The head of the national and New York real estate practice of Greenberg Traurig LP, Robert Ivanhoe, recently said, “Residential rental buildings in Manhattan have become a very precious commodity, with very few available for sale and an insatiable demand. Most luxury high-rise rental buildings have been built by established New York City developers, who generally hold their assets as long-term investments and rarely sell.”

The vice president at the Lefrak Organization, Jamie Lefrak, told me, “Every year rental housing becomes scarcer and scarcer because some is converted to ownership housing and others depreciate out of existence due to fire, disrepair, etc., and insufficient new rental housing is built to replace even that which was destroyed.”

Last week, it was announced that Adellco plans to sell its 38-story, 266-unit rental apartment tower, with 12,000 square feet of retail space, The Aston, located at 800 Sixth Ave. at the corner of 27th Street. According to industry sources, the building, which was completed in 2004, could sell for as much as $210 million, or more than $650,000 a residential apartment.

The building was financed by bonds issued by the New York State Housing Finance Agency under the 80/20 program. The 80/20 program enables a building’s owner to keep 20% of the units reserved for low-income tenants earning no more than 80% of the area’s median income, thus making the units affordable to low-and moderate-income tenants. The remaining 80% of the units are rented at market prices.

According to Matthew Adell, the president of Adellco, tenants who reside in the affordable apartments in The Aston are earning between 40% and 50% of the area median income. The median income there is approximately $64,000. For example, an individual or a family that is renting an affordable one-bedroom apartment in the building is paying between $475 to $600 a month based upon their income and family size. The monthly rent for a market-rate one-bedroom ranges from $3,000 to $4,200 a month.

Under the 80/20 program, the developer is afforded the opportunity to obtain floating or fixed-rate financing, 20-year abatement on real estate taxes, and gain 4% low-income tax credits.

Mathew Adell said, “The residential rental market in New York City is strong and only getting stronger. There are a limited number of rental apartments being developed. The market is being dominated by a supply and demand equation.”

***

Last year, John Buck & Co. secured $108 million in bonds from the New York City Housing Development Agency for an 80/20 rental development located at 408 E. 92nd St., at the corner of First Avenue. This summer, the first tenants plan to move into the tower known as River East which will have a total of 196 rental units. In January, the developer entered into a contract to sell the tower to UBS Realty Investors for $97 million or $494,879 per unit.

One of the most active investor groups in residential rental properties have been apartment REITs, including Equity Residential, one of the largest owners of residential properties in the nation. In October 2004, Equity Residential paid approximately $100 million, or $420,168 per unit, for the 22-story, 238-unit residential tower at 71 Broadway. The landmark building previously served as the headquarters of U.S. Steel and was converted to residential use in the mid-1990’s by a World Wide Holdings partnership.

71 Broadway was converted into residential rental apartments under a tax exemption and abatement program that encouraged conversions of commercial buildings into multiple dwelling units. Under the tax incentive program known as 421-g, for properties south of Murray Street, City Hall, and the Brooklyn Bridge. The developer received exemption from the increase in real estate taxes resulting from the work and a 14-year (10 years of full exemption, and four years phase out) abatement based on the existing real estate taxes in year one of the benefit term. Since the property had landmark status, it receives one additional year of full benefits. Under the program, all rental units are subject to rent stabilization for the duration of the benefits.

***

In March 2002, the AFL-CIO Building Investment Fund provided a $25.4 million investment in partnership with the Dermot Organization for the construction of a 259-unit, 80/20 market rate rental apartment building, Hudson Crossing, located at 400 W. 37th St., at the corner of Ninth Avenue at the entrance to the Lincoln Tunnel. The total cost of the project, which was financed by bonds issued by the New York City Housing Development Agency, was $74.3 million. In August 2004, the partnership sold the building to Equity Residential for $93.1 million, or $359,460 per residential unit, earning a profit of more than 20% on their two-year investment.

***

Colorado-based apartment REIT Archstone Smith has been an active investor in Manhattan rental buildings. In March 2004, it paid $125.5 million, or $492,126 per unit, to the Related Companies LP for the 29-story, 254-unit Sonoma rental building, located at 300 E. 39th St., at the corner of Second Avenue. The building, which opened in 2001, was financed under the 80/20 program. In 2002, Archstone Smith paid $209 million, or $413,000 per unit, to a joint venture of Tishman Speyer and Travelers Insurance for the 506-unit Park Hudson, located at 101 West End Ave.

***

“The scarcity of available product for sale and the very strong demand, particularly from institutional and REIT buyers, have created a very shallow market with a very high price of admission,” said Mr. Ivanhoe.

A principal of Apollo Real Estate Advisors, LP, Richard Mack, said, “REITs and foreign owners value New York rental property for its likely appreciation value. They have a lower cost of capital, and less tolerance for risk.”

A REIT, or real estate investment trust, acquires or provides financing for all forms of real estate. A REIT does not pay corporate income taxes and most states do not require REITs to pay state income tax. In order to qualify as a REIT, the entity must invest at least 75% of the total assets in real estate; derive at least 75% of gross income from rents from real property, or interest on mortgages on real property; and pay dividends of at least 90% of the REIT’s taxable income.

***

Another active REIT that has made investments in the New York marketplace is Colorado-based Apartment Investment and Management Company, or Aimco. In October, it purchased the Tempo, a 16-story building built in 1928 with ground floor retail located at 240 W. 73rd St., between Broadway and West End Avenue. The company paid $51 million, or $255,000 per unit, for the building, which has a total of 200 apartments, consisting of 139 studios, 48 one-bedrooms, and 11 two-and three-bedroom apartments. Over the past few years, AIMCO has purchased 20 apartment buildings on the Upper West and Upper East Sides of Manhattan.

***

Next month, the rental office is scheduled to open for the first development in Manhattan of one of the nation’s biggest apartment REITs, AvalonBay Communities. Avalon Chrystie Place, at 229 Chrystie St., will house 361 rental apartments and a 75,000 square foot Whole Foods Market. It is located on the entire south side of East Houston Street between Chrystie Street and the Bowery. The New York State Common Retirement Fund invested $25 million and has an 80% ownership, and the remaining 20% is owned by AvalonBay. The New York State Housing Finance Agency provided $117 million in debt financing for the building under the 80/20 program. A total of 72 apartment units are available to households with income at or below 40% and 50% of the area median income, based upon the family size. A family of two with a total annual income of $19,275 to $31,400 will have a monthly rent range from $514 to $656. The market rent for a two-bedroom unit will be approximately $4,500.

***

This writer agrees with the executive vice president of World Wide Holdings, David Lowenfeld, who said, “Institutional buyers love Manhattan for its consistent cash flow, growth potential, and significant barriers to entry. More opportunistic investors are willing to pay premium prices for rental properties that can be converted to condos and co-ops. Together these buyers have pushed prices to levels that justify long-term investors selling to rebalance their portfolios to achieve greater geographic and sector diversification.”

The managing director at Eastdil, Douglas Harmon, who arranged the sale of 71 Broadway, The Sonoma, and Hudson Crossing, said, “In the rarified air of luxury 80/20 sales the REITs and other institutional purchasers who have dipped their toes into the hypercompetitive New York marketplace, are ravenous for more luxury product and the economy of scales.”

***

Due to the financing structure of rental buildings developed under the 80/20 program, it is difficult for these REITs to convert the rental units to condominium for a period of up to 15 years. “Ten years from now, many of today’s rentals will be converted to cooperative and condominium, and many of the remaining rentals will be owned by REITs and pension funds,” said Mr. Lowenfeld.

The outlook for 2005, with the limited supply of residential rental units, coupled with the frantic desire of individuals from around the world to own a condominium in Manhattan, is positive for owners of residential properties in New York.

Mr. Stoler is a television broadcaster and vice president at First American Title Insurance Company of New York. He can be reached at mstoler@firstam.com.