The leasehold on 16 West 36th Street, a roughly 65,000 square foot office building, has been sold for $8.2 million.
NorthEnd Equities, an investment company run by investor Charles Herzka, will acquire the 12-story building from a group called Beach Plaza Associates.
Eric Meyer, an executive at Colliers International who arranged the deal, said that the purchase was a bold bet on appreciating rents in lower Midtown and Midtown South, areas that have benefitted from an uptick in leasing among a growing group of tenants who prefer to be outside of the city’s more corporate office precincts.
Mr. Meyer said significant portions of the building’s office space are set to become vacant in the coming months, openings that will allow Mr. Herzka to swap out tenants who are paying below market rents with far more lucrative leases. But to land better deals, Mr. Herzka will likely also have to invest money to renovate the spaces.
The deal is a compelling but risky proposition.
About 30 years remains on the leasehold Mr. Meyer said, a timeframe during which its value is likely to deteriorate rapidly.
“Leaseholds that stretch for 75-years or more typically trade for about the value of the property,” Mr.Meyer, who has handled several leasehold sale deals in the area, said. “When they start to get below 50-years their value begins to decrease exponentially, usually every decade.”
The acquisition is hence effectively a race against time.
“The goal here is to lease the property up and profit on the higher rents and improve the value at a faster rate than the natural depreciation of the leasehold is sucking away value,” Mr. Meyer said.
Mr. Meyer pointed out Beach Plaza’s success, saying that the company purchased the leasehold about five years ago for roughly $5 million. The firm refurbished some spaces, but recouped that investment by getting better rents. By selling at a profit based on the improvements it made, the company was able to earn better than 50 percent returns on its money.
“In deals like these buyers are typically looking for at least returns in the high teens,” Mr. Meyer said.
Mr. Meyer has handled several leasehold sales in recent years, a specialty of his, though he also does commercial office leasing. He said that he has sold the leasehold interest to 35 West 36th Street and 28 West 36th Street twice each. He also in recent years handled the sale of the leasehold at 65 West 36th Street. Buyers are typically lured by the low prices.
“NorthEnd was able to buy 16 West 36th Street for about $130 a foot,” Mr. Meyer said. “That’s a quarter of the building’s value.”