Newark, N.J. – In March, the first potential tenants were shopping for apartments at eleven80, a historic Art Deco high-rise overlooking Military Park, just a few blocks away from Newark’s Penn Station.

Cogswell Residential, the project developer, is taking a huge gamble on the old, blighted office building, which has stood empty since 1986. Underwriters, who have no existing projects to compare it with, estimate the 317 apartments at eleven80 could be worth as little as $70 million when it is finished this summer. But the project will cost a total of $110 million to develop.

“This is as much fun as you can have in real estate,” said Arthur Stern, a principal with Cogswell. “You get to prove to people that they were wrong and you were right.”

Stern believes there is a tremendous unmet demand for apartments in Newark. In Newark, Orange and Eastern Essex Counties combined, developers only finished 48 new apartment units in 2005, increasing the area’s existing apartment stock of roughly 40,000 units by less than 1%, according to experts at Reis, Inc., a New York-based market research firm.

Although just 3.1% of those apartments are vacant, effective rents average $824 a month – just $8 more than in 2001.

That makes Newark’s rental stock much cheaper than housing in Hoboken and Jersey City, just a few stops away by light rail. The average effective rent in Hudson County, N.J., was $2,152 per month in the fall of 2005, according to Marcus & Millichap. Just across the Hudson River in New York City, the average apartment rents for more than $3,000.

It’s possible to see the Empire State Building in Manhattan from some of the apartments at eleven80, so Stern thinks it’s reasonable to include the New York market in his calculations for Newark. In that market, eleven80 will deliver a bargain to renters, even as it earns about 50% less in rent than comparable projects in Manhattan and 30% less than comparable projects in Jersey City.

Stern projects he can charge $30 per square foot for eleven80’s studio and one- and two-bedroom apartments. That would put the rent on a 900-square-foot, one-bedroom apartment with a den at about $1,600.

So far, the marketing for the project consists of a Web site, banners over the building’s entranceways and two billboards overlooking Military Park. In recent weeks, 650 households have filled out requests for applications. About 90% of these potential tenants live within 10 miles of the building and 90% work in downtown Newark, which is home to the corporate headquarters for several large companies, including Prudential Insurance Company of America and Verizon. About 10% of the applicants are graduate students attending one of the five colleges, such as Rutgers University, with campuses downtown.

Finding the money

The fact that the building might be worth $40 million less when it’s finished than it will cost to develop made eleven80 extremely difficult to finance.

“We spent four years of our lives trying to finance this,” said Michael Skurnick, a principal with Cogswell.

The developers finally got tired of waiting. In the summer of 2005, workers began swarming over the building, even though the developers hadn’t closed their construction loan.

“We said, ‘If we don’t start building this, no one will believe this project will happen,’” Stern remembered. So the work began, and Cogswell spent roughly $3 million a month from the development partnership’s funds. The decision to start work without financing was a desperate gamble because if the financing did not eventually close, Cogswell would not have had enough capital to finish the building. “We weren’t in a position to finance this ourselves out of our own equity,” Stern said.

Soon afterward, Bank of America joined the project. It could not underwrite a large loan in this untested market, so Bank of America led a consortium that included Banco Popular, Commerce Bankcorp, Inc., and City National Bank.

Negotiations stretched on for six more months. Many of the debt and equity investors were used to leading transactions, and had to bend their own rules to participate in subordinate positions, according to Daron Tubian, senior underwriting manager and vice president for Bank of America.

“There were a number of nights at three in the morning where people got off the phone cursing at each other, swearing off the deal – then got up the next morning and tried it again,” Stern said.

Finally, in the last days of December, the construction financing closed. By then, Cogswell had spent $15 million. “Our job would have shut down in January,” Stern said. “We were way beyond our means.”

Together, the banks provided $46 million in construction financing. The New Jersey Economic Development Authority provided another $7.9 million in redevelopment area bonds, purchased by MuniMae. The Prudential Insurance Company of America provided $5 million in mezzanine financing.

The project also received $19.8 million in equity from the sale of federal historic rehabilitation tax credits to Fannie Mae, along with another $5 million in preferred equity from Fannie Mae’s Historic Communities Fund I. The New Jersey Housing and Mortgage Finance Agency provided another $5 million in equity, in addition to the $15 million put up by the developer.

Cogswell plans to stay invested in downtown Newark for years to come, and already owns the sites for several other projects around Military Park that eventually will add 3,500 new apartments over more than 10 years.

Asked how long the developer plans to hold eleven80, Stern replied, “Forever.”

1999   0

2000   0

2001   0

2002   0

2003   0

2004   63

2005   48

* In Newark, Orange and eastern Essex County

Source: Reis, Inc.