539-unit, pre-war complex illustrates steep increase in taxes, flat NOI in recent years
By Adam Pincus
The 539-unit apartment complex in Rego Park being marketed as the Rego Park 18 with a reported asking price of $210 million could wind up on the city’s “Speculation Watch List” if it were to sell at or above that figure, an analysis by PincusCo Media found.
At that price, the 18-building portfolio would transact at a 3.04% modified capitalization rate, slightly below the 3.10% modified cap rate identified as the median cap rate for Queens in the second quarter of 2018.
That a complex with potential development rights and very few if any housing code violations may end up on the city’s controversial watch list raises questions about how the list is compiled.
Furthermore, an analysis of city assessment data shows the property taxes for the complex rose by 121 percent over the past 9 years,
while the actual NOI increased by less than 20 percent during that period and is actually down from 2013.
The buildings were built in the 1930s and have been privately owned by the Kestenbaum family and its descendants including members of the Mazurek family, ever since. The owners hired B6 Real Estate Advisors to market the asset with addresses including 98-09 65th Road and 64-33 98th Street, Crain’s reported last week. All analysis was based on public information, which may differ from data in the marketing material or other privately held information related to the buildings.
The 18 apartment buildings are three blocks south of a development site where Kenny Liu plans a 177,376 residential tower, and about four blocks from Vornado Realty Trust’s Rego Center mall.
Representatives for the city and B6 Real Estate declined to comment. A source familiar with the listing said there was no finalized marketing price, underscoring that this analysis was conjecture.
The city’s Department of Housing Preservation and Development launched the watch list in October 2018 to keep an eye on buildings that could be at risk for tenant harassment. Real estate professionals have been skeptical, noting investors may pay more — yielding lower cap rates — for a variety of reasons including because of a 1031 exchange. Some might just be bullish on a neighborhood.
The determine the modified cap rate, the city takes the net operating income as calculated by the Department of Finance for the most recent year, and divides that by the sale price. The city does not subtract taxes from the net operating income, as is the accounting norm, thus this modified cap rate is actually higher than a standard cap rate as calculated by investment sales professionals.
PincusCo calculated the modified cap rate by taking the city’s reported NOI of $6.385 million from the January 2019 Notice of Property Value, published by the Department of Finance. (To make things more complicated, those 2019 numbers are actually calculated using data from Real Property Income and Expense reports that cover the calendar year 2017.)
The NOI was then divided by the published marketing price of $210 million, yielding a 3.04% cap rate.
For the nine-year analysis of the complex, taxes were taken from the first or second quarter tax bill. To determine the “actual NOI,” the net operating income was assigned to the actual year in which the income was reported and the taxes for that year were subtracted. Thus the most recent year available is 2017 since the 2019 Notice of Property Value is in fact 2017 income and expense data.
There are a lot of unknown variables to this analysis, including the ultimate sale price, the median cap rate for qualified transactions during the first quarter of 2019, once it wraps up, and if the city will take into consideration the low level (or lack) of housing violations, and the value of development rights in the deal.