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« Last post by rb on July 12, 2020, 04:18:05 PM »
First off. thanks to the pupil for all his contribution the the thread. I tried to in vain to find BG's comments about the apartment building in queens. Couldn't find them, instead I read 25 pages of BG's posts, which isn't all that bad in itself.
Anyway, as I mentioned previously, I'm trying to price this thing piece by piece. Right now I'm gonna look at the 731 retail piece.
As per BG's sister contribution from the 2020 Q1 10q they won't be able to extend the mortgage on the 731 retail because they'll be in violation of covenants. Thanks BG's sister! Well it actually turns out that they breached their debt service covenant on that property in Q3 2019! No mention of this fact in the 2019Q3 10Q or the 2019 10K. Only some vague footnote about extension covenants in 2020Q1 10Q. But let's move on because now that we know about the covenant breach we can piece together numbers on this property.
I assume the covenant got triggered by H&M pulling out. Per the mortgage they need to keep a debt service ratio of basically projected cash NOI to debt service of 1.1:1. Debt service is the higher of:
a) Actual interest payment with 30 year amortization = $19M
b) 10 year treasury +2.5% with 30 year amortization = 20.6M
c) Principal x 6.44% = 22.5M
In 2017 they had 174,000 sqft @ 99.4% ocupancy and $181.72 per foot rent and were in compliance with the covenant. That means that they had at least of 24.8M NOI and that expenses were less than $6.6M.
In 2019 they breach the covenant (I'm assuming H&M paid average rent). They still have 177,000 sqft @ 99.4 occupancy. That means 172,956 sqft. Less H&M's 27,000 sqft you get 145,956 sqft. Avg weighted rent is now 193.81. Based on that you get that expenses are at least 3.5M.
So now we know that expenses for 731 retail are between 3.5 and 6.6 million. These expenses would include the VNO management piece which I don't have the patience to break out right now. I may update the post with that. But now this is where shit gets weird:
First, from the 2018 10k to 2019 10k the building goes from 174k sqft @99.4 occupancy to 155k sqft @ 92.7 occupancy. Did the building shrink or something? Well no, they put 8,000 sqft into the various category and 20,000 sqft just vanished. I guess it's better to have a 155k sqft with 7.3% vacancy than 174k sqft with 17.4% vacancy? I don't know.
Second, the avg weighted rent went from $194 a foot to $277 a foot. This is really bizarre. I can think of a couple of unlikely scenarios of why that is:
1. The rent for H&M was so low that it dragged the average rent way down. But then why leave?
2. In 2019 there was the mother of all rent steps. This would explain why H&M would pack up. But I've never heard of this kind of rent step. Additionally, if this were the case they wouldn't breach because they're making way more in rent (39.5M) even without H&M than before with H&M (33.5M).*
* I also saw that next door at 715 Lexington they had a crazy increase in rent from 105 a foot in 2018 to 211 a foot in 2019. So I thought that maybe there was some crazy expense increase that gets passed through on rent, maybe some weird property tax levy or something. But then next door to that at 968 3rd avenue rents went from 165 a foot in 2018 to 168 a foot in 2019 so I guess it's not that.
If anyone has a better idea of what's going on, please chime in.
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