A rendering of the boutique hotel to be developed by Delshah Capital at 17 W. 24th St.
NEW YORK CITY—The past few years with a development and construction boom firmly in place in Manhattan and buyers willing to pay record prices, investors in the niche non-performing debt arena had slim pickings indeed. The outlook for the distressed real estate sector now may be changing, says Michael Shah, principal and CEO of Delshah Capital LLC.
The New York City-based real estate investment and property management firm recently closed several distressed real estate transactions in Manhattan including the purchase of a non-performing senior mortgage note encumbering 17 West 24th St. for $9 million. That deal represented approximately a 63% loan-to-value on the underlying asset value. Delshah Capital plans to move forward on plans to convert the currently vacant five-story commercial building off Madison Square Park in Manhattan’s Flatiron District into an 18-story, 68-key boutique luxury hotel.
The firm also recently acquired a defaulted note on 97 2nd Ave. The 10,948-square-foot, six-story mixed-use building in the East Village features 10 residential units and 2,245 square feet of ground floor retail and is 100% leased. Delshah purchased the note all cash, at a purchase price that equates to $868-per-square-foot, which represents approximately a 61% LTV. The two recent deals were the first distressed note purchases by Delshah Capital since 2012.
“We are pleased to see opportunities in the non-performing debt space after several years of an overheated market. These opportunities represent a return to Delshah’s core competency of acquiring defaulted notes in premier locations,” Shah said. “Over the past several years, we stood by patiently while many of our competitors took speculative bets on rising retail rents and condo prices. Now that market conditions have begun to change, it’s time to fire up the engine and hit the gas.”
Michael Shah, principal and CEO of Delshah Capital, LLC
The firm since its inception in 2006 has seen its equity value grow from approximately $15 million to more than $327 million. Its current portfolio totals more than 2 million square feet and is valued at more than $800 million. The company expects its portfolio value to grow to approximately $975 million with projects under development. Delshah Capital’s current portfolio includes 17 real estate assets, composed of 1,200 residential rental units and 10 retail units across the five boroughs of New York City.
Shah tells Globest.com that after a three-year run-up in real estate values, the real estate market in Manhattan began to plateau in the second half of 2016. Now he notes that sellers expectations have come down to the point that normal market transactions (non-distressed) “are almost palatable again.”
The pool of buyers for the most part, he adds, are more “responsible in terms of pricing that they were in the past few years.” This change in investor attitude, along with other market forces, are creating prime opportunities for the first time in the non-performing sector since 2012, Shah believes.
He says those distressed asset opportunities will come “in two flavors”—residential condominium development sites and existing retail condo properties that were underwritten based on securing extremely high rents.
“There were a lot of development sites and development projects planned with break-evens above $2,500-a- (square)-foot where people thought they were going to get $3,000 to $3,500-a-foot during the exuberant run-up in condo pricing,” he says. “It is very clear that they are not going to get much more than $2,000-a-foot and they are under water or are unable to finance their condo developments because the market for financing them dried up.”
Some of these condo developments’ land loans are now coming due and require further interest reserve modifications. Shah says those type of deals are beginning to occur. In fact, the firm’s purchase of 17 West 24th St. stemmed from the purchase of a note from a bridge lender whose borrower defaulted and couldn’t secure project financing.
The other source of distressed real estate will come from the retail sector based on the changing fortunes of retail investors who paid very speculative prices for retail condo properties in Soho, Madison and Fifth avenues, based on the tremendous increases in rents those properties were enjoying from 2012 to 2015.
The retail market has changed tremendously since then and those property owners are not going to be able to sign lease deals that would support the loan underwriting terms. Those opportunities, he believes will become more and more prevalent as these retail property loans become due.
“In fact, we are in the process of purchasing loans on three retail condos in Manhattan right now,” Shah says.
Among the firm’s projects already in development, Shah says Delshah Capital’s “crown jewel” is 30 Morningside Drive. The firm hired architectural firm CentraRuddy to reposition the five historic buildings it acquired from Mount Sinai Hospital and to put in another 20,000 to 30,000 square feet of space based on air rights that respected the historic character of the property and retained its qualification for historic tax credits, he relates. The project, including acquisition, financing and development costs, will total approximately $255 million and will convert the former hospital property to approximately 205 luxury residential condominiums.
Shah says the company has self-financed construction at the site but plans to close on a construction loan in August or September of this year. The project’s financing stack currently includes: Israeli capital, EB-5 and historic tax credits. The project should begin leasing in 2019, he says.