Ask an Expert About… the Under-$100 M. Investment Sales Market

Massey Knakal co-founder and chairman Robert Knakal will be available this week via The Commercial Observer online to answer your

Massey Knakal co-founder and chairman Robert Knakal will be available this week via The Commercial Observer online to answer your questions about New York’s under-$100 million investment sales market. He’s qualified: In his career, Mr. Knakal has brokered the sale of over 1,000 properties in the city. Plus, he’s The Commercial Observer‘s Concrete Thoughts columnist.

Email your questions to or submit them via the Comments box at the bottom of this post. We’ll get them to Mr. Knakal, and the answers to the questions will appear Monday and Tuesday. (And for the last Ask an Expert… click here: Attorney Barry LePatner answered your questions about construction in New York City.)

Q: Albany seems obsessed with passing some new forms of tenant protection in the rent-stabilization laws. Can you explain how greater tenant protections–like raising the monthly rent amount for deregulation from $2,000–could affect multifamily investment? – Monday 7:31 a.m.

A: Raising the deregulation threshold would affect multifamily investment properties mainly in Manhattan. There are only a few neighborhoods in the boroughs where free market rents exceed $2,000 per month now. Most high-rent or high-income deregulations occur in Manhattan south of 96th Street on the East Side and 110th on the West Side. The biggest impact of an increase of the $2,000 to the proposed $2,700 level would occur on properties with extraordinarily low rents (such as formerly Mitchell-Lama properties) having the potential of free market rents well above $2,000. If an owner can put enough money into an apartment renovation to get the legal rent to $2,000 and then charge $3,000 for the apartment, the building value goes up based upon this upside.

To the extent the threshold is lifted, if would require additional investment to get the legal rent to the new threshold and it may require more investment than an owner could realistically make into a unit. Increasing the threshold also serves to provide protection to existing tenants who are paying between $2,000 and $2,700 per month. If someone is paying that much, they are likely to be earning more than $135,000 per year. Should that person really be getting welfare? And should all other non-regulated residents of New York be subsidizing these people? This would also limit upside potential and reduce value. Both of these factors also lower the real estate tax collections from the properties in which these units exist. The real focus of rent regulation modification should not be to increase this threshold but should be focusing on converting the system to one which is needs based. But that is an entirely other discussion.

Q: If it’s a really cold winter, does that mean more apartment building sales in the spring? – Monday 11:10 a.m.

A: It very well might. The perception is that multifamily property owners make money hand over fist and this is simply not the case for many owners. These buildings barely break even. Based upon rent regulation, increases in rents do not come close to keeping pace with operating expense increases. From 1997 through this year, regulated increases were 40.5 percent and increases in real estate taxes alone during this period were 130 percent. Water and sewer charges have gone up about 14 percent for three years in a row. If heating bills increase substantially due to an exceptionally cold winter, it could put some properties in the red, causing owners to consider a sale. I think the pending potential capital gains tax increases will create incentive for some sellers to sell next year as well.

Q: What’s the most active sector of the investment market right now? What building type: multifamily, mixed-use, commercial? What’s the most active going into 2010? – Monday 3:15 p.m.

A: Multifamily properties are always the most active for three reasons: 1) there are more of them than any other property type; 2) they have very safe cash flow as rent regulation keeps rents at artificially low levels; and 3) they are the easiest to finance. Through the first three quarters of 2009, value has only declined by 16 percent to 20 percent for walk-up and elevatored properties, respectively. Other property types have declined in value by 46 percent to 70 percent from their peak in 2007. It will be interesting to see how different product types fare as we get into the 2010-2012 deleveraging phase of the market.

Q: What should I look for in a property manager? I’m a smaller landlord, a couple of buildings? – Tuesday 10:23 a.m. 

A: I would look for a firm with a good track record and someone who manages other properties in your neighborhoods. You also want to know specifically who will be your account executive. You want the firm to be good, but the experience you have with that firm will come down to what type of job the person does who is responsible for the day to day management of your buildings. If he or she manages other properties in your area, they will be more likely to stop by and you may be able to share services and servicers with whom the manager already has a good working relationship.

Ask an Expert About… the Under-$100 M. Investment Sales Market