Recovering residential market presents investment opportunity in occupied units.

With all indicators pointing to a slow but steady upturn in the New York City residential marketplace in 1994, an investment vehicle that may prove especially attractive will be occupied apartments, according to Daniele Bodini, president of American Continental Properties (ACP), a real estate investment and development firm.

"Occupied apartments have been out of favor since tax reform eliminated deductions on passive real estate losses," Bodini points out. "But in the coming months, these investments will benefit greatly from a rising market and the continued financial troubles facing many recently converted cooperative and condominium buildings."

There are several factors that are now driving the market for occupied apartments, Bodini says. For one thing, convertors are mostly out of the picture. The banks and financial institutions that now hold loans for most units do not particularly like these assets; they have been slow to push for foreclosure, leaving individual cooperative and condominium buildings in limbo as lenders shy away from making new mortgage loans. At the same time, most of the residences have a negative cash flow, meaning an investor has to have a long term outlook.

On the upside, prices are now as good as they are ever going to be and blocks of units are sometimes available at a fraction of the market price, according to Bodini. "Resale demand can be strong if an investor takes over enough apartments in a building to provide it with new financial stability, enhancing a buyer's ability to finance a purchase and raising values along the way," he notes.

A recent ACP deal illustrates the type of opportunity that can exist. In 1993 the firm acquired a portfolio of approximately 1,700 apartments in 19 coop/condo buildings in Manhattan. The apartments were part of the original MacArthur Foundation portfolio of 6,200 units that was acquired by a partnership of The Equitable, Bernard Mendik and Martin Raynes in 1985. The buildings were converted to cooperative and condominium ownership in 1986 and 1987.

In acquiring the apartments, ACP structured a three-way agreement that included the lead lender, The Chase Manhattan Bank, and the current title holders, The Equitable/Mendik. "The purchase was based on our faith in the impending upswing in the New York City residential marketplace," Bodini explains. "The transaction was a unique opportunity to acquire premium New York real estate at a favorable price."

The purchase has clearly added a degree of financial stability to the buildings. Evidence of this is the recent $113 million securities backed financing concluded by eight buildings in the Lincoln Towers complex. The underlying mortgages were refinanced through Goldman Sachs and GMAC, then packaged for the public financial markets by Fannie Mae, the first such transaction for a New York City cooperative.

Each building will save several hundred thousand dollars in interest costs annually. The tenants' and ACP's carrying costs will now be lowered, moderating cash flow needs substantially.

"Clearly, investing in occupied apartments requires considerable financial wherewithal and patient investors," Bodini concludes. "But as the MacArthur portfolio demonstrates, the upside potential can be considerable. At ACP we continue to foresee these types of opportunities, especially as market conditions head upward in 1994."

Based in New York City, American Continental Properties Group is a privately held family of companies controlling and managing real estate assets throughout the United States and Europe.