By Lev Mavashev, founder and principal, Alpha Realty
Last year in 2020 and even now well into 2021, the COVID-19 pandemic has many New York City property owners feeling like deer in headlights.
Should I push forward? Take a step back? Or should I just freeze and brace for impact from the worst disaster to strike the world in living memory?
While little is certain in these uncertain times, for New York’s multifamily owners considering their future beyond 2021, values might drastically be impacted by the following factors.
Lev Mavashev, Alpha Realty
Rising Property Taxes
New York will never move forward unless its real estate industry moves forward. Next to finance and, increasingly, big tech, the industry is the biggest driver of the state economy, and its 12-month enforced hiatus has cost the state $1.6 billion in lost tax revenue.
The state can’t just print money to make up that shortfall, so it is doing one of the only things that is certain in life: issuing taxes. From hikes in property taxes to capital gains, personal income to corporate tax, both the city and state are creating a clear roadmap to recouping what’s been lost. Property taxes will definitely be going up for the next few years, and that will reduce landlords’ net operating income.
Biden’s Tax Code Overhaul
At the federal level, the Biden Administration is looking to abolish 1031 tax exchanges and increase capital gains taxes. That change will drastically remove a big part of the investment market, as tax exchange buyers are a huge driver of value in New York City’s multifamily market.
For multifamily owners considering their next moves, a number of factors currently play to their favor should they consider a sale while 1031 exchanges are still a possibility.
First, we are more than a year into the Housing Stability & Tenant Protection Act (HSTPA) of 2019, a bill that rewrote the rules for how owners of the city’s 1 million stabilized units could raise rents. While there has undoubtedly been a contraction in values, the market has adjusted both in terms of operating expenses and unwriting.
Pre-HSTPA, rent-regulated apartment buildings that were trading at sub-4-percent cap rates are now trading at 6-caps. Multifamily owners that have been holding off on moving forward should consider this a window of opportunity before the slew of tax and regulatory changes that are forthcoming deals another negative blow to valuation dynamics.
As all this is currently developing, Alpha Realty is advising its clients that 2021 might be the best year to maximize value and complete a 1031 tax-free exchange — or pay a lower capital gains tax this year.
However, as gloomy as this all sounds, real estate has always been a glass-half-full kind of business. For all of the reasons above, 2021 will be a transformative year for New York City real estate as both sellers and buyers position themselves to maximize the value of their assets and hedge their investments against any prolonged slump.
Already, the investment sales numbers for 2021 indicate that more players are getting back in the game. While the numbers are a little different, the rules are still the same. Even after the upheaval of a global pandemic, New York City continues to be viewed as a stable and secure real estate market by investors, with multifamily the most coveted asset class beyond the current darling of industrial real estate.
In this climate, for the reasons mentioned above, multifamily investors are currently attracted to deals that offer an upside in income potential due to below market rents or a hedge against drastic increases in property taxes.
Right now, unregulated multifamily assets, particularly those with a protected tax class (e.g. — 2A or 2B tax classes), are generating a great deal of interest among investors eager to lock into a stable investment with a long-term upside strategy.
Furthermore, newly constructed multifamily properties built under the Affordable Housing New York Program — in which 70 percent of the units are market-rate — are also catching the eyes of investors that see plenty of upside in the free-market units, while enjoying a 35-year tax abatement. With COVID-19 causing a contraction in market-rate rents, no short-term fix to income stagnation and the prospect of crippling tax hikes, it makes sense for those developers to cash in now, too.
For landlords to maximize the value of their assets in the current environment, it pays to consult experts who are well-informed about a market where what you know is just as important as who you know. We have completed numerous deals throughout the pandemic that demonstrate not just the resiliency of the New York multifamily market, but the underlying value that can produce outsized results for both sellers and buyers.
Recently, we secured a buyer in a $25 million deal for a portfolio of 115 units, all of which were rent-regulated apartments in Queens. We also helped a landlord with negative cash flow and regulatory red tape liquidate a 255-unit portfolio by working with local housing agencies and canvassing qualified operators who ultimately bid up the closing price to $22 million.
Furthermore, we recently signed a contract on a package of tax class 2B buildings in Brooklyn at a price of over $1,000 per square foot. This price level, which represented a post-COVID-19 record, was negotiated on behalf of a seller looking to capitalize on his asset and a buyer looking to grow his portfolio of stable multifamily properties in prime neighborhoods with potential for future growth.
Each of these deals is illustrative of our philosophy of working with both sellers and buyers to broker a trade that exceeds their expectations with the kind of insider insight that creates options for building capital. While
COVID-19 may have caused a temporary setback in the market, there is no doubt in our minds that the bricks and mortar of the Big Apple will always present a pathway forward.
— This article originally appeared in the May 2021 issue of Northeast Real Estate Business magazine.