Wanted: Manhattan rental properties

Real Estate Weekly, August 15, 2001 by EDWARD E.('NED") MIDGELY

The major institutional buyers and developers of multifamily rental properties are currently scouring the country for properties in 24-hour, seven-day-a-week cities, close to places of employment, retail stores, restaurants and entertainment venues, where there are high barriers to new development. It sounds to me that these multifamily investors are describing Manhattan

Manhattan market rate rental apartment properties and development sites are very much in demand. However, given the size of the Manhattan rental market, the sales transaction volume is modest. This has to do with the dramatic increases owners have realized in their cash-on-cash returns due to strong rental rate increases, as well as the negative impact taxes have on the sale of their property. Combine the reasons already mentioned with a lack of attractive alternative investments, and it is no wonder transaction volume is modest. As the rental rate growth moderates and returns to more normal levels, we should see owners begin to examine exit strategies; and if they are not, they should be. Owners should be looking to harvest gains, diversify their holdings and offering co-investors the ability to act independently.

Capital providers sense the strength of the Manhattan multifamily market and have instituted capital investment programs designed to capture today's attractive yields and secure income streams. These programs go beyond the traditional acquisition and lending programs and include complicated structured financial products. Simply stated, the increased capital allocated to multifamily housing has led to an increased demand for multifamily product.

That increased demand provides an owner with the ability to tailor individual exit strategies. It is possible to tailor a strategy that will allow for asset diversification, maximize after-tax returns, and increase liquidity while simultaneously minimizing current tax impacts.

The increased availability of capital allows for the execution of numerous exit strategies, which offer owners the flexibility to diversify and liquify their holdings.

The traditional exit strategies are fee simple sales or financings refinancings. Both strategies are well understood and the only differentiation between transactions is price execution. That is not to diminish the importance of pricing; it is vital, but alternative tax deferred exit strategies exist and need to be evaluated. Tax deferred exit strategies such as UPREIT & DownREIT transactions, 1031 exchanges, and mergers need to be considered.

These transactions can offer not only tax deferral options, but the ability to structure different tax treatments for different ownership entities, a continuing investment of pre- tax proceeds, increased levels of liquidity, varying degrees of continuing control, asset diversification, public market execution, and the ability for partners to make independent investment decisions.