May 2024 - Lipton's Tea

Single Room Occupancy Properties (SROs) Are Back En Vogue in NYC…Sort Of

Published on May 20, 2024

Few in NYC are jumping at the chance to live in a building with shared bathrooms, kitchens and a mere 80 sq. ft. of living space seemingly talor-made for a Lilliputian. SRO properties have been synonymous with poverty, overcrowding and substandard living conditions. Let’s face it, these properties aren’t pretty but they have played a pivotal and longstanding role in addressing—at least in small ways—the city’s affordable housing crisis.

Historical Role of SRO Properties

During the industrialization era, SROs accommodated the vast influx of workers and migrants seeking opportunities in NYC. They also provided refuge for those facing economic hardships and financial devastation during the Great Depression. They fell out of favor during the post-WWII economic boom, reemerging once again during the homelessness crisis of the 1980s.

More recently, the properties have been largely neglected by investors and owners alike who have had little use for them other than as single and two-family conversions or for housing program tenants. That may be about to change, however.

SROs Relevant Again As Short Term Rentals

In today’s “rent everything” generation, the short term rental model has exploded in popularity with Airbnb leading the pack. For a while, NYC landlords benefited but the passing of Local Law 18 in 2023 imposed severe restrictions on the practice all but killing the business for most. Officials blamed the noise, trash and danger short term rentals invited as reasons for the regulation but influential hotel groups certainly played a role.

For SRO property owners, however, Local Law 18 was a blessing as these “Class B” dwellings are exempt from its requirements. SRO owners are free to operate their properties under the Airbnb model. From a practical standpoint, transforming SROs into profitable short term rentals requires owners to vacate existing tenants—a task often fraught with legal and practical complexities.

Nonetheless, for an asset class with very limited use cases, call this is a small victory for the SRO community.

How Albany Makes the Rules, And Landlords Circumvent Them

Published on May 8, 2024

The great Spanish painter, Pablo Picasso, suggested you “learn the rules like a pro, so you can break them like an artist.” With the recent passing of good cause eviction (GCE) in NYC, landlords should find their inner artist and paint the town red identifying a relevant GCE exemption. And one exists and it’s glaring.

Getting an Exemption

If an owner has received a temporary or permanent certificate of occupancy (C/O) after January 1, 2009, a thirty (30) year exemption from the GCE rules applies. And how do you achieve a new C/O for your existing property? The answer: through an Alt 1 (now Alt CO) permit when there is a change to the use, occupancy or egress of the building.

There are many alterations that fall under an Alt 1 but arguably the most relevant for multi-family owner/operators would be to increase the number of apartments in a residential building (i.e., subdividing units) or adding a roof deck to the property in certain cases.

If I were an owner of apartment buildings in NYC with free market tenants, I would be on the phone with my architect asap seeking ways to legally and ethically apply for an Alt 1 that would allow me to obtain a new C/O exempting my property from the GCE restrictions on rent increases.

No doubt the process is more involved than I let on but certainly worth exploring.

Someone much more famous than me—with whom I concur—once said, “if you obey all the rules, you miss all the fun.”

Go have some fun.

Rethinking the Real Estate Sales Process: Getting More May Mean Asking Less

Published on May 7, 2024

In the world of real estate investment sales, it is rare for the broker to suggest ownership ask less than the market value. But maybe more of us should. In an industry of low probabilities at every turn, it would take brass to suggest such an approach. So few do it even if it maximizes price and yields better outcomes. A few reasons to reconsider:

1. Asking Whatever is Foolish: Many believe asking for the moon will land at sky-high pricing. It won’t; instead it keeps otherwise interested groups at bay. Asking $7 million for a $5 million property won’t get you $6 million…only a stale listing.

2. NYC is a Sophisticated Market: Investors may and often do overpay for the “right” asset but not by nearly as much owners often think. And a good broker matches the owner’s property with the “right” investors—that’s the skill. Groups willing to overpay will quickly move on from a supremely overpriced listing and overpay elsewhere.

3. Price Maximization Requires Competition: It’s true that broad exposure invites competition but it isn’t sufficient. You can spread the gospel far and wide but if the message reeks, few will follow. Pricing matters…a lot. If too high, groups will move along and focus on better opportunities. Why make your property easy to dismiss?

4. Get ‘Em Half Pregnant: Asking less than market invites an abundance of interest. A well-priced asset has legs and spreads faster than a salacious high school rumor. It also invites investors to dig into the due diligence and inspect the property. An active investor with time and resources allocated to a property is one step closer to consummation.

5. Sending the Right Signal to the Market: Overpriced listings or marketing materials riddled with phrases like “ownership seeking proposals” is a sure pass for any serious and well capitalized group. The message (realized or not) is clear: pay me a stupid premium and I’ll sell. If you are a seller, be a seller!

To be clear, the ask price should not be foolishly low—consider a 5% discount to market (but be sure your broker knows the market). A pool of rowdy and eager buyers chomping on the bit to buy beats the alternative. I have several anecdotal stories where we employed the above with phenomenal success achieving, in each instance, above the ask price.

Owners: let your brokers disrupt the old model. It works, is more fun and gets you to your goal of selling sooner for more.