I just got off the phone with a friend of mine. "You know everything,
Felix," she said, perspicaciously. "Instead of buying a loft, would
it be cheaper to buy a loft building and then convert it into lofts?"
The answer, like the answer to any question, is "it depends". Certainly,
some developers do seem to have made
out very well that way. But let’s consider a specific building on the Lower
East Side of New York. Lofts around here are rare beasts, but look at the sale
prices at 7 Essex: none of them seem to exceed $700 per square foot. Let’s
be generous, and say that in the wake of recent trend-seeking
developments, the going rate for LES lofts is now $800 per square foot.
And
let’s say you’re interested in this good, solid loft building, constructed in
1920, on the north-west corner of Essex and Broome. The building is 37 feet
wide by 81 feet long, which means that it has just under 3000 square feet of
gross external square feet per floor.
Let’s put the ground floor and basement – the 3,600 square feet of retail
space – to one side for the time being. There are then three floors for
apartments. A standard real-estate rule of thumb states that to work out what
the gross internal square footage of an apartment is (excluding things like
the stairwells and the width of the walls), you take 85% of the gross external
square footage. If you decided to build floor-through apartments, that would
give you three apartments at about 2,550 square feet each. At $800 per square
foot, that would value each apartment, when fully converted and kitted out,
at about $2 million.
Now, it’s worth noting that no apartment has ever sold for anything like that
amount of money on the Lower East Side, let alone below Delancey Street. But
let’s be generous and say that if you converted this building into swanky residential
lofts, you could get $6 million for them. Then there’s the retail space –
let’s add on another $2 million for that. (I have no idea who might spend $2
million for retail space on Essex Street, but there’s gotta be a sucker out
there somewhere, right?) Total, once all the work is done: $8 million. So if
you bought the building for $5 million, say, and spent another $1 million doing
it up, you might stand to make some money by selling it off as lofts.
Then again, maybe you’re the Eisner Brothers, owners not only of the eponymous
sporting-goods store presently on the ground floor, but also of the entire building.
It turns out that they bought the building from the City of New York in 1985
for $330,000. (Here‘s a PDF of the sale document.) Buying
for $330,000 and selling for $5 million after 20 years? A tidy profit right
there, in anybody’s book.
Maybe the Eisners want more, however. Should they perhaps do the loft conversion
themselves? No – they should rather find someone willing to spend even
more than $5 million on this building. And the way they can do that is by using
a wonderfully recondite number known as Floor Area Ratio, or FAR.
The Eisners’ building, it turns out, is on a lot which measures 51 feet wide
by 96 feet long, or closer to 5,000 square feet. You can take that total square
footage and multiply it by the lot’s FAR to find the total square footage allowed
for a building on that lot – and since the FAR for the lot is 6.0, if
you tore this building down and put a new one in its place, you’d be allowed
to construct just shy of 30,000 total square feet on the lot. (At 3,000 square
feet per floor – ie, if you didn’t increase the size of the present building
at street level – that would mean a nine-story building, plus basement.)
This is where my expertise runs out. I have absolutely no idea how much it
would cost to demolish the present structure and put up a new one, and I also
don’t know how feasible it might be to try to add some kind of residential tower
on top of the building which is currently there. All I know is that if you go
to weichert.com, you can find this building on
sale for the eye-popping price of $25 million – or about $2,450 per
usable above-ground square foot. And that’s before it’s converted into
anything.
What kind of return does that give the Eisner brothers, you ask? Well, if you
buy at $330,000 and sell at $25 million after 20 years, you’re making more than
24% per annum annualised – and that’s before getting a penny in rent or
store profits. Even by New York standards, it seems that the Eisner Brothers
made themselves an astonishingly good investment back in 1985. In comparison,
$330,000 invested in the S&P 500 on August 14, 1985 would be worth just
over $2.1 million today, again disregarding income. Looks like Lower East Side
property is ten times better, as an investment, than the stock market!
Then again, I can’t imagine who would be interested in buying the building
for anywhere near $25 million. Let’s say demolition and construction costs are
zero, and you build the maximum allowable 29,376 gross exterior square feet.
Conveniently enough, that translates into, realistically speaking, an absolute
maximum of 25,000 usable interior square feet. So anybody buying for $25 million
would be spending exactly $1,000 per hypothetical square foot, before spending
a single penny on actually building those apartments.
Back when there was a bubble in oil exploration companies in the 1970s, it
used to be said that oil was worth more in the ground than it was in the barrel:
a hypothetical unextracted barrel of oil which might not even exist was valued
by the stock market more highly than an actual traded barrel of oil today. The
same thing seems to be going on here: unbuilt apartments are being sold for
more than real, built ones. Looks like the days of converting Manhattan loft
buildings and making a fortune are, unfortunately, far in the past.
