Sales Over Rentals, Even in a Credit Crunch
The New York TimesOctober 14, 2011
IN the last few years a number of new condominium projects, facing poor sales and tighter lending requirements for buyers, have chosen to become rental buildings. While rentals don’t usually generate as much initial revenue as sale properties, developers see them as a safe long-term bet, generally easy to fill and providing steady revenue.
But 305 West 16th Street, developed by Centaur Properties at Eighth Avenue in Chelsea, has taken the opposite tack, abandoning plans to lease its 53 units, which are spread across seven stories, in favor of selling them.
Back in 2008, when ground was broken around the time of the Lehman Brothers implosion, the dark gray metal-clad building, designed by SLCE Architects, was conceived as a rental.
In addition to the weak sales market at the time, Centaur had another inducement to offer the building as a rental: Google, whose New York headquarters are across the street at 111 Eighth Avenue, had raised the possibility of leasing the entire building as employee housing, said Harlan Berger, a principal of Centaur.
Mr. Berger said he ultimately balked at Google’s proposal to add doctor’s offices for its workers, and a basketball court. (Google would not verify that it had made these suggestions. “Unfortunately, I’m unable to confirm whether we had discussions,” Jordan Newman, a company spokesman, said in an e-mail.)
About the time negotiations fell through, Mr. Berger signed two big tenants, Bank of America and Duane Reade, for the pair of ground-level retail spaces. The financial cushion from those leases, coupled with an improving sales market, prompted him to rethink his plan. At the end of 2009 he decided to sell the units at 305 West 16th.
But not as condos. The building is a condop, which is like a co-op in that residents own their apartments collectively, but unlike a co-op in that they do not control the rest of the building. In this building, the retail spaces are retained by Centaur as a single commercial condo unit.
While that structure may benefit Centaur to some degree, it was also required by the state because the building sits on land that Centaur leases rather than owns. The 1964 law that created condominiums stipulates that the land under these buildings be owned, not leased. Any residential units atop leased land become co-ops or condops, by default, explained Stuart Saft, a real estate lawyer.
There are currently just 258 condop buildings in New York, according to the Council of New York City Cooperatives and Condominiums, but the atypical arrangement does not seem to be scaring off buyers at 305 West 16th.
By early this month, 36 of its 53 units had sold, Mr. Berger said, adding that two of the buyers are Google employees. And more than a dozen of the buyers have moved in, he said. Prices for the remaining units range from $500,000, for a 450-square-foot studio, to $1.265 million, for a 970-square-foot two-bedroom.
And while condop maintenance costs can be high, owing to extra ground rent, Centaur will cover 80 percent of those costs for a decade, Mr. Berger said.
It took more than just filing paperwork to go to a condop from a rental, Mr. Berger said. He also raised the quality of the finishes. In the kitchen, for instance, he opted for a separate stovetop and range from Bosch rather than a one-piece unit from General Electric. Cabinets, bathroom tiles and faucets were also upgraded.
On the roof Mr. Berger installed a 37-foot-tall, 5,800-pound steel-and-concrete daisy that he first saw at the Burning Man festival in Nevada in 2007. He tracked down the sculptor and bought it, part of which was being stored in a Reno warehouse.
In gambling that the sales market has improved, Mr. Berger might take solace in a nearby building that seesawed between rental and sales strategies: Chelsea Modern, at 447 West 18th Street, at 10th Avenue.
Built as a condo, Chelsea Modern had sold 37 of its 47 units when Lehman collapsed, forcing banks to rescind loan offers to buyers and scuttling some purchases, said Robert Gladstone, the chief executive of Madison Equities, the developer.
Suddenly faced with a new crop of units, Chelsea Modern put 20 on the market as rentals, said Mr. Gladstone, who added that he gradually began to sell those sponsor units as time passed.
Today, just 6 of 47 units there remain. And in words that might hearten developers wondering about the sales market for new construction, Mr. Gladstone also said he had sold more than twice as many units so far in 2011 than in all of 2010. “Our velocity,” he said, “has definitely increased.”