By Orlando Lee Rodriguez
In one of the largest deals of its kind, AREA Property Partners has sold a block of 663 unsold sponsored co-ops in the Soundview section of the Bronx for just under $35 million.
The co-ops were sold in an all-cash deal and are located in the four towers of the Lafayette Estates development.
The broker for all parties involved, Mark Zborovsky, described the deal as the “largest ever bulk sale” of unsold shares from one single development ever to transpire in New York. “Everyone is happy,” said Zborovsky. “AREA is happy because they sold the buildings for a very good price, slightly higher than I expected. The buyer is happy because he made a good investment, and the people are happy because [there is talk] about possibly reducing maintenance charges — which is unheard of in New York City. Maintenance charges always go up, like taxes.”
With this sale, AREA Property Partners has now completely divested the interest it once held in the group of eight middle-income high-rises that line the western end of Story Avenue.
Once part of the Mitchell-Llama program, AREA had purchased the Lafayette Estates along with the Lafayette-Boynton Houses in 2006 for around $100 million. In late 2011, the 900-unit Lafayette-Boynton was sold for $51.5 million to Robert Nelson’s Global One Real Estate Fund and remains a rental development.
However, the Lafayette Estates (formally known as Lafayette-Morrison Houses) were converted to co-ops, with the backing of the tenants. Around 300 units were sold by AREA to current occupants at 25 percent below market value.
The remaining 663 units, fully occupied with rent stabilized tenants, would have gone for $114 million had the units been vacant, said Zborovsky.
Blocks of unsponsored units, he said, are usually sold to investors in bulk with a huge discount from the vacant market value. Usually the discount is 65-70 percent because the new ownership has to wait the tenants out.
“The discount is always there, because it’s a long waiting period,” Zborovsky said. “You cannot do anything with these apartments except pay maintenance and listen to the tenants complain. Only if and when a tenant moves out, then your apartment becomes deregulated, free-market. That’s why people buy them at good discounts.
It’s for investors with a lot of money and for the long term. Because they are rent stabilized tenants, they have the right to stay there.”
Zborovsky, who described the un-named buyer as a “young and very knowledgeable” person, analyzed the investment in Lafayette Estates as a long term and “patient one” that will pay dividends down the road.
And it may be a while.
The Bronx has yet to undergo any of the gentrification that areas in Brooklyn and Queens have seen in the last 10 to 15 years.
The Soundview section, located deeper in the borough than the Grand Concourse or Mott Haven, is not rich in public transportation. With one of the highest concentrations of public housing projects in the city, it could be close to 20 years before change in Soundview is abundant enough that rents will be similar to the rest of the city.
“You need to have a substantial amount of capital to carry something like that,” said Michael Tortorici, a vice president at Ariel Property Advisors. “Let’s say it’s a big package, then it’s going to sell for not much to someone who can carry the loss and is willing to wait, potentially a long time.”
Tortorici said that investors do get a guaranteed upside when units eventually vacate and that investors in long hold properties factor into strategies a balance between units that they can make money back on sooner verses those units that will not pay dividends until much later on.
“It’s hard to generalize because you have to take it on a case by case basis,” Tortorici said. “But if you are looking at 600 units, that’s a very big package, not many of those trade. These aren’t sold every day and each case has its own value add potential.”