endless possibilities cost $1,160/ft in quiet Noho, at 325 Lafayette

are you following the disconnect here?
Yesterday it was an artist’s loft of “3,300 sq ft” in the bottom of Soho that cleared for $742/ft (April 16, artist loft clears at $742/ft in south Soho, 307 West Broadway). Today it is the “2,000 sq ft” Manhattan loft on the 5th floor at 325 Lafayette Street at the bottom of Noho, which cleared recently for $2.32mm, or $1,160/ft, where the “possibilities” are “endless” and the Certificate of Occupancy may soon be changed from commercial to residential. Not all possibilities are priced the same, obviously.

Figuring out why, well, that’s the goods. No promises, but let’s get into the weeds on this sale and, especially, this south Noho sale compared to yesterday’s south Soho sale, both of which promise a total gut renovation. And compared to other lofts selling around the same values. Then taking into account some fancy accounting and other complicating factors. It is enough to make my head spin, but let’s begin at the beginning, and go from there.

no bragging at all
325 Lafayette Street sit on the only block above Houston that Mulberry Street penetrates. Lafayette and Mulberry don’t quite meet at Bleecker, but they get very close, so 325 Lafayette has a funky shape, tapering towards the north end, with a virtually all windows along both long sides, plus two windows south. But aside from “27 windows, 3 exposures”, there’s no bragging about the bones. None. Nothing about classic loft elements like columns or beams (as yesterday), no tin ceilings, no brick walls. The floor plan shows 3 bedrooms and 2 baths, but if there is even a fancy faucet worth saving the agent forgot to mention it.

There are now bathrooms in opposite diagonal corners, and a kitchen in the middle of one long wall, so there seem to be enough risers to afford great flexibility in a new floor plan. Once demolition is done, this space will be the blankest of canvasses, with nary a column to be be worked around.

To review: someone just spent $1,160/ft for the opportunity to spend another (say) $300+/ft to create a dream loft. Not only is that a 56% premium over the same opportunity at 307 West Broadway yesterday (on a dollar-per-foot basis), that is a premium over other recent (going back only through February) interesting loft sales (looking only in Soho and Tribeca, and only around 2,000 sq ft), in one case after adjusting for condition (there are some serious Notes to Self … here):

• the “2,300 sq ft” 114 Mercer Street #4 sold on April 4 for $967/ft well above ask as a “[v]ery well maintained live/work loft with recent upgrades make it move in condition”
• the “[l]uxurious renovated 1,900 sq. ft” 114 Spring Street #3 sold on March 19 for $1,158/ft
• the “1,850 sq ft” 38 Warren Street #7C, a 2002 conversion, sold on March 15 for $1,162/ft
• the “1,800 sq ft” 22 Warren Street #4 sold on February 29 at $1,056/ft as “a seamless merging of the past with modern, state-of-the-art finishes”
• the “2,23 sq ft” 73 Worth St #3F sold on February 3 at $1,063/ft as “sophisticated loft-living at its best!” with proper proper names and proper high-end materials throughout
• the “2,150 sq ft” 60 Grand St #7 sold on February 1 at $1,095/ft as a “possibilities are endless” loft, before adjusting for “dedicated private outdoor space”

To be blunt: the recent 5th floor sale is looking like an outlier, isn’t it? But wait … there’s more….

a serious outlier, at least compared to building comp
If someone just paid $1,160/ft for the opportunity to renovate, what might the space be worth post renovation? Fortunately, there is a same building, same footprint comp, as the 4th floor sold in after a “New Mint Renovation”. Of course, since that loft sold in a near-Peak market (deed dated June 30, 2008; contract was two weeks post-Peak of the overall Manhattan residential real estate market, on April 16, 2008), you’d have to adjust for different market conditions then compared to now. Unfortunately, that logical step will make your head spin, as that new minty loft sold for $2.29mm near The Peak … a 1% deficit to the recent 5th floor sale.

The 4th floor was professionally exposed to the market, coming out September 9, 2007 (in the quarter before The Peak) at $2.65mm and dropping 3 times about every six weeks to $2.4mm before finding that April 2008 contract. The 3 quick drops in the frothiest of frothy markets shows a certain motivation, consistent with that seller’s history as a buy-and-build flipper.

For that June 2008 seller bought the 4th floor loft in February 2007 in “fair” condition at $1.85mm, took only 7 months to turn it into mints, and had it back on the market (as above) at $2.695mm by September 9, 2007. Obviously, there was no intention to live there. Obviously, the big payday did not happen.

Instead of flipping the February 2007 purchase ($925/ft) plus renovation (?$200/ft minimum?) for $1,347/ft, the 4th floor flipper got (only) $1,145/ft. Put some inevitable expenses on both ends of the round trip, and that 4th floor flipper probably got creamed, even if the renovation was done at the circa 2007 The Manhattan Loft Guy Ballpark Number For A Basic Gut of $200/ft. But let’s not get (too) distracted by that flipper’s problems, and stay focused on what the prior sale says about the recent 5th floor sale.

To be blunt, again: the 4th floor sales in 2007 (as a buy-and-build) and in 2008 (with a “New Mint Renovation”) show either that these prices were ‘wrong’ or that the recent 5th floor sale is ‘wrong’. And not by a little. The 5th floor just sold in comparable condition to the 4th floor in 2007, at a 25% premium; before adjusting for condition or market conditions, the 5th floor just sold at a 1% premium to the 4th floor in new and mint condition very, very close to The Peak.

Of course, comping is hard. And there is another element to these sales that makes comping within the broad Manhattan market hard.

financing restrictions are hard to comp
In theory, anything that reduces the buyer pool for a loft reduces the market value, right? And two things that reduce the buyer pool are unusual financing requirements and other unusual complications.

I hit below the regulatory status of the building, because that is fun. That status has serious practical consequences for a non-cash buyer, per one bit of prior broker-babble in the building:

Since this building does not yet have a Residential C of O, the Owners are willing to help supply part of the mortgage, although commercial loans are available.

Compared to even jumbo residential mortgages, commercial loans tend to have (a) higher rates and (b) higher down payment requirements. Unless a buyer is bringing all the required money to the table, using OPM will be unusually more expensive here. And more complicated.

Snark Alert: plans are just plans, until they happen (and caution)

• August 2011: “Plans filed and work in progress to change C of O to residential”
• November 2010: “plans are afoot to get the Residential C of O over the next 12-18 months”
• September 2007:  “Plans filed for residential C of O”
• July 2006: “currently a Commercial C of O, plans are afoot to get the Residential C of O over the next 12-18 months”

speaking of monthly carrying costs
This loft quotes $600/mo in monthly maintenance, with the explanation from that same prior bit of babble:

One of the most interesting things about this property is that the maintenance is only $600 and the street level stores produce high income currently providing each floor with a minimum of $25,000 income a year through a separate partnership which is included with this sale, and this figure will continue to go up.

If I am reading that right, the $600/mo is for coop cash flow, and the shareholders are members of a separate partnership that generates more than $2,000/mo in dividends from the retail rental income. Compared to a no-frills coop maintenance of, say, $1/ft in a ‘regular’ downtown Manhattan coop, this building is plus $3,400/mo, a very non-trivial amount (the $2,000/mo regular maintenance minus the $600/mo actual maintenance plus the $2,000/mo in partnership income).

There’s a way to think of that positive $3,400/mo in reduced carrying charges as financing $x amount of mortgage, so that the practical effect of this on an affordability scale is that the peculiar structure is as if the real comparative value of lofts in this Noho building were as much as $500,000 higher (as, roughly, the $3,400/mo savings could support roughly $500,000 in additional mortgage at some rate above 6%).

This significant wrinkle makes the comping to the rest of the market even more complicated. (In round numbers, the ‘free’ financing hidden in the positive $3,400/mo in reduced carrying charges adds $250/ft in value, so that the $1,160/ft in 5th floor purchase cost is more like $910/mo; among other impacts, bringing it more in line with — but still not near — 307 West Broadway at $742/ft for a buy-and-build.)

But it does not change at all the fact that the 5th floor is a significant outlier compared to the two sales of the 4th floor.

Did I mention that comping is hard? And fun!

© Sandy Mattingly 2012