$8.7 Million for a Condo You Can Only Live In 120 Days a Year

I almost get the math that would justify the purchase of a hotel condominium listed at Trump Soho (warning: the hotel website has music) for just over $8.7 million. As a hotel condo, you are allowed to use your unit for no more than 29 consecutive days in any 36, for a maximum of 120 in a year. The rest of the time it is added to the rental pool and offered to hotel visitors.

Owners of hotel condominiums still pay condominium and taxes all year long. In essence, it’s exactly like a rental property that you buy and hand over to a rental pool to manage. You get a cut of the profits and the management company takes a bit. As it’s in a rental pool – revenue is split between all units each month even if they all weren’t rented.

If the general rule of thumb is 1/16 of the price of housing is what you can normally rent it for so let’s assume a more generous 1/15, and add in an 81.5% hotel rental occupancy use and the room should go for.

Because there are room rates online for the studio units (425 sft) which match some of the available units for purchase, let’s try the math. This unit lists at $995,000.

$995,000 / 15 / 0.815 / 245 (days available) = daily room rate required. That works out to about $332/night required rental rate. Currently the hotel is offering ~435/day ($1.03/sqf/night) for room bookings, based on blended rates listed for units of about 420 sqf on the Trump Soho booking site.

Ok – that seems plausible that there might be an opportunity for the owner to actually make some money on the purchase. Don’t forget the owner is paying a fixed price (taxes, management, and hotel operation) no matter if the unit is rented – while the return from the pool is affected by the occupancy and average nightly rate. A 31% mark up over required daily rate might be enough to cover the costs of operating the hotel and miscellaneous costs.

All in all hotel condominiums may not be for the faint of heart. One would assume that if all the numbers where known, the management company is likely putting the following offer forward: the purchase should return about 4% (much like a good bond) with the bonus of 120 free days of living in Manhattan.  I really think that’s how simple the formula likely is when trying to sell the units to investors/part time residents.

So that $8.7 million unit – should return about $29,000/month in revenue, and cost (thinking that one couldn’t rent for less than a week such a large unit) about $17,000/week.

Great Salesman Barnett Asserts 10,000/sqf is 20 to 30% Cheaper than Market

Real Estate is usually the ultimate in capitalist negotiation, and ensures the price of the property reflects the true market value at the point of sale. The agent and seller are negotiating for the highest possible price, and the purchaser looks to capture the best property in their mind for their cash. In most cases the market has comparative units that can be used as benchmarks for price.

A sale completes only when both sides are happy with the value they receive from the transaction.

So when I see Gary Barnett, who just raised the price of a yet to be developed penthouse from $98.5 million to $110 million in the pre-build One57, says his properties are still 20 to 30% undervalued, well, I just have to chuckle. Anytime a seller tells you that by purchasing a property you’ll instantly increase your wealth – that the property will miraculously increase in value because you hold it – you have to just step back a minute.

Mr. Barnett has no interest at all in granting you any bonus value. It’s his job, his best interest, and it’s his positive (yes, a good trait here) greed to maximize the revenue on his sale. When you purchase his property (or purchase any property, from any realtor, no matter how inexpensive or gaggingly decadent) the property will be worth Exactly What You Paid For It.

The only possible case where the property will be worth something different than you paid, is if you paid too much. The only side of the negotiation that has the best information about the property is the seller. They hold more cards than you. They know, say, if the marvelous property that you bought with a fantastic view has a new development slated for build that will completely cut off that panoramic cityscape in only a few years.

It’s just lovely to know that the same cheezy realtor lines that I get at the other end of the market (yeah, I don’t have $110 million for a condo sadly) are the same lines at the top. Barrnett also describes the property as “there will be more room to increase prices in the near future” and “prices in the building are still extremely conservative given where the market is today”.

Ahhh, it’s the same pitch at every level of the market. “Buy now, it’s underlisted, and the market supports higher prices, but only if you buy. right. now.”

Recession Proof-ish Condos: Buy In Financial Districts

I’ve mentioned many times that the condominium market in financial centres will always retain more value in a recession and bounce back quicker. New stats out of NY continue to show this trend.

Top end condominiums (the top 10% by price in any quarter) are down a very modest 16% from their height in Q1 of 2008 (4.17m vs. 4.99m) – where outside the financial district we are easily seeing values that have plummeted 60%, and in rare cases 90% (You can get HOA property for as low as $52 per sq. foot in Las Vegas).

This quarter and the last quarter have the highest number of 10m+ units sold in Manhattan. 12 completed sales of units 20m+ occurred in the three months ending September 30^th (here’s one).

Finally, One57 developer still believes he’ll sell out his development – the tallest residential building in Manhattan when it goes up – at prices ranging from $3,500 – $8,000 a sq. foot (up to $91,425 a sq. m.).

It’s nice to know the 1% are still buying, and buying, and buying.

Developer Sells “Panoramic Manhattan Views” Knowing He’s Building a Condo That Blocks View

I seriously wouldn’t mind working in the developer business – with a position to repair and rebuild the industry’s reputation. It seems like one of those impossible opportunities with no chance of success. I would love that challenge. People like Jamie LeFrak of the huge New York The LeFrak Organization would make every moment exciting and challenging.

As an upstanding developer, he specifically marketed 16 luxury apartments in the Shore Club condominium as having panoramic views of Manhattan. He did this while fully aware that he’s building a 32 story building that will block the view.

A court case brought by the 16 purchasers has been ruled in their favor for false advertising. They group has been awarded 3.8 Million in damages, interest, and another one million to cover legal fees.

P.S. – For Feng shui reasons, the Shore Club has no 2nd, 4th, 13th, 14th, or 24th floor – which means if you buy on the 25th floor you are actually on the 20th. That seems awesome – now you can have that 25th floor experience even with your fear of heights over 20 floors! [sarcasm]