Tuesday, October 19, 2004

Real estate's new rulers

Real Estate Articles

Working together, a small group of New York-based investors is bagging the biggest buildings in the land

Crain's NY
By Andrew Marks
Published on October 18, 2004

When 95 Wall St. hit the market in June, the broker leading the sales effort immediately knew whom to call--Joseph Moinian.

"I knew Joe would want a crack at it," recalls Ron Cohen, executive director in Cushman & Wakefield Inc.'s investment sales group. The problem was that Mr. Moinian was in Florida wrapping up the purchase of a hotel, and was about to head off to Chicago.

Reached at the airport and told that he would have to act fast if he wanted the property, Mr. Moinian fired back a few questions about the building's leases and cash flow. Then, without missing a beat, he simply told the broker to "write up the contract.

That was a Monday. By Tuesday, the contract--at the asking price--had been signed and a check for a nonrefundable deposit of $18 million was in the seller's hands.

"I wasn't worried about maximizing my profit in the negotiation," says Mr. Moinian. "I wanted that building, and I wasn't going to let a few million dollars stop me."

Not until Friday of that week did Mr. Moinian actually get his first close look at what he'd agreed to buy for $184 million.

Speedy decisions

It might sound hard to believe that a private investor would be willing to purchase a building at such a lofty price sight unseen, especially since it had been offered two years before in a two-tower package that fetched less than $150 million. But investors and brokers say that sort of scenario is close to the norm, because a loose circle of New York-based private investors are willing to move at blinding speed. In the process, they have also become increasingly controversial.

"It's become the question to ask in the industry," says Woody Heller, an executive managing director in the capital transactions group at broker Studley. "Are these guys going to end up blowing themselves up?"

Maybe so, but for the time being, the group, known simply as "the New York guys," is on top of its game, routinely blowing other bidders out of the water. Working together in various combinations, a group of no more than 10 men--including Mr. Moinian, Asher Zamir, Joseph Chetrit, David Werner, Lloyd Goldman and Jeffrey Feil--has snapped up some of the most prestigious properties on the market in the past year.

Incredibly, they have done all this while remaining faceless. Few have even been photographed or interviewed by the media.

Active nationally

Their list of deals is topped by the $855 million purchase of Chicago's Sears Tower, a conquest in which five of the men participated. In addition, in the last 10 months, one or more of the New York guys have been behind the purchase of 11 Madison Ave. for $675 million, a half-interest in the Bank of America building in San Francisco for $400 million, and all of 180 Maiden Lane for $355 million.

"They really are a force to be reckoned with," says Eric Negrin, a senior vice president at CBRE Investment Properties. "They act fast, are very aggressive and are willing to buy in a seller's market."

They have scrambled to the top of the heap by aping an approach pioneered by someone outside their ranks. Harry Macklowe set the pattern in 2003 with his purchase of the General Motors Building for $1.4 billion. Not only did Mr. Macklowe far outbid his rivals, but he also did it with staggering amounts of borrowed money, putting up merely $50 million of his own cash.

Like Mr. Macklowe, and the Japanese buyers who dominated the market in the late 1980s by paying unheard-of prices for such trophy properties as Rockefeller Center--before falling to earth in the bust--the latest group is betting that interest rates will stay low and that rents will rise.

Before this group emerged on the scene, most big buildings were purchased by real estate investment trusts. "Any number of REITs would have loved to own the Sears Tower, but not at that price," notes John Stewart, a REIT analyst at Smith Barney.

The REITs typically want their properties to have a capitalization rate, a property's annual income as expressed as a percentage of the purchase price, of 7% or 8%. The New York guys are willing to settle for as little as 5% initially by optimistically projecting that they will boost those rates quickly by increasing rents when leases expire. By accepting a lower cap rate, the men can afford to make much higher bids.

In addition, they are able to borrow money more cheaply by taking out floating-rate loans, which can carry interest rates of up to 1 percentage point less than fixed-rate financing. If interest rates should spike or if rental rates fail to rise, however, the consequences for them would be swift and dire.

Still, the long and growing list of the group's willing lenders--institutions such as Wachovia, Goldman Sachs and Deutsche Bank--suggests that the men are not just bold but also bright.

Fast, loose, sophisticated

"Everybody thinks, `How can these guys pay that much?' But the same thing was said several years ago when Steve Witkoff bought the Daily News Building," says real estate attorney Andrew Herz, a partner at Patterson Belknap Webb & Tyler. "These guys may play it a little fast and loose, but they are very sophisticated investors who know what they're doing."

Not new to the game

Indeed, most of the members of the so-called "new crowd" have been buying and selling real estate for over 25 years. Mr. Werner and Mr. Chetrit are known for making shrewd investments in Williamsburg, Brooklyn, long before it became hot. Others, like Mr. Goldman and Mr. Feil, are second-generation members of well-established real estate families.

The group is also helped by its ability to work together, to combine knowledge as well as checkbooks. "We have our little fights," says Mr. Moinian. "But we all respect one another, and that allows us to work closely together."

Social, religious and cultural ties also serve to bind them. Messrs. Moinian, Zamir and Hakim are Persian Jews who came to the United States in the late 1970s, when the Shah of Iran was overthrown, and attend the same synagogue on the East Side.

Mr. Werner, a Russian, is a rabbi in Brooklyn, Mr. Chetrit is a Moroccan Jew, and Mr. Goldman is a fixture in the social scene swirling around East Hampton's synagogue. Despite their different backgrounds, their religion is an important link.

"They don't all belong to the same temple--some are Ashkenazi, some Sephardic, some are recent immigrants, others are second-generation--but a lot of deal-making among these guys gets done after temple or at bar mitzvahs," says Cushman's Mr. Cohen.

Those deals are literally leading the market. Gentry Hoit, managing director of California-based Shorenstein Co., has competed with the new titans on many transactions, and lost several to them.

Yes, she agrees, they are willing to take risks in the form of paying very high prices while accepting low cap rates that she wouldn't. "But they are very smart, and very fast," she says. "At the same time, they have proven themselves to be not just shrewd investors but honest and reliable, too."

February 6, 2005
A Developer Finds Many Opportunities

IN a little over two years, Shaya Boymelgreen, an Israeli immigrant who came to New York in 1969 to study at a yeshiva, has gone from being an obscure builder of low-rise apartment houses to become one of the city's busiest residential developers.

In partnership with Lev Leviev, an Israeli billionaire and diamond magnate, Mr. Boymelgreen has plans to build some 2,200 apartments in Manhattan, Brooklyn and Queens, at a total cost of more than $1.3 billion - with more on the way. His buildings have attracted wealthy buyers and media attention, and along the way he has clashed with the city's powerful construction unions.

Three years ago, Mr. Boymelgreen's company had about 20 employees; now, as president of Leviev Boymelgreen, he oversees a staff of more than 200 (including six of his eight children). The new company, jointly owned by Mr. Boymelgreen and Africa Israel Investments - the holding company for Mr. Leviev's real estate interests - has also branched out to Miami and Las Vegas, with real estate investments there totaling more than $500 million.

But perhaps the most intriguing thing about Mr. Boymelgreen, 53, is his ability to see real estate gold in the most disparate places. In mid-December, Leviev Boymelgreen paid $170 million for 20 Pine Street, a 35-story office tower a block from Wall Street, which Mr. Boymelgreen plans to convert to luxury condominiums.

About a month later, the partners paid $8 million for a property on the Gowanus Canal in Brooklyn, the last piece in an assemblage of industrial parcels he hopes to turn into a hip village of 400 apartments beside the still-murky waterway. While he is a long way from getting zoning changes and myriad approvals, he has hired the cutting-edge architect Enrique Norten to start shaping the complex, complete with waterfront esplanade and sidewalk cafe, into a dream of urban reclamation.

Not every developer has the imagination to tackle two projects as economically and spiritually far apart. The common thread, it seems, is that, in its own way, each is helping expand what New Yorkers think of as livable neighborhoods.

Richard Marans, a lawyer who handled the closing on the Gowanus property, said he has seen Mr. Boymelgreen plunge into risky ventures before, in fringe areas shunned by others. "It's an example of his convictions, his vision for the market and where things are going to go and his ability to stand by those convictions," he said. "You have to be a tough guy to do that. He's not afraid of the risk."

After buying their first building in August 2002, Mr. Boymelgreen has taken his partnership with Mr. Leviev from zero to 60 in a New York minute, embarking on an impressive variety of projects.

They are building a boutique hotel with 50 luxury apartments at Atlantic Avenue and Smith Street in downtown Brooklyn. And he is building the tallest building in Dumbo in Brooklyn, Beacon Tower, with 23 floors and 79 apartments, at 85 Adams Street.

They have an agreement with the Empire State Development Corporation to turn the Empire Stores, a group of Civil War-era warehouses in Dumbo, into a Chelsea Market-like complex of shops and restaurants.

In Queens, they have plans to build on top of the historic RKO theater in downtown Flushing, to create some 250 apartments.

And then there is Manhattan. Mr. Boymelgreen has pushed the fringes of TriBeCa, with a 68-unit development called River Lofts at West and Laight Streets. In trendy NoLIta, he is converting the former East River Savings Bank building at 60 Spring Street into 42 condos. He has changed the face of the financial district, hiring the flamboyant designer Philippe Starck to carry out the high-concept conversion of the old J. P. Morgan offices at 15 Broad Street into 326 condos with a view of the New York Stock Exchange across the street.

"Right now he's one of the most active developers in the New York City area," said Richard Bassuk, president of the Singer & Bassuk Organization, a real estate investment banking and advisory firm that helped Mr. Boymelgreen put together tax-free Liberty Bond financing for yet another project: a 19-story, 352-unit rental building by the architect Costas Kondylis, under construction at 88 Leonard Street in TriBeCa. "Shaya is an unusual guy," Mr. Bassuk said. "He hasn't been on the screen for a very long time, but he's able to juggle a lot of things."

Pinchas Cohen, the chief executive of Africa Israel Investments, said the company is looking for even more deals in New York. "We believe the market is strong and we want to be a part of it," Mr. Cohen said.

The transformation of Shaya Boymelgreen began a little more than three years ago, in late 2001, on a Lubavitcher-sponsored cruise from Miami to the Caribbean. A friend introduced him to Mr. Leviev, an Israeli businessman born in Uzbekistan, who, like Mr. Boymelgreen, is a Hasidic Jew who belongs to the Lubavitcher movement.

In Jewish circles Mr. Leviev is well-known for his philanthropy. In business circles he is known as the man who challenged the powerful De Beers diamond cartel and won. Thanks to his diamond business, which includes mines in Africa and a farflung cutting operation that is one of the largest in the world, Mr. Leviev was ranked at No. 277 last year on the Forbes magazine list of the world's richest people, with an estimated net worth of $2 billion.

Part of that fortune comes from Africa Israel, which has diversified in recent years into gasoline stations, swimwear, telecommunications and construction. The company was begun some 70 years ago by a group of Jewish investors from South Africa that bought land in Israel. It now owns property or does business in Israel, Russia, Eastern Europe, the United States, Canada, Angola and Namibia. Mr. Leviev bought a majority stake in the company seven years ago.

Mr. Leviev and Mr. Boymelgreen hit it off during a walk on the beach in San Juan, Puerto Rico. By the end of the cruise, Mr. Leviev asked Mr. Boymelgreen if he was interested in forming a partnership to do business in the United States, where Africa Israel was looking for real estate opportunities.

Until then, Mr. Boymelgreen's real estate ventures had been successful, but on a more modest scale. He was born in Israel and came to New York in 1969 to study. He went into business, opening a religious bookstore in Brooklyn, working a diamond mine in the Brazilian jungle and then, in New York, running an asbestos-removal company.

In August 1991, his life intersected briefly with the broader life of the city. He was driving home to his house in Crown Heights, Brooklyn, one evening when he saw a man staggering in the street. He stopped and got out, and the man collapsed against him. "I feel on my clothes this blood," Mr. Boymelgreen said. "He held my hand and said, 'I'm scared, I'm scared.' I said, 'What's your name?,' and he said, 'Yankel.' " It was Yankel Rosenbaum, the Hasidic student who had just been stabbed in the Crown Heights riots. Mr. Boymelgreen comforted the wounded young man until an ambulance took him away. He wanted to go along to the hospital, but the police would not let him. He said he still blames himself for not being more insistent. Mr. Rosenbaum died after emergency room doctors failed to detect a chest wound and Mr. Boymelgreen feels that if he had been there he might have been able to demand the kind of care that could have saved his life.

In the mid-90's, Mr. Boymelgreen turned to real estate. He built his first building, with 35 apartments, on a lot at Avenue A and Third Street in Manhattan.

That was followed by another building on Avenue B (on a whim, he wired it with T1 lines for direct Internet connections, making it perhaps the first such apartment building in the city), then a condo conversion in Williamsburg, Brooklyn, a building on the Upper West Side, and the conversion of an old Daily News printing plant on Dean Street, in Prospect Heights, Brooklyn. Next came a conversion in Dumbo and several buildings on the fringes of Park Slope, off Fourth Avenue.

But with the backing of Mr. Leviev and Africa Israel (they have called their joint company both A. I. & Boymelgreen and Leviev Boymelgreen), Mr. Boymelgreen took his game to another level. In August 2002, he made his first purchase with Africa Israel, paying $26.5 million for a group of adjoining properties between West and Washington Streets, north of Laight Street, in TriBeCa. One of the properties was a 19th-century warehouse that is being converted to condos. The rest of the parcel will hold a new 13-story building. He dubbed the complex River Lofts and hired the architects Ismael Leyva and Calvin Tsao to design it.

The same month, he signed a contract to pay $36 million for 60 Spring Street, closing the deal the following January. And in May of 2003, he signed a $100 million contract for 15 Broad Street, which is being called Downtown by Philippe Starck.

That was only the beginning. Mr. Boymelgreen now oversees 15 projects financed jointly with Africa Israel in Manhattan, Brooklyn and Queens.

The former bank building at 60 Spring Street, a creation of the architect Cass Gilbert, is the first of the Leviev Boymelgreen projects to near completion, with 17 owners closing on their apartments last month. The 42 apartments, which were also designed by Mr. Tsao and Mr. Leyva, cost from $895,000 for a 936-square-foot one-bedroom, to $2.98 million for a two-bedroom with 2,063 square feet. They have dark Brazilian oak floors, flush baseboards, marble bathtubs, Bosch stoves with recessed hoods that slide out silently at the touch of a finger, and, in every unit, a safe.

Inevitably, however, there are growing pains. The Spring Street apartments were initially to have been delivered last spring, and time is the essential, invisible component of a developer's work. Delays of weeks or months can mean enormous extra costs as interest payments pile up on large construction loans.

Time was clearly on Mr. Boymelgreen's mind last month during a visit to River Lofts, the TriBeCa development, where about 125 workers bustled around the two buildings, old and new. "Every day costs me over here," he told Alan J. Krause, his director of operations, urging him to coordinate the work of the many subcontractors to avoid delays.

Much of the work at River Lofts and virtually all of it at 60 Spring Street and several other projects has been done without union labor, and this has put Mr. Boymelgreen on a collision course with the city's construction unions.

Union members have held almost daily rallies outside 15 Broad Street -sometimes setting up a large inflatable rat - and during a recent interview they could be heard chanting outside. Mr. Boymelgreen said he decided to handle the conversion of 15 Broad Street without union labor for the simple reason that it was cheaper that way and it allowed him to bring his condos to market at a more competitive price.

But pressure from the unions has clearly taken a toll. Mr. Boymelgreen says union protestors have threatened his workers. He accuses them of putting sugar in gas tanks and pouring cement down sewers. He says a bulldozer was stolen from the River Lofts site, and another disappeared from a construction site in Brooklyn. But he has done business with union contractors on some of his projects. Most notable is the building at 88 Leonard Street, an all-union job where work has begun on the foundation.

Edward J. Malloy, the president of the Building and Construction Trades Council of Greater New York, said he was unaware of any interference by union workers with Mr. Boymelgreen's projects. He said he hopes the two sides can work out their differences. "He is a major new player in real estate in New York City," Mr. Malloy said. "We would like to just hopefully convince him that building union has more positives than doing the work the way it's being done today."

Mr. Boymelgreen combines the bottom-line mind-set of all developers with an almost quixotic sensitivity that reveals itself in unexpected ways. At such moments, he seems blithely unaware of the fact that for many New Yorkers, developer is a dirty word.

Mr. Boymelgreen and his partners chose 20 Pine Street to piggyback on the success of Downtown by Philippe Starck, a block away. But instead of tapping Mr. Starck for a reprise, Mr. Boymelgreen said he is in talks with a well-known fashion designer to lead the team that will transform the office building into about 400 luxury condos.

It would have been easy, he said, to repeat the formula and simply do another Philipe Starck building. Easy, but boring. And then, too, there's the seduction of the new.

"It's second nature to a developer to do new things," Mr. Boymelgreen said. "We're kind of artists, to come up with new things, new ideas. An artist paints the 'Mona Lisa,' he's going to do a second 'Mona Lisa'?"

Borough barons hit the big time
Developers, consultants on luxury projects evoke dot-com lifestyle; trouble for tyros?
By Christine Haughney
Published on February 07, 2005

Elan Padeh recently celebrated a profitable year by buying a 40-foot
powerboat named Aquasition, a 28-foot sailboat called Lost Horizon and a
silver BMW convertible. His testosterone-fueled shopping spree may sound
like a Wall Street bonus-backed splurge, but Mr. Padeh is making his money
in a far less glamorous venue. He's consulting on the development of
luxury condominium projects, mostly in the boroughs beyond
Manhattan--namely Brooklyn.
Mr. Padeh is one of a group of developers, architects and consultants who
have engaged in a spurt of deals, reaped their fortunes and started
indulging in personal spending with an excess reminiscent of the dot-com
era. Their mission is to satiate what they believe is an almost unbounded
demand for luxury residential properties across the East River.
"I'm trying to think if I envision a limit, but I don't see it," says the
34-year-old chief executive of The Developers Group. "If you have young
people who are driven, you can do almost anything."
In the past 22 months, the company co-launched by Mr. Padeh has exploded
into a 32-person shop working on 76 development projects. The Developers
Group, which takes a 4% commission, expects to take in roughly $125
million on $3.5 billion in sales over the next four years.
The community of new profiteers ranges from professionals who have spent
decades trying to drum up business in overlooked neighborhoods, to
newcomers with little experience. Almost all are working through the
weekends, getting little sleep and bemoaning the lack of a personal life.
But they also are enjoying newfound wealth surpassing that of their
contemporaries in Manhattan development and even on Wall Street.
"I have lived through three previous booms in the real estate cycle, and
this is huge compared to anything I've seen," says Jay Schippers, head of
The Corcoran Group Inc.'s Brooklyn development division. "Everybody is
making a huge amount of money."
Some old-time players view the profiteers as little more than
carpetbaggers. Although extensive rezoning has created more opportunities
in the boroughs, the veterans warn that some developers are paying too
much to build on sites that have long languished. They question whether
those newer to Brooklyn and Queens are prepared to tolerate the
historically glacial pace of turning around some of the most downtrodden
"Eventually, the people who are in it for the quick dollar will move on to
the next hot thing," says Jason Muss, a principal at Muss Development Co.,
which has been building residential properties in Queens and Brooklyn for
98 years.
At the moment, developers are feasting on the boroughs as rezoned new
frontiers offering alternatives to Manhattan, where land prices are
escalating to unheard-of levels. Brooklyn alone now has at least 250
development projects worth $16 billion. Since zoning changes for downtown
Brooklyn were approved last summer, sales brokers say, land prices have
soared by 20%.
"Zoning is so favorable to residential or commercial deals, residential
condominium developers are willing to pay a premium for these sites
because of the strong sell-off values," says Brian Leary, a partner at
Massey Knakal Realty Services Inc. who runs the firm's Brooklyn office.
As more developers move into rezoned areas, The Developers Group is
cashing in on its borough expertise.
Mr. Padeh and his team advise developers on how to market to younger
buyers looking for, say, $450,000 one-bedrooms and $775,000 two-bedrooms.
They offer counsel on materials and layouts. Mr. Padeh recently showed
development firm GLC Group why buyers for a Williamsburg condominium
project may prefer terra cotta tiles over brick and pointed out their
preference for glass curtain walls.
Developers say that the group's insights on youthful customers clearly
help move their properties. For one project, potential apartment buyers
slept at the marketing offices to win a chance to bid and another open
house attracted so many prospects that the police shut it down.
Know their audience
"The Developers Group executives are experts in condominium sales to the
younger generation," says Pinny Loketch, chief executive of GLC Group,
which previously developed less high-end projects in Bay Ridge and
Successes in areas such as Williamsburg and downtown Brooklyn are leading
sales brokers to delve deeper into the borough. Since Massey Knakal opened
its Brooklyn office two years ago, the number of brokers has grown to 35;
it's expected to climb to 75 this year.
Income is soaring as well. Mr. Leary, who closed four deals in 2002,
earned commissions estimated at about $120,000. This year, he is already
marketing 15 properties, which could bring his income to more than $1
Yet the Wall Street veteran remains cautious about how he spends his hefty
"My advice to newcomers in the business is, `Don't get caught up in this
prosperous time, because it may not last,' " he says.
Still, when company revenues jump to $5 million from $2.5 million in two
years, as they have for architecture firm Scarano Associates, the
temptation to treat oneself is hard to resist. Discouraged by his wife
from buying a Corvette, Robert Scarano bought a limited-edition Cadillac
XLR convertible. He justifies it as a little pick-me-up for working on the
"I come in late afternoon on Sundays so I can get enough of a head start,"
Mr. Scarano says.


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