Crains New York: Looking For Profits In Unlikely Places
Looking For Profits In Unlikely Places
1/17/99
1430 Third Avenue
At the start of his career, Rick Aidekman brokered commercial properties. When the time came to go out on his own, rather than compete with his old boss, he decided to break new ground. Instead of staying with commercial leasing, he bought a residential building: a 47-unit rent-stabilized building on 103rd Street and Lexington Avenue, to be exact.
He was not competing with his former employer, but he wasn't impressing him much, either. In fact, Mr. Aidekman, now a principal of Bronx-headquartered Prime Realty Capital Corp., recalls his old boss asking plaintively: "How could you go into rent-stabilized apartments?" According to conventional wisdom, investing in rent-regulated apartments brings lots of headaches and little in the way of returns.
Yet as daunting as New York City's rent laws can be, Mr. Aidekman found that it is possible for landlords to work within those laws and still earn a respectable, steady profit. In fact, some owners say, a portfolio of rent-stabilized buildings in solid middle-class neighborhoods can be one of the most reliable investments around.
"This is the best-kept secret in America," says Robert Kligerman, Mr. Aidekman's partner at Prime Realty, which now owns and manages 5,400 apartments in upper Manhattan and the Bronx. "Middle-class people in New York City pay the rent. They not only pay it, they mail it in."
Experience required
At the same time, building owners warn, owning and operating middle-class housing in New York is not for the timid or the inexperienced. "It's a nice little profitable business, but you need to understand it," says Frank Patafio, a director of the Praedium Group, a real estate investing offshoot of Credit Suisse First Boston.
In the last year alone, Praedium has poured between $80 million and $90 million, including the cost of building improvements, into 1,800 rent-controlled and rent-stabilized units around the city. "We're not speculating," says Mr. Patafio. " We are not hoping for decontrol. And we don't overpay for assets."
For Prime Realty, the key to making this management-intensive, low-margin business work was, according to Mr. Aidekman, "to bring Wall Street to the Bronx." That has meant owning enough apartments to achieve economies of scale, and to use its bulk to push for lower prices on everything from fuel oil to insurance and maintenance.
Being a landlord of some size has also helped to convince private pension funds that Prime can be trusted with some of their money. The partners estimate that after four years of building their business, about three-quarters of their approximately 60 buildings today are owned 50-50 with institutional investors. Returns for those investors average a respectable 9% to 12% per annum.
Mr. Kligerman concedes that it took some work to attract pension funds to the Bronx, even with a track record of solid returns. However, as the crime rate has dropped, there has been less need of a sales job.
"Once you separate out the stigma of the neighborhoods so they can focus on the investment, the assets sell themselves," he says.
Searching for lenders
Similarly, Prime had to struggle to reach beyond the New York mortgage market in search of lenders willing to charge less than the New York banks. "It took a lot of convincing on our part to get them here," Mr. Aidekman says. "The rent laws really scare a lot of banks away."
Recent changes in those rent laws, including limitations on succession rights and a new rule allowing for a 20% vacancy hike, have also helped. Happily for tenants, keeping buildings well maintained is another key part of being profitable.
"If you don't upgrade them, you wind up spending the largest portion of your budget on constant repairs," says Mark Engel, president of Langsam Property Services Corp., based in the Morris Park section of the Bronx. Langsam manages 9,000 units in the Bronx and upper Manhattan.
One of the tougher problems confronting would-be investors is the lack of vehicles. Accumulating assets in what has long been a family-dominated industry requires patience. Also, the new landowners put themselves at the mercy of the Rent Stabilization Board. Currently, the board allows a 2% hike for a one-year lease and 4% for two years.
By Matthew Flamm
