ain't cheap.

Posted by: sashae at 15:20 EST, January 04, 2005

I googled for residential contruction costs in nyc and found a couple of reports:

1999 report is too old to be accurate ($100 per sqft) but does show the hard and soft costs that need to be catered for:
http://www.law.nyu.edu/realestatecenter/CREUP_Papers/Cost_Study/NYCHousingCost_Section2.pdf

Nov 2003 report reckons $150-$200 per sqft:
http://www.manhattan-institute.org/cr_39.pdf

This report about the sale by GLobix of their Tribeca data center for $310 per sqft in Oct 2002 shows the kind of numbers (back then) that were being paid for existing warehouses. 415 Greenwich is huge and would rival 429 Greenwich (Deitz Lantern building) in terms of scale of loft apts that could be built there.

Despite the Perry st towers (all three) going for over $2000 per sqft the high end sales price for finished lofts seems to be $1000-$1200 per sqft in other areas like Tribeca.

All this to say that this buildings price makes it too expensive to make sense for anyone.

Posted by: Jammypup at 15:51 EST, January 04, 2005

the whole process that you have dipped your toe into on line, of what is and isn't allowed on a lot is called a zoning study. it is a thoroughly byzantine bit of conjuring it requires flipping back and forth through many pages and sections of a three volume book of zoning regulations, cross checking meanings, sounding loopholes, looking for traps, making certain assumptions, etc. it usually helps to ask some people who know the code as a double check and as a final review, i like to see which way birds are flying in relation to tea leaves left in the bottom of my cup.

if you can keep yourself awake through the process and you do it enough times, you can start to see the cool factor in it. the zoning code is the long winded text version of an invisible envelope that wraps every lot, or combination of lots in the city. it doesn't outright define things, but offers areas of possibility where things might happen- contingent on various trade offs. this makes the zoning books a lot like schrodingers desciption of electron orbits:

http://www.tmeg.com/esp/e_orbit/orbit.htm (scroll to the bottom)

only much sexier...

http://www.2blowhards.com/archives/000720.html

(for some reason, the instantly recognizable images of hugh ferriss and his visual definition of nyc zoning are painfully hard to find online... 2bhrds was the only site that aggregated a few of them)

anyway...

the way nyc zoning has been written, there is something that governs the form of buildings more than the FAR. it is the sky exposure plane. this is an imaginary line that says that a building can only go up so far, before it starts going in away from the street. the idea is that it brings light down to the street (this was largely done in reaction to buildings like http://www.emporis.com/en/wm/bu/?id=115589 ready the 'facts' at the bottom) how this plane is calculated depends on where the building is in the city, the size of street that it is on, etc. it is the sky exposure plane that gives nyc skyscrapers their instantly recognizable zigguarat style of setbacks (think empire state- it is also very clear in the ferriss renderings). in some areas the rules even say that you must build to the sky exposure plane to the point where it starts to angle back over the lot. this happens on park avenue, where you must go up 10 stories, before you can go back (no short buildings allowed)... giving park ave the smooth walled canyon look that it has.

in many cases that sky exposure plane starts cutting back into a building in such a way, that all the FAR is not buildable, or is not usefully buildable
here is where the city keeps the entire new york zoning resolution online:

http://www.ci.nyc.ny.us/html/dcp/html/zone/zonetext.html

of course, to know what zone you are in- you need a zoning map- here's a link to the sub page that covers manhattan

http://www.ci.nyc.ny.us/html/dcp/html/zone/mn_zonedex.html

find your area and look up the zone you want...

in the case of 232 broome, its a c6-1 its a commercial district (c- commercial, r- residential, m- manufacturing)... if you want to do residential within commercial you have to lookup the appropriate section...

http://www.ci.nyc.ny.us/html/dcp/pdf/zone/art03c04.pdf

section 34-112 tells us to treat the lot as an R7 zone... so its off to the residential bulk rules section. but first it is important to note that being in a commercial district, i don't have to worry about the side yard or front yard rules and that the 'sky exposure plane' starts at the street line.

http://www.ci.nyc.ny.us/html/dcp/pdf/zone/art02c03.pdf

of course there is a whole lot of stuff in http://www.ci.nyc.ny.us/html/dcp/pdf/zone/art03c05.pdf which covers mixed use buildings in commercial areas, but experience tells me that i probably won't find a great deal of interest in there except that the ground floor retail conforms to commercial zoning yard setbacks, and the residential portion above conforms to residential zoning... there are also a lot of applicable bits about being on a corner lot scattered throughout the volumes

section 23-632 is the real important part... it has some nice diagrams, and shows us that at 60' above the street, the building would have to start going back 1 foot for every 2.7 feet it goes up... this would have to happen on both corners of the street.

skipping a lot of the actual analysis... as i have other things to get to today (i leave you to dig through the dirty bits of the code)... i am guessing that the building is about 50' feet tall, so you could maybe squeeze another nice floor on top before it has to start getting smaller (you could certainly squeeze on a nasty 8' clg floor)... lets say that the next floor above this is anther 10' up (again- tight floors)... 10/2.7=3.7'. if the building is 37' wide to start, its already down to 24' wide after setback, stair/elevator core, etc.

my sense of it is that the apts would get too small before the FAR would run out. there are tricks that could be done to gain some of it back... but it would be a full reworking of the building.

is it landmarked? if so, forget about doing anything to it that could be seen from the street... any street, even if it is 10 blocks away. with landmarked buildings, sightlines from the street become the limiting factor, not zoning envelopes.

of course, occupying a prime (manhattan) piece of real estate in the way that it does, makes it attractive for reasons other than filling its FAR with high priced lofts... like selling the unused FAR as air rights (typically at 70% of the value of the land itself), to allow an adjacent development to go higher or fuller with his high priced lofts. or just being a thorn in the side of someone who wants the whole otherwise empty area to do something really large with.

the famous example of this plan going bad being the missing south east corner of macys... i seem to think it was a hot dog stand owner that refused to sell his land... macys built around him and only purchasing the land years later.

any questions?

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