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Thursday, May 31, 2007


RETAIL CONDIMINIUMS AND 1031 EXCHANGES: MINDING THE STORE IN A CONDO 

Minding the Store in a Condo - New York Times



The market for retail condominiums in Manhattan has skyrocketed in recent years. More than 560,000 square feet of retail condo space sold last year, a sharp increase from 28,000 square feet in 2003.

The popularity of 1031 Exchanges have led to the proliferation of retail condiminiums.

Retail condominiums work much like residential condos. Developers carve out retail space on the ground floor of a building and sell it to investors. The developers often lease the space out first, and the more compelling the tenant, the steeper the price they can ask of the buyer.

Over the last few years, the market for these properties has skyrocketed in Manhattan. More than 560,000 square feet of retail condo space sold last year for almost $650 million. That was a sharp increase from the 28,000 square feet that sold in 2003 for around $26 million, according to Real Capital Analytics, a New York real estate company that tracks deals worth at least $5 million.

Over the last two years, Manhattan represented 38 percent of the total square footage of retail condo space sold nationwide, and 65 percent of the dollar value, according to the company’s statistics.

While New York has the largest market for retail condos, they are also popular with investors in other densely built-up American cities like Chicago, San Francisco, Boston and Washington, said Dan Fasulo, the director of market analysis at Real Capital Analytics. “They’re the glamour cities, with global appeal,” he said.

Brokers say that in New York’s intense real estate market, developers are eager to assemble construction sites, even in neighborhoods not previously regarded as prime commercial areas. In the process, they are offering such high prices for smaller buildings that the owners cannot resist selling. And once they do sell, there are powerful tax incentives to plow the money back into real estate.

Mr. Cooney, for example, purchased the SoHo store with money he made selling four adjacent residential brownstones on the Upper East Side of Manhattan that had been divided into rental units.

Mr. Cooney, a restaurateur who immigrated from Ireland in 1968 and owns O’Casey’s at 22 East 41st Street, had purchased all four buildings for a total of $350,000 in the late 1970s. So when he sold them for $12 million in 2001, almost all of the proceeds would have been subject to capital gains taxes.

But he opted to do a 1031 exchange, which is named for a section of the federal tax code that allows real estate investors to avoid paying capital gains taxes if they quickly reinvest in real estate. The law gives them 45 days to identify the properties they would like to buy and 180 days in all from when they sold their original properties to close on the new ones.

Mr. Cooney used most of his windfall to buy two retail condos.

First, as part of his original agreement to sell the brownstones to the developer Sherwood Properties, he gained the right to pay $3.5 million to acquire a retail condo in the Metropolitan, the 30-story residential tower at 181 East 90th Street that was built on the brownstone site. A Chase bank branch has a 20-year lease in his condo.

He also paid $6.3 million to the Horizon Realty and Development Corporation for the store in SoHo, where the Museum of Modern Art already had a 10-year lease.

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