Interviews Michael Tortorici, Ariel Property Advisors

0:00 Speaker 1 Good morning. This is Michael Stoler for the Stolar Real Estate Report on the Cats Around Table. This new legislation that has been passed with regard to housing, it may have the major effects. Certain people have different positions on it, but at least Governor Hoko passed the lawyer at the end of April, and now we’re going to look at

0:17 seeing what’s happening in the future to discuss the effects of this on the investment sales business and the New York market. I have one of the founding partners of Ario Property Advisors, Mike tore Reaching. Mike, thanks for being here.

0:32 Speaker 2 Thanks for having me, Michael, pleasure to be here. Great to see you.

0:36 Speaker 1 Same here. So let’s talk about the new program, the four eighty five X Sure.

0:41 Speaker 2 So it’s been two years since we’ve had a tax abatement program, a much needed tax abatement program to develop multi family rental housing here in the city. In that time, transactions have essentially the ground to a halt lowest level of transaction volume we’ve seen since, you know, coming out of COVID twenty eleven, twenty twelve, and even going into

1:06 this year, there wasn’t a whole lot of optimism that something would get passed. A lot of people thought that it would it would kick into next year or the following, so this was in some ways a pleasant surprise. Does that have everything that I like to see in a tax abatement program? It doesn’t.

1:21 Speaker 1 So why don’t you tell me what you like about the program?

1:24 Speaker 2 Well, the first thing I like is that there’s a program that people can now price in that there will be tax abatements for rental development housing and they don’t need to do any guesswork. So it gives developers and it gives lenders one less thing to worry about. There’s still plenty of things to worry about in the market,

1:43 high interest rates being probably the biggest one right now, and an elevated construction costs, but this was definitely holding back groups from jumping into the market. And it should give some clarity that the city and the state are series about tackling our housing crisis.

2:02 Speaker 1 So let’s talk about the City of Yes program.

2:05 Speaker 2 Yeah, you know, it could be a really great compliment to this. There’s a few things in there that I’m excited about. One is the Universal Affordability Program, which I believe is is set to increase Florida area ratios on zonings all across the city. If you pair that, they’re about to do probably a twenty percent bonus on existing

2:33 far on different fars across the city. And if you pair that with the new affordability requirements in the forty five X program, it might offset some of the downsides of the forty five X program that that exists.

2:45 Speaker 1 Right, So let’s talk about that with regard to the taxes. Okay, in the A m I.

2:50 Speaker 2 Right, So what this tax abatement did as opposed to other taxable it did in different ways. It increased the amount of affordable housing that’s required on site for new rental buildings. The last program had a very popular option which was one hundred thirty percent of a building had to be allocated for about one hundred thirty percent of AMI.

3:16 Speaker 1 Okay, and explain what AMI is Area median income. So currently what is HEM in the City of New York.

3:23 Speaker 2 Well, the one hundred percent of AMI is about one hundred and thirty thousand, I believe one hundred thirty percent, which was a previous level. If it’s a single person, I believe it’s around one forty one fifty. If it’s a couple, it’s about one sixty the current AMI program that they did in this new program, so they’re instead

3:43 of doing thirty percent at one hundred thirty of AMI, now they’re saying you have to do twenty percent at eighty percent of AMI, which is roughly about eighty or ninety thousand dollars for a single person.

3:55 Speaker 1 What about a family of for.

3:58 Speaker 2 I got to do the math on that one, but I think and that’s actually that’s that’s a good point. There’s the more these laws come out, it’s just getting more and more technical, which is why there’s going to be a digestion period for the market in terms of how to valuate these and even when we’re now looking

4:16 at comparable sales that come out, it’s not just you know, one price per buildable square foot compared to another. We need to now look at, Okay, which AMI programmer they are they going in there?

4:29 Speaker 1 You know, the the.

4:31 Speaker 2 Twenty percent of a building at eighty percent of AMI only applies to buildings that are one hundred units and less. The requirements are different for you buildings that are one hundred to one hundred fifty units or one hundred and fifty units and up.

4:45 Speaker 1 Right. And some of the changes is that you have to make certain wages for units over one hundred years.

4:51 Speaker 2 Right, So you have new rage requirements on those levels, and you also have greater affordability requirements on those levels. So if you’re going above one hundred units, you now need to do it’s either it’s twenty five percent at sixty percent of AMI or less. So a lot of you know what happened in the last program where the

5:16 threshold was three hundred units before wage requirements kicked in and other requirements, you saw a lot of buildings, you know, top out at two hundred and eighty eight or two hundred and ninety nine units. So I wouldn’t be surprised in this case if you know, certain developers tried to slide under that one hundred units to get the benefit

5:36 that has the twenty percent and the lack of wage requirements.

5:41 Speaker 1 What about the affordable housing Commercial Conversion TAXIT benefit program.

5:46 Speaker 2 So I’m really hopeful about that. Twenty years ago, as you know, the financial District was revitalized by the four to twenty one G program. When that was introduced in the nineties, it didn’t really take effect and take off until after you know the events of nine to eleven, but now we’re in a situation where post COVID, Midtown,

6:10 the Garment District, a lot of areas are struggling to adapt to this new work from home environment or hybrid of work work from home environment, and these areas need revitalization. So it gives the city a clear path and the tools to make the changes necessarily turn these into residential areas.

6:29 Speaker 1 So how do you feel that the investment sales is going to be affected with regard to all these changes.

6:35 Speaker 2 I don’t think there’s going to be much of a difference in the near term, as in terms of pricing. There’s going to be, as I said, a digestion period of how these really work into things. But we still have our challenges ahead with the elevated interest rates, which is impacting both construction financing and also on multi family

6:52 rental development exit caps. People are pricing in higher exit caps. It’s another reason why you don’t see a lot of large institutional caliber free market buildings trading right now because the cap rates that people are going to demand are just too high. So I think that pricing is going to need some work. There’s plenty of obstacles in terms

7:12 of transaction volume. Our firm is right now doing a ton of valuations for development sites all across the city. People are trying to figure.

7:20 Speaker 1 Out our land price is going up now.

7:23 Speaker 2 I wouldn’t say we’re definitely seeing interest from bidders, but I wouldn’t say we have prices going up just yet. It’s only been a couple weeks, so it’s very early. My expectation is that prices will tick up a little, if at all, given this, given this change, but I am expecting more sellers to meet the market where it

7:42 is now that this concern is alleviated. We’ve got our other concerns, but this was a big one that was holding.

7:49 Speaker 1 With regard to the sale of these seed class office buildings, what’s happening with them, especially the only purpose that taken the is a conversion or a knockdown.

7:59 Speaker 2 Yeah. Look, I mean I think a lot of these office buildings, if you don’t have certain attributes, certain light and air, if you’re not on a corner, it’s very difficult to convert the buildings. It’s very expensive. The building codes are don’t make it any easier. Maybe the City of Yes loosens that a little bit, but just the

8:17 cost of converting these structures and and putting in new mechanicals is tremendous. So I do think a lot of the buildings are going to be torn down, but you know it’s going to give room for buildings that do work on a conversion basis to actually move forward.

8:34 Speaker 1 And what about good cause of diction? So explain to what it is.

8:38 Speaker 2 So the you know, everyone knows about rent stabilization, rent controlled. Now there is a level of stabilization on free market units. If you’re in a free market unit, there’s a bunch of outs for different landlords. If you’re a condo owner, if you own less than if you own a portfolio of less than ten units, there’s a bunch of exceptions

8:58 that are made. But if you’re a tenant in in the building of a large landowner or a large multi family owner, effectively your rent is capped at the greater the lesser of ten percent or five percent over CPI.

9:16 So that’s a big change for free market tenants in a lot of buildings across the city. Where I think that’s going to impact the multifamily market near term is investors that are more value ad oriented, so people that have a look at a free market building, they see that there’s some upside in the rents. Let’s say you

9:34 can get a unit from eighty dollars a square foot to one hundred dollars a square foot. It used to be that you could make an arrangement with the tenant, have them vacate, or try to raise their rent and have them vacate and then they leave, and then you put money into the built into the unit, raise the rent,

9:53 and you effectuate your your value add play. Now the free market tenant, if they’re happy with a you know, an eight or ten percent increase on their rent, they can stay there and your rent will stay below market until they leave, and then you could do your work plan.

10:10 So I would anticipate free market value add investors to basically be pricing in longer turnover and expect higher cap rates on a going in basis.

10:25 Speaker 1 One last question, talk to me about nonprofits and the effects on.

10:29 Speaker 2 So City of Yes is doing a lot of a lot of good things. I think for nonprofit landowners, particularly religious institutions, which are getting a lot of attention from city Hall. One thing they’re doing is it’s proposing reforms to landmarks so right now, if you have a landmark building, you can’t knock it down and build on or you

10:50 can’t build on top, but you can sell the air to adjacent properties or across the street. One of the things that they’re doing is possibly expanding that and allowing someone to sell the landmarked air on surrounding blocks, which opens up a nice amount of liquidity for nonprofits and you know, it’s another path for them to support their

11:12 local congregations.

11:14 Speaker 1 Okay, I’d like to thank Mike Toro Richie for being here from Ario Property Advisors, and I’ll see you next week.