HAP Investments lands $55M loan for East Harlem building with rent-stabilized units

UPDATE Monday, June 24, 2019, 7:25 p.m.: Eran Polack’s HAP Investments closed on a $55 million refinancing of a rental building in East Harlem less than a week after sweeping rent regulation reform was passed by the state legislature.

Asia Capital Real Estate, a private investment firm that claims on its website to manage “discretionary capital” for family offices and institutional investors, issued the two-year loan at a variable rate of LIBOR plus 3.25 percent, with two one-year extensions, Polack told The Real Deal. ACRE did not respond to request for comment.

Polack said he started working on the refinancing deal about two months ago and the specter of rent regulation reform didn’t affect the process. Miami-based Primrose Capital arranged the financing.

“Everything went smoothly,” said Polack, explaining that the building was completed in fall 2017 so everything is brand new and he doesn’t expect a “massive renovation” will be needed for at least a decade.

“We don’t see an issue with the new buildings. [We’re] not trying to be very high on the LTV,” he added. “[The deal] still works for the lenders.”

HAP built the 108-unit rental building at 2211 Third Avenue after the company bought the undeveloped land from Tahl Propp Equities for $13 million in 2014. HAP developed the building as five condos comprising of one condo entity that contains 22 rent-controlled apartments in exchange for a 25-year tax abatement under 421a, another that contains 86 market-rate units, and the final condos hold retail, parking and a community space.

The new financing covers four of those condos and replaces a $50.25 million loan that W Financial provided the developer in 2017.

The East Harlem refinancing comes days after a significant overhaul to New York State’s rent regulation laws, which has shaken some lenders’ confidence for projects with rent-stabilized components. Even before changes became law on June 14, building owners’ biggest lenders, such as New York Community Bank, Signature Bank and Dime Community Bank, lost a combined $2.5 billion in market capitalization.

“The feeling is that you could see less refi activity and less loan demand just because the ability to increase the rent rolls of these buildings really has been hampered,” said Peter Winter, a stock analyst who covers NYCB and Signature for Wedbush Securities, in a previous interview with TRD.

Joshua Emory, a principal at Primrose, wrote in an email that “the challenge [in the deal] was getting lenders educated on the growing demand for luxury rentals in East Harlem. ACRE was very experienced in the market and was [able] to stretch on proceeds.”

According to him, Primrose had multiple offers for HAP, ranging from $47 million to ACRE’s $55 million. Emory attributed the different offers to the lenders’ “belief in the property’s ability to support luxury rents in East Harlem.” According to StreetEasy, the average rent at 2211 Third Avenue, based on the 70 units from the building which have been listed on the site, was $2,972.

Clarification: The interest rate of the loan and the attribution of ACRE’s description of its assets under management was clarified. Comment from Primrose Capital was added. 

HAP Investments secures $94M construction loan for Tribeca condo project

HAP Investments’ first project in Tribeca is moving forward with more than $107 million in financing.

The $94 million construction loan for the 41-unit condominium was provided by G4 Capital Partners, the same private lender that provided HAP with a $32 million loan to acquire the site back in February 2018. The three-year loan was paired with a $13.5 million mezzanine loan from New York City developer and lender Quinlan Development Group.

HAP’s co-founder and CEO Eran Polack expects demolition of the existing five-story building at 65 Franklin Street to begin within weeks.

HAP’s new condo project is breaking ground amid a soft high-end new development market, but Polack is confident “the market will be there” when he takes units out to buyers. He estimated the project will launch sales in 18 to 24 months with the building being completed in three years.

“I’m a big believer in the New York condo market,” he said. “I’m sure in a year or two the market will be very strong.”

He also noted that “we don’t see many new projects starting” in the last couple years. Residential construction in Manhattan has dropped off, and a September analysis by the Marketing Group, shows that the number of new condo units expected to be delivered in Manhattan drops sharply in 2022 with an average price per unit of $2.7 million.

Polack declined to disclose pricing at 65 Franklin and plans have yet to be filed with the Attorney General’s office. However, a source estimated prices would be set around $2,500 per square foot, with most units ranging from 1,000 to 2,500 square feet and the largest spanning 3,500 square feet.

Plans for demolition and the new 19-story building were filed last July with the Department of Buildings. The plans show five duplex units and two full-floor units in addition to two floors of retail at the base of the building. Amenities, according to the plans, will include a children’s playroom, a swimming pool, bike parking and a rooftop terrace. CetraRuddy is the architect.

Both lenders noted the unit layout was an important factor behind capitalizing the project.

One of G4’s founding partners, Robyn Sorid, said the lender was a “huge champion of this deal” because of its “unique layouts and price points that provide optionality for various types of buyers.”

The $94 million loan is the fourth G4 has issued to HAP and the largest loan originated to date, according to the lender’s website. (Sorid first mentioned the forthcoming deal in an interview with The Real Deal last fall.)

Quinlan partner Tyler Wilkins also noted that by not having “large and elaborate” units, the building was “much more attainable.” He also said that Tribeca “will always be desirable.”

This is Quinlan’s first project with HAP. They were brought to the deal by HFF’s Chris Peck, Peter Rotchford, Rob Hinckley and Steven Rutman.

Though Polack rejects the notion that he’s waiting on the market to change — “I think the market will stabilize,” he said — he also noted that he’s not in a rush to launch sales.

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HAP lines up $53M construction loan for Washington Heights project

Eran Polack’s HAP Investments secured a $52.5 million construction loan for a mixed-use development site at 4452 Broadway in Washington Heights.

Madison Realty Capital provided the financing package, which will replace existing debt and cover construction costs, the firm said. Property records show that Gamma Real Estate provided HAP with $11.5 million in financing in 2017.

The developer bought the land in 2013 for $7.3 million, and the firm plans to build a seven-story mixed-use project spanning 134,475 square feet. The project will include 11,000 square feet of retail space and 129 apartments, 30 percent of which will be set aside as affordable.

HAP plans to start construction in April and finish during the third quarter of 2020. Polack said in a statement that the company looks forward “to bringing new, high-quality apartments to the Fort George neighborhood to meet the strong local demand.”

HAP is also planning to build a 41-unit, 19-story condo project in Tribeca at 65 Franklin Street, which it is financing with $32 million from G4 Capital Partners.

Josh Zegen, co-founder of Madison Realty Capital, said in a statement that investment interest was increasing in Washington Heights “due to its strong fundamentals as well as a recent rezoning of its neighboring area, which is increasing the overall density of the region.”

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Expert Interview: Eran Polack, CEO and Co-Founder of HAP Investments

For our latest Expert Interview, we had the opportunity to speak to Eran Polack, CEO and Co-Founder of HAP Investments. Eran is a well-recognized entrepreneur with a long, successful career in the real estate industry even before moving to the United States in 2011. A native Israeli, he had multiple successful ventures in Israel as well as throughout Eastern Europe. In 1998, together with partners Amir Hasid and Nir Amsel, Eran founded HAP Investments, an international, full-service real estate development company headquartered in New York. Its main focus is identifying and investing in strategically situated projects, usually in emerging and prime markets in the New York metro area.

Read on to find out more about Eran Polack’s journey through the real estate industry, as well as his insights on opportunity zones, investment opportunities and other things to keep an eye out for in 2019.

Q: Tell us a little bit about your background and why you chose a career in real estate development.

I’m originally from Israel, and while I was living there, I bought my first apartment, renovated it and rented it out. It was a great time for real estate, and this jump-started my passion for the business. I enjoyed real estate so much that I started to seek out opportunities to buy property in Eastern Europe and Budapest.

Q: What drove you to start investing and developing in NY after such a long and successful career in Europe?

My business partners and I had worked in real estate for 25 years and had grown into the industry slowly. We came to the U.S. in 2011 after the economic downturn, and we determined that New York was the best place to invest in and build something for future generations. The opportunity was there because land in certain neighborhoods was relatively affordable and there was a large pool of talent looking for new employment opportunities. This allowed us to buy property in strategic locations and to hire the staff we needed to execute our vision.

When we came to New York, we created an organization not just to be entrepreneurial or to focus only on the current project we were investing in, but a development company that would build numerous projects over the long-term.

Q: Where do you stand on opportunity zones going into 2019?

HAP Investments is bullish on the prospect of Qualified Opportunity Zones in New York City, and we believe real estate developers should not underestimate the tax benefits that these zones provide. If you hold on to the asset for ten years, no tax is assessed on your capital gains. Those savings can be reinvested into making a truly outstanding product.

We are most excited about the Opportunity Zone areas that we already have experience in — Washington Heights and Fort George. The area around Columbia University Medical Center is booming and tax benefits are a huge added incentive that should attract new growth there.

Q: What markets should we keep an eye out for in the following months for investment opportunities?

Land has always been expensive in Manhattan, but recently it’s become prohibitively so. Even Brooklyn is becoming extremely difficult to develop. We have started looking for affordable land farther afield, away from the densely populated centers of the five boroughs. We have been looking into the eastern areas of the Bronx, Yonkers and other parts of Westchester. With land prices as they stand, we believe we may see better return on investment for projects outside the city center.

Q: What development trends have you noticed in the market during the last months of 2018? Where do you see the market heading for the rest of the year?

We expect the 2019 real estate market to be governed by a glut of new multifamily and residential properties and a dearth of rental assets. There are very few new rental projects under construction in New York City right now, and that means that in two to three years there will be a shortage in product and rent prices are going to rise. We think developers should look to build or pivot to rental projects wherever they see a market void.

Q: Tell us a little bit about some of HAP’s current development projects.

We have two exciting residential developments in prime Downtown Manhattan neighborhoods — a project in Chelsea located at 215 & 225 West 28th Street, for a planned 20-story luxury rental and condominium development; and we are developing 65 Franklin Street, a 19-story luxury residential building in Tribeca. Both projects will be distinctive and boast a full suite of amenities.

In Uptown Manhattan we are developing a rental building at 4452 Broadway on the corner of 190th Street in Washington Heights, and another rental building at 249 East 117th Street in East Harlem.

Outside of Manhattan, we have our property at 500 Summit Avenue, a planned 42-story luxury rental tower with sweeping views of the New York City skyline and convenient access to the PATH train into downtown Manhattan.

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‘Devil In The Detail’: Brokers, Developers Trying To Figure Out Opportunity Zone Benefits, Pitfalls

The brand-new opportunity zones are shaping up to be one of the biggest trends to impact commercial real estate next year. But the program is uncharted territory, and investors and developers are being told to tread carefully if they want to make use of the benefit.

“This is not a panacea. The opportunity zones and Amazon can not cure every ill that every developer is facing,” Youngwoo & Associates Executive Vice President Bryan Woo said at Bisnow’s New York City 2019 Forecast event Thursday. “I truly believe it is a great program … [But] just because you have been designated an opportunity zone, you are not now worth 20% more.”

Passed as part of the Tax Cuts and Jobs Act a year ago, the program gives investors a tax break in exchange for investments in low-income communities in census tracts designated by each state’s governor. There are nearly 9,000 communities across the country that are designated as Qualified Opportunity Zones, with 514 approved census tracts in New York state.

The U.S. Department of the Treasury released updated guidelines on the zones in October, and this week President Donald Trump announced he would sign an executive order to form a committee of 13 federal agencies that will work to direct federal dollars into the zones.

Despite the heightened federal support and the extra regulations, developers, brokers and investors are still piecing together crucial details of the program — and figuring out how it will work over the next decade.

Normandy Real Estate Partners' Gavin Evans, Stillman Development's Roy Stillman, Meridian Capital Ronnie Levine, Acore Capital's Tony Fineman, Cove Property Group's Kevin Hoo, Hunton Andrews Kurth's Matthew Scoville
Normandy Real Estate Partners’ Gavin Evans, Stillman Development’s Roy Stillman, Meridian Capital Ronnie Levine, Acore Capital’s Tony Fineman, Cove Property Group’s Kevin Hoo, Hunton Andrews Kurth’s Matthew Scoville

There are ongoing concerns about whether it will actually bring investment to the places that actually need it; a National Council of State Housing Agencies study has found that a large majority of the Qualified Opportunity Funds are targeting large urban areas. Plus, Trump’s announcement this week spurred fresh questions around conflicts of interest and the first family.

Regardless, anyone looking to establish a fund, invest in one, or make use of the benefit with a development project should do their homework, panelists said.

“One of the biggest concerns [is the] self-certification program. As of today, anyone in this audience as a U.S. taxpayer can fill out their form next year and say, ‘I’ve started this fund and in six months I’m doing an asset test,’” Empire State Development Executive Vice President Pravina Raghavan said. “We are telling people, look at the funds … Look and see, and make sure there is a track record. That is the most important part of this.”

There has been a frenzy of excitement surrounding the zones throughout the year, with several firms rushing to make use of the benefit.

Cove Property Group’s Kevin Hoo and Hunton Andrews Kurth’s Matthew Scoville

RXR Realty, for example, said in August it would raise $500M specifically for opportunity zone projects. Goldman Sachs has invested $83M into an affordable housing complex planned close to Amazon’s new headquarters in Long Island City, saying its placement within an opportunity zone was a draw. Real estate startup Cadre, which counts Jared and Joshua Kushner among its investors, is also launching a fund.

While investors are swarming, Raghavan said she thinks many communities are still questioning what these zones will mean for them.

“I don’t think, even when we get the next part of the [regulations], it’s going to answer any of these questions,” she said, adding that the state is working to make sure investors know that the zones are across New York, and not just in the five boroughs.

Some brokers have seen property prices rise as a result of the zones, though many say people should be careful not get caught up in the buzz and overpay for the sake of a tax break. Meridian Managing Director Steven Adler told the audience that the zones have caused more land deals to come back to the market.

“The ones that are getting the focus are the ones that are already in existence and out there today,” he said. “People are trying to go back out and find investment on land deals that people had been skittish about doing a year ago.”

Anchin Block & Anchin’s Robert Gilman, Cushman & Wakefield’s Kenneth McCarthy, iDEKOgov’s Cristin Burtis, Oxford Properties’ Kate Bicknell and HAP Investments Eran Polack

Avison Young Head of Tri-State Investment Sales James Nelson said CoStar figures show that there are now 116 opportunity funds with an overall dollar value of $18B. The average fund is worth $156M, he said.

Woo, whose firm partnered with online investment platform EquityMultiple to launch an opportunity fund, said a flood of misinformation means some people now think their property has increased in value just because it is in a zone, and that is not the case.

Banks are still underwriting deals the same way, regardless of the zones, he said. “There are a lot of people who are sending out information saying, ‘Hey, I have a four-story walk-up multifamily building, it’s going to trade at 15 when it was eight two weeks ago,” he said.

Woo said he has been approached by large real estate families who do not specialize in development deals in emerging locations that now want to work with him.

He has also noticed that, while at first private equity funds did not seem interested in the program, that has changed in recent months. He also expects high net worth individuals to invest more and more into the program as knowledge about how it works grows.

Meridian Capital’s Steven Adler, Avison Young’s James Nelson, Empire State Development’s Pravina Raghavan and Youngwoo & Associates’ Bryan Woo

“It’s a brilliant program. It really is,” he said. “That being said, the devil is in the detail. This is still a development deal. So you are still taking development risk.”

He said he is still seeking clarity on how funds should actually be structured, and added there are questions as to whether or not, in 10 years time, you can individually sell assets. And, like everyone, he urges caution.

“Look at what’s going on in the EB-5 program right now, that is an unmitigated blank-show. It’s like, it’s going to get bad,” he said. “You are definitely going to have some unscrupulous people who will take advantage of this … Make sure whoever you are partnering or working with is a reputable human being.”

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East Harlem Boosted by Rezoning, Tax Breaks

At the corner of Lexington Avenue and 125th Street in East Harlem, in front of a closed Pathmark grocery -– “Pat ark” is all that remains of the name — real estate broker John McGuinness paints a vision of the near future. The Pathmark transforms to a Trader Joe’s or a Fairway. Then come condos and affordable rentals, retail, offices.

“The epicenter of redevelopment is going to be around Lexington Avenue and 125th Street,” McGuinness said. “That area is so vital for transportation for the city and is kind of the most neglected area in upper Manhattan – probably the most neglected area around an express train in all of Manhattan.”

Harlem real estate has long performed like Manhattan’s emerging market, growing at a faster pace than the rest of the island, yet still lagging behind in investment, said Jonathan Miller, president of Miller Samuel Inc. The neighborhood represents 7.7 percent of Manhattan’s co-op and condo sales despite representing roughly a third of the borough’s landmass, Miller said. As lower Manhattan went through boom and bust cycles over the past decade, Harlem’s growth has been steadier.

“It’s more in line with the balance of the market,” Miller said, which means that it’s displaying characteristics “less in line with an emerging market.”

Opportunity Zones

West Harlem has caught up faster, and now it’s East Harlem’s turn, given a nudge by a series of rezoning decisions and tax incentives. The Metro North train station at 125th Street and Lexington Avenue is getting an investment from the city, while much of the area has been rezoned to allow the highest densities in Manhattan and taller buildings.

Construction rises behind a DMV location. Photographer: Allison Joyce/Bloomberg

East Harlem is also home to several Opportunity Zones, a designation included in President Trump’s 2017 tax law that’s meant to spur investment in poor communities. Real estate investors are eligible for generous perks that include deferring some taxes and avoiding them altogether on future capital gains from projects in the zones, if they own them for more than a decade.

Though less than a year old, the zones are already attracting investors and boosting development in East Harlem and elsewhere in New York. While some of the zones are in areas that don’t seem especially depressed, such as sections of Queens that have drawn investments from Amazon.com Inc. and Goldman Sachs Group Inc., East Harlem, with its vacant storefronts, empty lots and derelict housing, may be just the kind of place to benefit from the added sweetener.

“Right now, if we can buy land for better prices in Harlem and build a brand new rental building, the potential is very big,” said Eran Polack, chief executive and co-founder of HAP Investments, which is planning opportunity fund investments in Harlem and elsewhere in Northern Manhattan. “Now that the opportunity for rentals are kicking in, I see a lot of opportunity zone funds that are looking for investment in that area.”

While investors are embracing the incentives and the new development coming to East Harlem, it is less clear what it will mean for long-term residents of the neighborhood. Many will likely be driven out by higher rents, said Marina Ortiz, founder of East Harlem Preservation, a neighborhood advocacy group. The opportunities in the zones are all aimed at property owners and businesses, she said.

“I really don’t know what to say other than these are not programs that are going to benefit low-income people,” Ortiz said. “I have seen these programs come and go before, and I have very little faith in them. The rental market’s going to shoot up. I don’t know what else is coming, but it’s not for us.”

Narrowing Spread

Since beginning to invest in Harlem 20 years ago, Rodney Propp, who co-founded Tahl-Propp Equities, said he’s seen the spread between average prices in the neighborhood and the rest of Manhattan narrow considerably.

“Over time, we expect that spread will continue to narrow as Harlem continues to become the preferred choice of millennials and families looking for a hipper and more culturally diverse neighborhood to call home,” said Propp.

A person enters a home next to a boarded up residence. Photographer: Allison Joyce/Bloomberg

Areas that have already started to gentrify — or where a significant number of landlords have begun redevelopment and hiked prices, drawing groups of higher income earners — are the mostly likely to attract investment because returns are already apparent.

“Harlem is up and coming. Harlem is already alive,” said Joseph Douek, chief executive officer of Viceroy Equities, which is planning an opportunity fund in New York City. “There’s some exciting projects coming in Harlem, and I think that it’s going to keep getting stronger and strong and stronger.”

A block from the Robert F. Kennedy and Willis Avenue bridges connecting Harlem with Randall’s Island and the South Bronx, construction is underway on a complex spanning 125th Street to 127th Street. There, developers including Richman Property Services Inc and Monadnock Development LLC are building 1.7 million square-feet of retail, office and commercial units, and 30,000 square-feet for the East Harlem Media Entertainment and Cultural Center.

A spokesperson for the New York City Economic Development Corp. said the project also “continues to hold powerful potential for affordable housing” beginning next year.

Preservation Projects

Separately, Lemor Development Group also has begun preservation projects in the area, including one along Lenox Avenue that got started too soon to be able to benefit from the tax breaks. The firm’s umbrella company, Lemor Realty Corp., has been working on uptown properties since the 1960s, eventually focusing on Harlem.

The anticipated location for the East Harlem Media Entertainment and Cultural Center. Photographer: Allison Joyce/Bloomberg

Douek also is looking at developing a mixed-used project in an opportunity zone in Brooklyn near Prospect Park and said he’d also consider building in Harlem. In both cases, Douek, who serves as New York City’s planning commissioner, is holding off on accepting outside investment until he gets further clarity from the U.S. Treasury.

As the policy guidelines stand, property owners have six months to invest realized capital gains into opportunity funds to qualify for the tax breaks. In New York City, the federal, state and city taxes total about 33 percent on capital gains. If an owner is expecting to make a million-dollar gain, for example, then that either could be invested in new construction opportunity zone projects with a hefty tax break, or the tax agency would charge roughly a third of those gains.

“So you decide,” Douek said. “People want to write as big a check as possible because they want to deploy the maximum capital gains and get the tax benefits. It reduces the return percentage, but the other benefits certainly outweigh that for them.”

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NYC Real Estate Investment Outlook and Opportunities For 2019 from HAP Investments CEO Eran Polack

As 2018 comes to an end, many real estate developers and investors are looking toward the new year and considering what challenges and opportunities are in store for the industry, and the best way to navigate the New York City metropolitan market. Will land pricing and construction costs remain high? Will interest rates continue to increase? What neighborhoods are ripe for development? What are the most attractive real estate investment opportunities? How popular will Opportunity Zones be?

Before jumping ahead, it’s important to look at the current state of the economy. The U.S. economy saw continued expansion in 2018 and is in its 10th year without a recession. The U.S. economy has been expanding since June 2009, the second-longest streak of its kind in history. While speculation about the next downturn in the U.S. economy has become the chatter of the commercial real estate community, many markets continue to grow. Some experts say a correction is on the horizon, but there are differing opinions as to how much impact it will have.

“We believe 2019 will still be a good year for real estate investment but it’s important to approach it with cautious optimism keeping factors such as high land pricing and construction costs, and rising interest rates in mind,” said Eran Polack, CEO and Co-Founder of HAP Investments, an international, full-service real estate development company headquartered in New York City.

New York City remains the most expensive place to build in the world with an average cost of $362 per square foot, according to Turner & Townsend’s 2018 International Construction Market Survey. And by the end of this year, construction spending in New York City is expected to reach $61.5 billion—a record high in the city’s history, per a report by the New York Building Congress. Regarding residential construction spending, Building Congress anticipates it will reach $14 billion by year-end, up from $13.2 billion in 2017. They also predict that 60,000 units of new housing will be produced between 2018 and 2020, averaging around 20,000 new units per year.

“Not only did Manhattan land prices increase in 2018, but so did the cost of construction, which led many developers to pursue strategically located multifamily projects in the outer boroughs as land prices were more affordable,” said Eran Polack. “This created a major building boom in Brooklyn and Queens, but now many neighborhoods in these boroughs have become overbuilt and overpriced, forcing developers to seek out opportunities elsewhere.”

Emerging Real Estate Market Trends for 2019 from Eran Polack

As real estate developers and investors plan for 2019, they are currently identifying markets for strong investment opportunities, and maybe more importantly, markets that are not ideal anymore. Neighborhoods that were promising years ago are now overbuilt and overpriced. Meanwhile, new markets are emerging, ripe for development.

HAP Investments is known for identifying and developing in emerging markets from East Harlem to Budapest. According to Eran Polack, there are five trends defining the search for emerging markets in the New York City metropolitan area for 2019.

  1. Expected Shortage in Rental Properties in 2021 and Beyond

Eran Polack expects the 2019 real estate market to be governed by a glut of new multifamily and residential properties and a dearth of rental assets. “There are very few rental projects under construction in New York City right now, and that means that in two to three years there will be a shortage in product and rent prices are going to rise,” Polack said.

Companies should look to build or pivot to rental projects wherever they see a market void. Polack suggests looking at locations where migration patterns don’t match current rent prices.

“Neighborhoods like Mott Haven in the Bronx have many people moving to them, but the supply of rental apartments has not yet caught up,” he said.

  1. Building Around Alternative Public Transit: PATH Trains

Millennials are happy to live farther outside of downtown Manhattan as long as they’re still near public transit, as evidenced by the influx of young professionals to cities like Arlington, Va. and to neighborhoods like Queens.

Rather than building off already-crowded lines in Manhattan, though, Eran Polack has been looking at alternative transit methods, like the PATH train and the ferry system.

“One of the most exciting new areas for development is Journal Square,” Polack said, referring to the neighborhood that surrounds the Journal Square PATH train station in Jersey City, where multiple high-rises are under construction.  HAP Investments has a planned 42-story luxury rental project there at 500 Summit Avenue.

But even in established neighborhoods like Harlem, Polack said developers’ interest in a deal should be dictated by proximity to public transit.

“New York is not like Dallas or Atlanta — residents rely on public transit. You must look at transportation on a block-by-block basis,” he said.

  1. Opportunity Zones & Tax Credits in the NYC Area

There is a lot of industry talk about the potential for Opportunity Zone Funds—a new program that allows investors to defer capital gains taxes by investing in Opportunity Zone funds, which invest in designated under-developed areas. Although guidance about the rules around the program have only recently rolled out from the IRS, investors are already showing interest. The new Opportunity Zones program represents a brand-new incentive that could potentially bring billions of dollars in multifamily investment to distressed communities nationwide.

HAP Investments is bullish on the prospect of Qualified Opportunity Zones in New York City, and believes real estate developers should not underestimate the tax benefits that these zones provide.

“If you hold on to the asset for ten years, no tax is assessed on your capital gains. Those savings can be reinvested into making a truly outstanding product,” Eran Polack said.

While Opportunity Zones cover large swathes of Queens and the Bronx, the neighborhoods that HAP Investments is most excited about are the ones the company already has experience in: Washington Heights and Fort George.

“The area around Columbia University Medical Center is booming,” Polack added. “Tax benefits are a huge added incentive that should attract new growth.”

  1. Lower Costs of Land in the Bronx, Yonkers, and Westchester

Eran Polack believes that while construction costs, the subject of much worry in 2018, will stabilize in 2019, land prices — which have been spiking for years — will continue to rise.

“Land has always been expensive in Manhattan, but recently it’s become prohibitively so. Even Brooklyn is becoming extremely difficult to develop,” Polack said.

Polack has started looking for affordable land farther afield, away from the densely populated centers of the five boroughs. He mentioned that he has been looking into the eastern areas of the Bronx, Yonkers and other parts of Westchester.  With land prices as they stand, developers may see better return on investment for projects outside the city center. Once developers find affordable land, Polack said, they should look to build rental assets for the coming shortage.

  1. “Don’t Rule Out Luxury Markets” – Eran Polack

New York’s most expensive real estate markets are still rife with opportunity for developers who are willing to dive into every aspect of a budget and keep their costs low, Polack said. He credits his experience in emerging markets with being able to find a great deal even in more expensive neighborhoods like Tribeca and Chelsea.

“Every deal is different — working in emerging neighborhoods gives you a keen eye for a luxury opportunity,” Polack said. “No neighborhood should be written off completely as overpriced or overblown.”

Most recently, the company invested in select Downtown Manhattan neighborhoods including Tribeca with a planned 19-story luxury residential building at 65 Franklin Street.

“We believe in Tribeca because it is very established neighborhood that is highly desirable and stable. There is more product coming into the neighborhood today, but we view it as healthy competition. This challenges us to design, develop and deliver a building that will stand out from the crowd,” said Polack.

He added, “We also believe in the strength of the Chelsea neighborhood. It’s a healthy and stable market which led to our investment at 215 & 225 West 28th Street for a planned 20-story luxury rental and condominium development.”

Polack did add a caveat to developers to dedicate less of their space to retail in luxury markets, as the trend in retail has shifted toward smaller-footprint locations. He said luxury developers are better off investing in amenities, services and finishes for their tenants, as these will help set a building apart from its competitors.

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Top Three Neighborhoods to Watch in NYC Metropolitan Area for 2019

In addition to identifying emerging real estate market trends, HAP Investments plans to continue to keep a close eye on the following neighborhoods in 2019.

  1. East Harlem

HAP Investments identified East Harlem as an emerging market with a lot of opportunity and started investing in the neighborhood about seven years ago. According to Eran Polack, East Harlem was attractive for multifamily development for several reasons – the company could build quality projects with great amenities for less, they could offer more affordable rents, and the projects were situated near public transportation providing residents with an easy commute to and from the center of Manhattan.

“We think there are still strategic opportunities to develop in this neighborhood, so we are keeping a close eye on it, but it’s becoming more challenging to make the numbers work with rising land prices and construction costs,” he added.

  1. Washington Heights

Washington Heights is one of the city’s most talked about, up and coming spots. It’s located in northern Manhattan away from the dense crowds and hustle and bustle, providing a quieter pace of life with a true neighborhood feeling. HAP Investments has had a successful history of identifying and investing in uniquely positioned neighborhoods in the preliminary stages of urban revitalization and believes Washington Heights is an area with long-term potential.

“Northern Manhattan has become a fast-moving real estate market with a lot of activity taking place in Harlem and East Harlem, and we believe Washington Heights is the next frontier,” stated Polack.

Most recently, HAP Investments celebrated the opening of The Highbridge, a new, 39-unit condominium building located at 448 West 167th Street in Washington Heights. The Highbridge is one of the only new, ground-up condominium buildings that’s been developed in Washington Heights in the last few years. The Highbridge is approximately 87% sold, with closings underway, and the sales progress is a testament to buyers’ interest in a new, high-quality condominium building well situated in one of Manhattan’s up-and-coming neighborhoods.

Polack added, “We are actively looking to develop more projects in Washington Heights, and we are also interested in real estate investment opportunities in the Bronx.”

  1. Jersey City

HAP Investments identified Jersey City as another emerging real estate market several years ago and was one of the first developers to invest in the Journal Square neighborhood of Jersey City with its project at 500 Summit Avenue. The planned 42-story luxury rental tower will offer sweeping views of the New York City skyline and convenient access to the PATH train into downtown Manhattan.

“We think there are still good investment opportunities in Jersey City as the area continues to grow. There has been tremendous development activity, an influx of businesses moving to the area, and the region has attracted a lot more people looking for quality living options at more affordable prices compared to Manhattan,” stated Polack.

LEADERS Interview with Eran Polack, CEO and Co-Founder, HAP Investments

Eran Polack is an established entrepreneur with a long history of successful real estate ventures in Eastern Europe, Israel, and the United States. Polack was one of the first developers to identify East Harlem as well as the Journal Square neighborhood of Jersey City as areas in preliminary stages of urban revitalization. He was also an early leader in the revival of Neve Tzedek, a highly coveted neighborhood in the heart of Tel Aviv.

COMPANY BRIEF

HAP Investments (hap-ny.com) is an international, full-service real estate development company headquartered in New York City. The firm is focused on identifying and investing in projects strategically situated in emerging and prime markets in the New York metropolitan area. Founded in 1998 by partners Eran Polack, Amir Hasid and Nir Amsel, HAP Investments has successfully acquired, designed and developed a diverse portfolio of residential and commercial real estate that is renowned for its location, proximity to mass transit, and innovative, high-quality construction and design. Its U.S. portfolio is currently comprised of 11 residential projects totaling more than 1.8 million square feet in various stages of development, completion and operation.

HAP Investments’ 2211 Third Avenue project

The living/dining area of a unit of  HAP Investments’ 2211 Third Avenue project

After a long history of successful real estate development in Eastern Europe and Israel, what interested you in entering the New York market?

My partners and I had worked in real estate for 25 years and had grown into the industry slowly.

When we came to New York, we created an organization not just to be entrepreneurial or to focus only on the current project we were investing in, but a development company that would build numerous projects over the long-term.

We came to the U.S. in 2011 after the economic downturn, and we determined that New York was the best place to invest in and build something for generations.

The opportunity was there because the real estate was relatively inexpensive and the employment market was not strong, so we had good opportunities to buy properties and to hire the staff we needed to execute our vision.

What is the sweet spot for HAP Investments?

The sweet spot has shifted in the seven years since we’ve been in New York, and it will continue to shift. We started in Northern Manhattan with a number of smaller-scale projects in Washington Heights and East Harlem because the land prices were attractive in these emerging neighborhoods and there was long-term potential.

Then we did a deal on 28th Street in Chelsea. It began as a medium-size residential project but then grew to become very large because we assembled five pieces of land. We felt secure doing a project of that magnitude at the time because we had developed strategic partnerships over the years and had built strong relationships.

The PR that resulted from our Chelsea deal then brought us to New Jersey, where we found a great opportunity to build a large-scale, 42-story luxury rental building at 500 Summit Avenue in the Journal Square neighborhood of Jersey City. That defined another sweet spot for us – a place where we felt comfortable investing that was very close to Manhattan and our offices and that utilized the same construction company and architect we had worked with previously.

Then we did a deal in Tribeca at 65 Franklin Street, which was more mature. It was a good opportunity and we felt confident to do a deal in a place where we hadn’t done deals before.

Where does the real estate market stand today in terms of opportunity?

There isn’t the same opportunity today. It would be very hard for someone to start in real estate development today and build buildings at the current level of pricing. However, we have a great organization and a lot of experience, so we’re still looking for deals in neighborhoods we feel have stable demand so that we can go in, develop a high-quality building and sell or rent it.

I don’t see a lot of opportunities, but I do see some things sporadically.

How important is brand awareness for HAP Investments?

For a company like us – one that only started developing in New York seven years ago and is still growing – it’s important to have individual branding for each project, and we’re doing that.

Aside from that, we are also trying to build the brand of the company and our name in the industry in New York as well as slowly developing it outside of New York, although that will be a much longer process.

Will you expand into other markets in the U.S.?

Right now, we are only concentrating on the New York metropolitan area. We need more time to build and stabilize our brand in New York. If we are successful building the company here, then I’m sure opportunities will come from other places as well.

Will you highlight your portfolio and your current developments?

We have completed three residential buildings in Upper Manhattan – a small rental building at 419 East 117th Street between First and Pleasant Avenues; another rental building at 2211 Third Avenue between 120th and 121st Streets with 108 residences and 12,000 square feet of retail, which we leased to a supermarket; and a condo building at 448 West 167 Street, which we finished and sold the residences. Currently, we have a small rental building under construction at 2338 Second Avenue on the corner of East 120th Street that will be finished by year’s end. We also have a number of planned projects, including a rental building at 4452 Broadway on the corner of 190th Street in Washington Heights that will start construction this fall; and a rental building designed by Fischer + Makooi Architects at 249 East 117th Street in East Harlem. We also have two exciting residential developments in prime Downtown Manhattan neighborhoods – a project in Chelsea located at 215 & 225 West 28th Street, for a planned 20-story luxury rental and condominium development; and we are developing 65 Franklin Street, a 19-story luxury residential building in Tribeca.

Outside of Manhattan, we have our property at 500 Summit Avenue, a planned 42-story luxury rental tower with sweeping views of the New York City skyline and convenient access to the PATH train into Downtown Manhattan.

Do you still see opportunities in retail?

I still believe there is an amazing opportunity in retail, but retail has to change. It used to be about the mall experience but, today, people come to the malls and don’t buy, so the experience isn’t converting into sales.

The truth is, big brands in New York today are better off on Instagram than on Fifth Avenue.

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