23-Floor Manhattan Office Building Just Sold at a 97.5% Discount

https://www.nytimes.com/2024/08/01/nyregion/manhattan-office-building-auction.html

by paulpauper • 2 years ago

43 52 2 years ago

nytimes.com

dredmorbius2• 2 years ago

Archive / paywall: <https://archive.is/NpdIo>

19h2• 2 years ago

Or maybe, just maybe, this is tax evasion?

pcai• 2 years ago

I never understood the argument that “locking in your losses is actually a form of tax evasion” - or am I misunderstanding what you are trying to say?

recursive3• 2 years ago

I don't really know how taxes work, but I'd imagine it's because somehow it lowers your tax bill for that year.

19h2• 2 years ago

Selling a NYC skyscraper for 97.5% under market value? Yeah, that's tax evasion 101.

Reasons:

- Property taxes? Tanked.

- Capital gains? What capital gains?

- Money laundering? Check.

- Gift tax dodge? Probably.

- Transfer tax? Lol.

- Asset value shenanigans? You bet.

IRS gonna love this one. Good luck explaining that "market rate" to the auditors.

katzinsky2• 2 years ago

I'm renting a cube (of sorts) in a building in Alexandria VA that sold for something like 30% of what the owners paid for it originally just the other month.

We're definitely witnessing a crash in US office space prices.

fitzroy• 2 years ago

It sold for $8.5 million... ..."The auction was for the building itself, not the land. That is owned by a publicly traded real estate firm, which collects a monthly lease. But the rent from the building’s current tenants is not enough to cover those monthly payments, which are set to increase every five years and do not expire until 2123."

kylehotchkiss• 2 years ago

Ick! That is a gross ownership model. Seems almost feudal to me.

chrisco2554• 2 years ago

Kinda? I mean the name "landlord" directly traces back to the feudal era. The land owner could have a mortgage too in some cases and depends on that income to pay as well as taxes and insurance. The building owner is usually subleasing or selling subunits within the building so it's really just a tiered chain of ownership and leasing with various trade-offs in capital efficiency, risk, etc.

dboreham• 2 years ago

And literally called "Feu duty" in Scotland and only abolished in recent times (24 years ago).

0xB31B1B2• 2 years ago

Its not a gross ownership model. These things are set up this way because different groups of people will pay different amounts of money for different bundles of things that are taxed at different rates/advantages depending on their use. The land lease has scheduled payments for the next ~100 years, long beyond the time horizon of DCFAs that anyone is doing for investors. Many buildings in NYC and elsewhere have this ownership model. Why should a land owner be into construction and and why should a land owner be exposed to the volatility of commercial real estate rents if they don't need to be.

ok_dad• 2 years ago

It is very common to have leasehold properties in Hawaii, usually larger buildings for residential purposes, but sometimes also single family homes and commercial buildings. Usually, they are owned by native organizations, which do not want to sell the land (for obvious reasons given their history) but want it to go to productive use.

It isn't a big deal here, and most locals support leaseholds because it allows the natives who had most of their land stolen to hold onto at least a bit of it, while still utilizing what little space they have on the islands.

golergka• 2 years ago

Imagine that you own an empty lot. You could build something there yourself, but you don't want to bear the risk and manage it because you've never done it, and you don't have funds to do it. Why wouldn't you offer somebody else to do it for a fixed monthly fee?

On the other hand, imagine that you're a developer. You know how to build and sell, you've been in the business a long time and confident about your ability. But you don't have enough money to buy a piece of land AND build. Why wouldn't you rent land instead and then pocket the profits?

jaeckel• 2 years ago

Very common model in Germany as well, called Erbbaurecht. The land is usually owned by the Catholic Church or the city itself. They then give you a lease valid for 99 years and after that time the land falls back to them.

hi-v-rocknroll2• 2 years ago

Correct. This is what was lost. Louis Rossmann I think made a somewhat knee jerk video about it.[0]

The company who owns the land is called "Safehold".[1] Rent seeking upon rent seeking. I'm surprised UBS also didn't sell the mineral rights to a fracking concern before they sold the land.

0. https://youtu.be/vpV1FS-gRZw

1. https://www.safeholdinc.com

bobthepanda2• 2 years ago

There is no way in hell anyone would get an approval to frack anything in Manhattan of all places, and there isn’t really anything worth fracking under there anyways. Manhattan has never been a large source of mineral wealth.

sakopov• 2 years ago

Interesting. So, it's like buying a house on leased land, which I see quite a bit of in Southern California as real estate values shot to the moon. Why would anyone buy an office building like this? Is the expectation that people will go back to office in the near future and the owners will be back in the profit on rent?

bobthepanda2• 2 years ago

The area is zoned mixed use, so you could tear down and drop a mixed residence/hotel on it. Or redevelop the existing building into that use.

hleszek• 2 years ago

Who would buy a building like this without the land? How does it make sense?

not2b• 2 years ago

This sounds like the leasehold concept in the UK.

chrisco2554• 2 years ago

Lots of people do. McDonald's franchise owners do the same, as do CVS pharmacies, iirc. It's for capital efficiency, and it especially makes sense in markets where the land is very expensive like Manhattan, or for a business that is trying to expand rapidly. Instead of borrowing (for illustration sake) $2 million to buy a lot and building, you can have another party buy the land for $1 million and then you only have to borrow $1 million to build the building. Your total debt is now $1M instead of $2M. You now have another $1M in lending power to go open a second location.

reverius422• 2 years ago

Why not lease the building, too? In the case of McDonald's I can imagine it's because only McDonald's wants the specific building (which looks and serves a purpose specifically like a McDonald's), but if it's a generic office building, why wouldn't you prefer to lease both the building and the land it's on (assuming you prefer to lease at all)?

katzinsky2• 2 years ago

Property taxes in NYC are high enough that owning the land doesn't really save you much the way it does in most places.

dredmorbius2• 2 years ago

What's notable here is that the discount is from a 2006 sale.

I've seen previous ~90% valuation declines but based on sales far more recent.

Chicago, 90% decline 2013 -- 2024: <https://www.chicagobusiness.com/commercial-real-estate/offic...>

San Francisco, 90% decline 2016 -- 2024: <https://sfist.com/2024/04/23/empty-office-building-at-sixth-...>

The impact of a 90% devaluation of the CMB (commercial mortgage-backed) securities market will have an immense impact on bank and investor balance sheets, which brings to mind the 2007-8 residential real estate crash and financial crisis.

Total present commercial mortgage valuation is about $3.6 trillion if I'm reading things correctly:

<https://fred.stlouisfed.org/graph/?g=1rCDW>

paxys• 2 years ago

2006 was very close to the peak of the pre-2008 real estate bubble, so the inflated price makes sense. It would IMO have been more noteworthy had the purchase date been 2009-2014, because that's when the values were more "real".

unpythonic• 2 years ago

Here's a better article covering this situation: https://wolfstreet.com/2024/08/01/values-of-old-office-tower...

Unsurprising that a building's value goes down over time while the land on which it resides appreciates. The 97% discount is a comparison of the building price versus the building + land price, so the 97% isn't very relevant.

chrisco2554• 2 years ago

Still pretty surprising. Buildings often go up in value over time and it's often the building that gets more appreciation than vacant lots. NYC is a special case, however, because land is so scarce in Manhattan. It's also frequently the case in NYC that different parties own the land than the building.

tootie• 2 years ago

The building underwent a a $76M renovation in 2021. So, this is absolutely a huge loss in value.

hankchinaski• 2 years ago

Insane that building gets depreciated in the balance sheet

0xB31B1B2• 2 years ago

nah, its super normal in RE and the source of a lot of tax advantage

epgui• 2 years ago

What is insane about that? Nothing lasts forever.

shmerl• 2 years ago

If offices are shrinking, they can turn it into a residential building.

grendelt• 2 years ago

Right.

My first thought: find an all-but-vacant office building, build myself a sweet pad on my favorite floor, then go about slowly converting the rest into apartments/condos while reserving some floors for business - esp the ground floor.

sapphicsnail• 2 years ago

Good luck convincing the city to rezone it

underlipton• 2 years ago

Property owners are terrified of this becoming a go-to strategy, particularly funds that might have investors breaking down their door to get it to happen ("Isn't some income better than no income?"). Residential units go for less, and even an inexpensive conversion is a capital investment of some order, so you're putting money into the building to devalue it. Alternatively, you could not do that, and your balance sheet survives to see another day. Who cares about pathologically inefficient use of existing infrastructure?

kr0bat• 2 years ago

The 10 foot ceilings are too low for the modern renter's sensibilities, apparently.

reverius422• 2 years ago

That's... strange? I thought 8ft was standard for (non-"luxury") residential ceilings.

choilive2• 2 years ago

For many reasons this is very difficult and expensive.

trog• 2 years ago

Is it more difficult and expensive than finding new land on which to build new residential buildings in Manhattan?

TrackerFF• 2 years ago

The Covid upshoot was WILD. Housing real-estate exploded, commercial stagnated, now the REPE firms are squirming to brake even.

johnea• 2 years ago

Maybe this means HOPE can move back to Manhattan!

https://hope.net/

23-Floor Manhattan Office Building Just Sold at a 97.5% Discount

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