The Challenge

Assist a long time owner of industrial property and Class B residential rentals in determining and implementing the most profitable strategy to turn a warehouse into a mixed use building on the Brooklyn waterfront. The potential scenarios included:

• Sell the lot to a developer and re-invest the proceeds in other areas with greater returns
• Secure a construction loan and construct a property, something they had never done before
• Create a joint venture with an experienced developer and building
• Structure a long-term leasehold where the new lessee spends the money to construct a building in exchange for 99 years of control

Our Approach

In the belief that they could develop a 90,000 sq. ft. building on their own, ownership hired an architect, drew up plans and went to their primary lender of over 30 years for a construction loan. While this bank had provided well over $200M in debt over the decades, the loan that was offered reflected a total lack of experience in ground-up development. The loan proceeds were materially lower than anticipated and the interest rate was double what experienced developers were able to achieve. Ownership needed guidance on how to achieve their goals of developing an economically viable and more valuable, mixed use property, taking advantage of 421-a tax benefits to minimize the tax liability for a quarter-century, constructing a rental asset that could be passed down to the next generation of this family ownership, and securing a market rate loan to ensure that the potential returns outweighed the construction risk.

We instantaneously recognized the superior location of this asset, which given its waterfront location would have unobstructed East River and Manhattan views in perpetuity. We quickly assessed the balance of the positive and negative attributes of the property and opportunity, and determined that a Joint Venture with an experienced developer offered the highest percentage chance for success. In order to create the JV, current ownership would need to “sell” a piece of the fee, approximately 10% to 20%, to make the project worthwhile to a new partner and show potential lenders that the minority partner had substantial skin in the game. We also believed that given the competitive advantages this property would eventually have, a new partner would accept a land value above what would be a market rate for a rental building, but still a discount from a condo valuation.

After speaking with a handful of very select developers, all with at least 30 years of experience in the industry, and some with over 100 years, we made a minor course adjustment. These developers all stated that because they still had to hire a third-party general contractor, the returns were not great enough. It was at this point we decided to “cut out the middle man” and source general contractors who were also property owners, and had enough liquidity to buy into the property and meet a potential lenders requirements. We were able to locate the appropriate group from our deep bench of relationships, and they agreed to our aggressive land value. They were about to execute the partnership agreement when 421-a expired, creating a major tax liability that could not be overcome without cutting the land value in half. Ownership decided to shelve the project until 421-a could be revived or a new tax incentive program created to minimize and freeze the real estate tax burden long enough for the project to make economic sense.

The Challenge

The 6th & 3rd project is the second North Loop/Warehouse District (Minneapolis, MN) transaction in nine months for our client, CEDARst Companies ("CEDAR"), a prominent multi-family developer based in Chicago, Illinois. The 6th & 3rd properties are located one block from CEDAR's first project, "The Duffey Lofts" site which land acquisition closed in July 2019, providing an excellent opportunity for CEDAR to scale its operation in the Twin Cities by more than 3.0x. The acquisition of the 6th & 3rd properties did not occur without headwinds. Primarily, the spread of COVID-19 into the US in February/March of 2020 and the economic shutdown and recession that ensued, posed a major challenge to the transaction. As a result of COVID-19, lenders across the nation turned off the spigot for making new loan commercial real estate loans. Additionally, private and institutional equity sources were rattled creating a "cash-is-king" mindset, not knowing if, and how long, an economic decline would last.

Our Approach

Lee & Associates provided ongoing brokerage and transactional support to CEDAR in a variety of ways. The Team was successful in raising equity capital and relational support to multiple local/regional lenders who, through the Team's local market knowledge and expertise, were still actively pursuing new loan financings despite the economic disruption caused by COVID-19. Due to state-to-state travel bans leading up to closing the 6th & 3rd, it proved critical to have local boots on the ground to allow for social-distanced contact with the seller, City and neighborhood leaders, investors, third parties conducting due diligence, and other points of contact necessary as part of the transaction.

The Challenge

This assignment began in the midst of discussions regarding the upcoming renewal of the New York rent laws. There was a unanimous sentiment across the market that the laws would move in an unfavorable manner for land lords but the details were still unclear. Many investors decided to take a “wait and see” approach while other’s that remained active seemed to take a drastically more conservative approach. Ownership also leaned to the side of caution and wanted to sell the assets before the rent laws were renewed as it did not seem the market would get better in time. It was vital to her that the ultimate contract to sell the property had no room for the purchaser to exit the deal or re-trade price when the new laws were ultimately determined. The laws were set to change on June 15th which was expected to be in the middle of the closing timeline even with an expeditious process.

Our Approach

About half way through the closing process, news broke of the new rent laws and it was far worse for landlords than anyone had imagined. Multifamily assets in New York lost considerable value in an instant. However, because the seller was prepared with an ironclad contract, the deal closed on time and at full price.

The Challenge

This assignment was one of the first acquisition opportunities brought to market amid a changing political environment, with legislation in the process of passing in New York that significantly affected the economics of operating multifamily assets. Given that legal ramifications had not yet been realized or quantified, much of the typical investor pool for this type of asset had a “wait and see” approach concerning new opportunities at the time of marketing.

Our Approach

Prior to bringing the asset to market, Lee & Associates retained one of New York City’s preeminent Landlord-Tenant lawyers to complete a comprehensive lease review process. As the risk of units re-entering the pool of rent stabilized apartments due to questionable lease history in terms of capital projects and rent increases, the team completed a thorough due diligence project to identify any potential exposure for the current owner or new investor. As the seller was looking for short-term liquidity, an expedited marketing and sales processes was desired, requiring minimal diligence after issuing a contract.