Multifamily Conversion Opportunity

Multifamily Conversion-Tribeca, New York City

Written in Nov 2022

** is a six-story Class C historic landmarked office mix-used (residential) building built in 1800s in Tribeca, Manhattan New York. This building is on the market for sale offering at $21,000,000 with 100% leased with the annual gross income of $631,448, $295,960 as a total expense, and net income of 335,488. Total 14,255 square feet is available to rent, and $1,473 per square foot. Looking at the comparables, the surrounding office rent is being offered at $60 per square foot, and the median price per square feet for sale is $1,900, up for 1% compared to last year. At this point, this building’s Cap rate is between 2.8% and 3%, and if this building is converted to residential rental apartments, the Cap rate will be reached at 6% as of today.

<Site Information>

            The property is located on ***, New York NY . The lot covers 2,500 square feet (0.05 AC) with 5.45 FAR, total of 14,255 square feet, and six-story per 2,376 square feet per floor is available throughout the six-story building. Currently, this property offers five commercial spaces, offices, and one three-bed and three-bathroom residential space on the penthouse floor.

            The zoning code is C6-2A, which is a Contextual General Central Commercial Zoning district in NYC that a variety of commercial building uses, community facilities, and residential buildings are permitted to be built. The equivalent residential code is R8A, which is High Density residential zoning often being built 9 and 10 stories tall. 

<Nearby Market Information>

            Tribeca is a part of Manhattan Community District 1, and situated south to Hudson square, West to Hudson River and New Jersey, West to Chinatown, and North to Financial District in Lower Manhattan. As of now, 19,958 residents live in this neighborhood, and the median income is $221,071, well-known for one of the affluent neighborhoods in NYC. The overall age in this area is between 25 and 64 years old; the majority of age group is almost evenly residing in this neighborhood.

The median office rental rate in Tribeca includes that the Class A is $64, Class B is $60, and Class C I assume it would be below $60. The median apartment rent in Tribeca includes that the studios price $4,600, One-bedroom is $5,448, Two-bedroom is $7,123. The current office occupancy rate in NYC shows about 40%, and residential rental’s occupancy rate shows about 96%.

<Multifamily Conversion>

            As of now, the property’s gross income is $631,448, expense including insurance and management fee is $414,578, and property tax is $118,618. As a result, net income is $185,298 per year. The sale price of the property offered on the market now is $21,000,000, and the property value by the direct capitalization method will be $3,705,960 as $185,298 of current year’s net income. Based on a ten-year projection only from the operation’s perspective, the terminal sale value will be $4,150,408, reflecting the current Manhattan office market cap rate as 5% and exit cap rate as 6% at the end of 2032. From January 2023 to end 2032, the cashflow based on IRR analysis will -12.79%, which is significantly low due to the low cash-on-cash return between 0.88% and 1.12% throughout the future ten years.

            If this property is converted to multifamily property, the total IRR for the same period will be 1.80%, cash-on-cash return will be between 3.53% and 4.47% from the operations, and at the sale, the return will be 82.04%. Only from the operation’s perspective, based on terminal cap rate of 5.5% reflecting the year eleventh’ net income, the property value will be $17,279,611. It can be compared as over four-times higher value in asset valuation after ten years.

            Considering the profit from the operation, compared to $185,298 as a current net income from the office operations, after conversion to multifamily, the projected net income will be $728,386 as of year 2, 2024, $750,238 in 2025, $772,745 in 2026, $795,927 in 2027, $819,805 in 2028, $844,399 in 2029, $869,731 in 2030, $895,823 in 2031, 922,968 in final year, 2032. Year 1 is lease up period, and the net income is projected as $209,922. The rent-up charge and leasing commissions are omitted as they will be paid by the tenants through a brokerage. The expenses and tax are calculated as same amount from both operations. 3% inflation is applied in annual revenue and expenses. There will be total 18 units of residential apartments consisting of six studios at $4,600, seven one-bedrooms at $5,448, and five two-bedrooms at $7,123. The total potential gross revenue for year one at full stability is $1,216,212. If the property is fully operated as offices, the potential gross income at 100% occupancy and at $55 per square foot will be $784,025.  

            The conversion construction will be calculated as $100 per square foot, which requires total construction cost at $1,425,500, consisting of 100% of equity. Total $1,425,500 as construction will be drawn with one year schedule at 8% annual interest rate (0.667% monthly), and 10% of retainage. For January to April in 2023, 50% of the construction loan will be drawn ratably at $178,188, and for the next seven months from May to November the other 50% loan will be drawn at $101,821 each. In December, 10% of $142,550 construction mortgage will be drawn. 100% units will be leased up before beginning September, and the common areas including the roof deck, fitness center, lounges, and co-working spaces will be completed between September and December in 2023. The total rentable units’ square feet will be 11,800 consisting of studios at 500 square feet, one-bedroom at 650 square feet, and two bed-room at 850 square feet. The common area including roof will be 4,455 square feet.

            Since a positive return based on direct capitalization method is estimated during the next ten-year projection, I would recommend the property owner converts the office property to residential property, and sell the property at the end of year four with the direct capitalization value at $13,640,691 at 5.5% Cap rate.

<Return on Conversion Investment>

            The total construction cost will be $1,425,500, $100 per square foot, and the other expenses including marketing and administrative costs will be included in the operating expenses. The first year will be construction year, and the total construction cost will be from the equity investment. From the second month, February 2023, to December 2023, the interest will be paid on each draw: from February to December, $1,069, $2,145, $3,229, $4319, $4,959, $5,603, $6,251, $6,904, $7,561, $8,222, and $8,888 as total amount of $59,152. The rest of $59,152 will be paid out during the first and second stabilization period. The total interest amount during the construction and stabilization will be $118,304, which is 8.3% as interest.   

            The preferred return will be paid out at 90% of total 10% IRR from the three-year stability operations. During the first year, the unlevered cash flow will be $209,922, and $188,903 will be paid out, and $655,412 will be paid out from unlevered cash flow of $728,336 during the second year. At final stabilized year of three (year 4 after one year construction), $675,214 will be paid out as the preferred return, which is 90% of $750,238 as the unlevered cash flow. The total preferred return for the three stabilization years will be $1,519,556, which is 6.6% return.

            From the construction interest and preferred return, the total 14.9% return on investment will be reached, which is higher than the REIT investment rate as 11.8% on commercial real estate.    

**conversion projects are planned in throughout upcoming years in 2025, 2026, & 2027