Michael D’Alessio (Credit: iStock)

Westchester developer Michael D’Alessio was sentenced to six years in prison on Friday morning after pleading guilty in November to defrauding investors in his New York development projects.

D’Alessio, the former CEO and president of Michael Paul Enterprises, was accused of funneling more than $58 million of his investors’ money to shell accounts under his control and using these funds to pay off gambling debts, cash out early investors and cover other debts. He was also accused of excluding money and property belonging to his estate when he filed for Chapter 7 bankruptcy in 2018.

The federal courtroom was packed for D’Alessio’s appearance on Friday, which took place in Lower Manhattan at the Thurgood Marshall Courthouse in front of U.S. District Judge Jesse Furman.

D’Alessio broke down in tears while delivering a brief statement to the court saying he stood before the judge as “a broken man.”

“I feel terrible for all the damage and heartache I have caused to my investors, my friends and to what once was my good name,” he said before Furman handed down his sentence.

He asked the judge to view him not just as a criminal but as “a good man who has struggled with addiction and made terrible mistakes.”

Scott DeCarolis, a victim of D’Alessio’s Ponzi scheme, spoke at the sentencing as well. He asked Furman to remember the financial hardships D’Alessio’s decisions put his investors through, noting that the losses he suffered almost caused him to file for personal bankruptcy.

“I’ll be suffering the rest of my life for this,” he said.

Benjamin Brafman, D’Alessio’s defense attorney, stressed that his client had been struggling with a gambling addiction while the Ponzi scheme was going on and had also been on Abilify, an antipsychotic used to treat diseases such as depression and schizophrenia. He also noted that several victims of D’Alessio’s fund had written to the court asking that he get a lenient sentence.

Assistant U.S. Attorneys Amanda Kramer and Daniel Nessim acknowledged D’Alessio’s gambling addiction as well but said that this was not enough to excuse his actions, especially from the perspective of his investors.

“They were confident in these investments,” Nessim said, “and they paid the price.”

Furman ultimately sentenced D’Alessio to six years in prison followed by three years of probation. He will also have to do 300 hours of community service and take an outpatient program for drug and alcohol abuse. He will need to surrender approximately $58 million to the United States as well, and his prison sentence is scheduled to start on June 5.

He has sold multiple development projects at bankruptcy auctions in recent months, including boutique Manhattan condo buildings at 227 East 67th Street and 184 East 64th Street on the Upper East Side, which sold for $15 million and $17.5 million, respectively.

Bond Collective CEO Shlomo Silber and a Bond Collective office (Credit: Bond Collective)

Bond Collective is the latest co-working firm expanding to Chicago, with plans to add 100,000 square feet of luxury shared offices in the city this year.

The New York-based firm plans to open a 68,000-square-foot location in the Civic Opera Building, 20 North Wacker Drive and a 31,000-square-foot space at 1101 West Lake Street in Fulton Market, CEO Shlomo Silber told the Chicago Tribune.

Bond Collective, founded in 2015 as Coworkers, has locations in Manhattan, Brooklyn and Philadelphia, and is expanding Los Angeles, Houston, Nashville and Austin, Silber said.

The firm bills itself as luxury co-working, setting itself apart from competitors with higher-end finishes.

“Our members want a space they’re proud to have investors or clients visit,” Silber told the Tribune. “Not everyone wants music playing in the lobby and people drinking beer at 2 p.m.”

Bond Collective’s move into the Chicago market comes on the heels of No18’s announcement it plans to take three floors in the office tower under construction at 110 North Wacker Drive. Like Bond Collective, No18 says it offers an elevated co-working experience, billing itself as a “cosmopolitan members’ club for business.”

Chicago’s co-working industry has tripled in four years, with shared-office firms now controlling about 2 percent of the Downtown office market. The growth does not appear to be slowing, thanks in no small part to industry leader WeWork’s continued expansion in the city. [Chicago Tribune] — John O’Brien

From left: Moderator and WLRN vice president of news Tom Hudson, Urban Land Institute’s Billy Grayson and Heitman’s Laura Craft

The impacts of climate change are spurring institutional investors to consult imaging maps, computer models and big data to help make decisions about whether or not to buy real estate in Miami, New York and other major coastal cities around the world, according to real estate experts.

At a a sea level rise conference Thursday hosted by the law firm Hinshaw and Culbertson LLP, keynote speaker Billy Grayson said the National Oceanic and Atmospheric Administration’s Digital Coast website and real estate-focused big data produced by firms like GeoPhy are among the new tools investment managers are using. They help them to gauge the threat level climate change to properties being considered for acquisition, as well as existing buildings in a portfolio.

As executive director of the Urban Land Institute‘s center for sustainability and economic performance, Grayson said he’s spoken with 30 of the largest investment managers for wealth funds and institutional investors who believe climate change is an existential threat to real estate assets in cities dealing with sea level rise, flooding and coastal storms.

“We are getting more sophisticated and starting to get hyper-local risk assessments,” Grayson told the 200-plus attendees. “[Managers] are thinking about how not to overload someone’s portfolio with high-risk assets. People are starting to draw lines of where they will and will not invest.”

Laura Craft, another keynote speaker and head of global sustainability for real estate investment management at Heitman, said her firm uses an in-house due diligence team to conduct onsite analyses of properties, as well as determine what local jurisdictions are doing to build infrastructure to minimize the impacts of climate change.

“We also hire third-party consultants, usually engineers, to do deeper dives to understand what is being done at the city level,” Craft said. “We are using projection models. If it goes above a certain threshold, it means the property is more vulnerable and a physical threat could happen.”

Craft said institutional investors want data in order to formulate how much capital to put into a building to make it more secure and safe, and to factor in the fluctuating cost of insurance premiums. “We are all working on how to price the risk into the deal,” she said. “Before we really didn’t have the tools to assess portfolios. We used to rely on FEMA maps and a few other sources.”

During a panel discussion, Jessica Elengical, a director for global investment firm DWS Group, said it is up to investment managers to arm buyers with the right tools to make better acquisitions in areas facing impacts of global warming and sea level rise. “Our investors are more aware of these issues and are looking to us to provide more guidance,” Elengical said.

Nathan Blecharczyk, Airbnb cofounder, and Beijing (Credit: Airbnb, Pixabay)

Airbnb is making a big push into China, hoping to plant a flag in the country’s nascent home-sharing market.

Unlike some of its competitors, Airbnb has built its own operation in China, instead of partnering with a local company. The home-sharing giant now has 300 employees in the country and co-founder Nate Blecharczyk is at the helm as chairman, according to the Wall Street Journal.

There’s strong competition in China — Airbnb currently has just 7 percent of the home-sharing market, dwarfed by domestic leaders Tujia and Xiaozhu, who together account for nearly half of the market. (Xiaozhu is pushing to take on Airbnb outside of China as well.)

The Chinese home-sharing market itself is also relatively small compared to the U.S. at just five percent of China’s lodging industry, compared to a 10 percent market penetration in the U.S. Airbnb is hoping to ease its Chinese expansion by working with government regulators, instead of fighting any attempts to limit home-sharing as its done in markets around the U.S., including Los Angeles and New York.

Airbnb has found popularity with Chinese millennials, who make up 69 percent of Airbnb’s customers in the country. Around 70 percent of Chinese millennials own their home – a higher percentage than Americans across all age groups – and they often list their homes when they travel. Millennials in China outnumber the entire population of the U.S. [WSJ] – Dennis Lynch

Petra Ecclestone and Spelling Manor (Credit: Getty, Realtor.com)

Looks like no one is racing to buy the home of Formula One heiress, Petra Ecclestone.

The daughter of billionaire Bernie Ecclestone has re-listed her 56,500-square-foot mansion, known as Spelling Manor, for $160 million, Forbes reported.

She originally listed the home in 2016 for $200 million, and later dropped its ask to $175 million last summer.

Built by the late television producer Aaron Spelling, the French chateau-style compound in Holmby Hills has seven bedrooms, a two-lane bowling alley, tanning rooms, two-level closet and 123 rooms in total.

Ecclestone purchased the property from Candy Spelling, Spelling’s widow, in 2011 for $85 million, property records show. She then hired some 500 workers to renovate the iconic property.

Jade Mills of Coldwell Banker Global Luxury, Kurt Rappaport of Westside Estate Agency and the Agency’s David Parnes and James Harris now have the listing.

The discounted home is one of many luxury properties lingering on the market. Last year, developer Bruce Makowsky dropped the price on his “Billionaire” pad from $250 million to $188 million. [Forbes] – Natalie Hoberman

In Los Angeles, a pool can add over $95,390 in value to a property (Credit: iStock)

How much extra would you pay for a house with pool?

In Los Angeles, a pool can add over $95,390 to a property’s value, while in Austin, Texas, the water feature could boost the value by over $50,220, a new analysis by Redfin has found.

To work out how much value a pool can add to a home, Redfin ranked metro areas where at least 5,000 homes had sold in 2018 and more than 2 percent of homes had pools. (Only places with statistically significant results were included in the ranking.)

The index’s highest-ranked metro was L.A., where a pool adds an estimated $56.45 to a property’s average price-per-square foot.

“In some parts of Los Angeles, particularly in the San Fernando Valley, it’s almost a given that a house will have a pool and the lack of a pool can make it harder to sell,” said Redfin agent Lindsey Katz. “Nearly half of my listings have pools, and when they don’t, potential buyers are constantly asking whether they can add a pool to the property.”

California cities dominated the study’s top 15, with the Sunshine State’s cities trailing in second. The study’s highest-ranked metro area in Florida was Fort Lauderdale where a pool was found to add nearly $37,000 to a typical home’s value.

The only metro area included in the study where a pool detracted from the value of a property was Boston, where a home with a pool costs $15,484 less than one without. [Redfin] – Decca Muldowney

From left: Byron Sigcho-Lopez, Jeanette Taylor, and Daniel La Spata with Chicago’s City Hall (Credit: iStock and Facebook)

Three days after a group of self-described Democratic Socialists declared victory in their respective races for alderman, plenty of questions remain about the looming impact of a possible City Council “Socialist Caucus” on development across the city. Chief among them is whether they will form a caucus at all.

But the presence of at least five Socialist council members — six, if 33rd Ward challenger Rossana Rodriguez-Sanchez clings to her 64-vote lead over Alderman Deb Mell, — is sure to elevate a ream of thorny policies tied to the Democratic Socialists of America’s platform of “Housing for All.”

The new members could throw momentum behind efforts to crank up the city’s Affordability Requirements Ordinance, deepen the Chicago Housing Authority’s involvement in new residential developments and even require Community Benefits Agreements for big projects going forward.

“Across the city we’re seeing a clear mandate for change,” said Alderman-elect Byron Sigcho-Lopez (25th), who next month will take over for scandal-plagued Alderman Danny Solis. “We have to be able to have a citywide discussion on how to create more affordable housing, and there are concrete ordinances that have been proposed by different housing advocates that can help get us there.”

Specifically, Sigcho-Lopez said he would work with colleagues to try and revive the “Development for All” ordinance, which was proposed in June by a group of eight aldermen but never made it out of the council’s committee on housing and real estate. Alderman Joe Moore (49th), chairman of that committee, was ousted by challenger Maria Hadden in the February election.

The ordinance would boost the minimum allotment of affordable units in any new development seeking a zoning change up to 30 or even 50 percent, depending on where it’s proposed, up from the current 10 percent threshold. It would also extend the requirement to new residential buildings with fewer than 10 units, currently the minimum size that triggers the rule.

A separate ordinance, also introduced to the council in June, would expedite approval of affordable housing proposed in wards where less than 10 percent of housing units are designated affordable. That proposal also died in Moore’s committee.

But even with a sixfold spike in membership, the Socialist group wouldn’t be able to turn “housing for all” from slogan to reality unless it can drum up at least 26 votes in the 50-member council. The council’s existing Progressive Caucus has 11 members, and many of its landmark proposals, like overhauling the city’s tax increment financing system, remain on the shelf.

It all depends on how many aldermen Mayor-elect Lori Lightfoot can wrangle in support of her agenda, according to former alderman and City Council historian Dick Simpson. Previous mayors have traditionally hand-picked leaders of the council’s powerful committees on zoning, finance and housing, but the responsibility technically falls to the council itself.

“The most important vote that gets taken over the next four years will be the first one, when committee chairmen and members are appointed,” Simpson said. “That not only will decide how zoning decisions are made, but it will set the tone for what the council wants to accomplish.”

And if new aldermen want to fulfill their promises to build more affordable housing around the city, they’ll have to figure out how to dole out two multimillion-dollar pots of money that are growing faster than they can be dispersed, Simpson said. One is the surplus budget of the Chicago Housing Authority, which is taking a piecemeal approach to developing mixed-income housing complexes with private developers like Brinshore and Hunt Companies. The other is the city’s Affordable Housing Opportunity Fund, which developers pay into in order to include less on-site affordable units in their projects.

“The problem is that it’s very difficult to write a law that gets more affordable housing built” as long as the city seeks private developers as partners on new housing, Simpson said. “You have to figure out what kinds of carrots and sticks are at your disposal, so you can actually make it profitable enough for the private sector to get involved.”

Even if the new aldermen can’t force changes to city code, they’ll have wide latitude to influence development in their own wards. Lightfoot has railed against the long-standing practice of aldermanic privilege, the unwritten rule that gives aldermen the final say in any proposal on their own turf. But some incoming aldermen have suggested they would embrace that power in service of their winning agendas.

Democratic Socialist candidate Daniel La Spata, who unseated incumbent Alderman Joe Moreno in the rapidly-gentrifying 1st Ward, said he would “negotiate” with developers to get more affordable and family-sized apartments built. And Alderman-elect Jeanette Taylor (20th) has pledged to intervene to stop DL3 Realty’s proposal to demolish and redevelop the Washington Park Bank building in Woodlawn.

Sigcho-Lopez, whose ward includes the 62-acre future site of Related Midwest’s “The 78,” mega-project, told The Real Deal that he would use his newfound muscle to pry more commitments from Related, even though the City Council approved the firm’s master plan for the site late last year.

“This is a project we’re inheriting, and we need to make sure it’s responsive to the needs of residents,” Sigcho-Lopez said. “We want to discuss things like affordable housing, local hiring, and the fact that they’re being subsidized with [tax increment financing] opens a whole other conversation about what they can do for the community.”

If the council approves the new 141-acre Roosevelt/Clark TIF district later this month, Sigcho-Lopez said he would ask Related to sign a Community Benefits Agreement for its proposal.

In a statement Friday, a spokesperson for Related Midwest said the company has formed a “Community Inclusion Council led by the top community, civic and business leaders from across Chicago to provide strategic direction, help us implement our programs, establish best practices and monitor our progress” on the The 78.

“We look forward to meeting with Alderman-elect Sigcho-Lopez to discuss our shared commitment to investing in the community,” the statement continued.

In other parts of the city, brokers and property owners are waiting to see who Lightfoot chooses to staff her administration, according to Brian Bernardoni, lobbyist and policy director for the Chicago Association of Realtors. Realtors are ready to work with the incoming government to “find ways that make affordable housing work” for both residents and builders, Bernardoni said.

As for whether the incoming class of aldermen can see their affordable housing policies through, Bernardoni recalled a quote from boxer Mike Tyson: “Everyone has a plan until they’re hit in the face.”

“It’s one thing to talk about what you want, as far as development in your ward,” Bernardoni said. “But it’s different when you have to come face-to-face with all different kinds of stakeholders, who may want different things.”

The strongest risk would be if borrowers abandon the malls to avoid foreclosure. (Credit: iStock)

Commercial mortgage-backed securities could face high losses if struggling mall loans are not refinanced before maturing in 2020.

The strongest risk would be if borrowers abandon the malls to avoid foreclosure, according to Bloomberg, citing data from a research note written by Fitch analyst Huxley Somerville.

“When a mall goes bad, potential losses can exceed 60 percent of the loan amount,” Somerville wrote, “and the potential for zero recoveries is very real and have already been seen.”

The first loans issued after the financial crisis will begin maturing next year, meaning 2019 should give people an idea of what will happen in 2020. Fitch covers 15 mall loans in CMBS deals that are set to mature next year, and the agency is concerned about 10 of them.

Mall owners struggling with closing anchor tenants have been turning over keys to their properties before their leases end rather than looking into refinancing them. This has forced loan-servicing companies to either try selling the malls or running the malls themselves. [Bloomberg] – Eddie Small

(Illustration by Brian Stauffer)

Churchill Real Estate Holdings’ Justin Ehrlich made a name for himself as a New York developer snapping up distressed Downtown buildings during the financial crisis and turning them into luxury condos.

But lately, his focus has been on another high-growth business: cannabis.

In addition to his property dealings, Ehrlich is a partner in Loudpack, an umbrella company of brands that sells a popular line of vaporizers, among other  products. He’s also a partner in Greenwolf LA — a recreational marijuana shop in West Hollywood described as “the Whole Foods of dispensaries” — and has a stake in the ne plus ultra of stoner culture: High Times magazine.

While the burgeoning cannabis business may seem contrary to New York real estate, Ehrlich said the two have more in common than one might think.

“It’s the same philosophy as when we were buying up distressed properties,” he said, referring back to the recession. “There was a lot of fear in the market, and we knew whoever had cash on hand was going to clean up. It’s the same thing we’re doing now [with cannabis products]. A lot of people don’t want to touch it because it’s very risky and it’s a lot of work.”

Ehrlich is one of several real estate players looking to get in on the ground floor of an industry with a vertical growth trajectory.

As states around the country loosen restrictions on marijuana for medicinal and recreational uses, there’s a growing class of investors clamoring for a piece of what the cannabis research firm Arcview projects to be a $57 billion industry worldwide by 2027. New York, Illinois and Florida are among the states now looking to legalize marijuana for recreational use, and doing so would not only give them a major tax revenue boost — it could also pump billions of dollars into real estate leasing, sales and financing deals.

And a number of property investors are looking to capitalize on the increasing need for cannabis-friendly commercial space by launching specialized funds and real estate investment trusts. To date, there are around 10 REITs and private funds exclusively focused on the marijuana industry.

“The investor class in cannabis is similar to any other investment today,” said Adam Levin, whose private equity firm Oreva Capital bought a majority stake in High Times in 2017. The magazine’s owners are now pushing for an initial public offering at a valuation of about $225 million. “People who invest in real estate,” Levin added, “there’s just all this overlap because of the opportunities cannabis investments present today.”

The roster of big-time players in the sector is also growing.

Money managers BlackRock and the Vanguard Group are the biggest investors in Innovative Industrial Properties, the top-performing cannabis REIT. We Company CEO Adam Neumann is an investor in an Israeli medical marijuana company. Magnum Real Estate Group principals Ben Shaoul and Marc Ravner are partners in Ehrlich’s growing cannabis empire. And the blue-blooded Durst family even teamed up with the Greater New York Hospital Association in 2015 in a bid for one of the state’s first medical growing licenses— though the duo lost out to five other ventures including Columbia Care, which now runs a dispensary in the East Village.

“We were interested in that because we have one of New York’s largest organic farms,” the Durst Organization’s spokesperson, Jordan Barowitz, told The Real Deal. “As a real estate company, we are familiar with highly regulated industries.”

Into the weed

In total, 33 states have now legalized medical use, while 10 states (plus Washington, D.C.) have made recreational use legal. These early adopters have handed New York, Illinois, Florida and others a roadmap for what worked and what went wrong.

But the latest states are far behind places like California, Colorado and Nevada, where recreational use is already legal and the cannabis industry is in growth mode, sources say.

“I think Nevada has probably done it best,” said Michelle Bodner of the medical marijuana company Curaleaf New York, which holds one of just 10 medical licenses in the Empire State. “They started their adult-use program very slowly and were very cognizant of oversupply problems.”

New York, meanwhile, has shelved plans to legalize recreational use in its latest state budget, and New Jersey lawmakers recently voted down a similar proposal.

How the U.S. cannabis market and cottage industries around it evolve largely depends on federal and state regulations. Too many restraints could stifle a potentially booming industry, while sweeping legalization could fuel an investor frenzy across state borders, pushing out local players, experts say. For now, as long as federal laws prohibit the cultivation or sale of marijuana, it’s a divided market.

“This is generating revenue for the states, and [state governments] may be covetous of that revenue,” said John Massocca, a stock analyst at Ladenburg Thalmann Financial who covers Innovative Industrial.

Marc Spector, principal of the New York design firm Spector Group, which works with cannabis clients, said those heavily invested in the business are eager for federal changes that would allow money to flow across state lines. “Right now, on a state-by-state basis, you are siloed with what you can do,” he said. “A growing company can’t use resources from Colorado to expand into New York.”

And while real estate is essential to the marijuana industry, there are huge barriers to entry. On top of federal restrictions, the business still conjures up images of smoke-filled dorm rooms and streetcorner drug deals for some. Many banks and other large corporations won’t go near it. The same goes for most of the big commercial brokerages, at least publicly, sources say. CBRE, JLL and Cushman & Wakefield, for example, have published only a handful of detailed reports on cannabis and real estate. At the same time, property owners are still working out the legal kinks of renting space to tenants that create or sell marijuana products.

New York attorney Jerry Goldman, co-chair of Anderson Kill’s regulated products practice, said that while landlords have been charging less of a premium on rents for dispensaries as legalization becomes more mainstream, the costs are still generally higher than in leases for other businesses. That’s largely due to uncertainty over how federal marijuana laws will be enforced on the local level, he noted.

Goldman referred to the federal “crack house” law — which makes it a felony to knowingly lease space for the manufacturing or distribution of any controlled substance — as a deterrent to leasing space to cannabis companies.

“That risk does exist until federal law changes,” he said.

High rates

Matthew Schweber, an attorney at Feuerstein Kulick who represents dispensaries, manufacturers and other marijuana companies, called it the “cannabis premium.” Schweber said he’s representing a client who was awarded a license in West Hollywood and, for those reasons, will likely pay double the rent a noncannabis company would. “It is a legal concern,” he said, noting that landlords “will say there’s the risk of foreclosure.”

If an individual or company has a mortgage on a property and leases it to a cannabis producer, that landlord is violating a clause of the mortgage, which means the bank could demand full repayment of its loan at any moment, Schweber added. The clauses stem from federal lending guidelines, and in some cases, companies in the marijuana industry need to pay all cash to buy property for growing and distribution.

That’s left a huge void when it comes to financing for cannabis companies looking to lease or build out space, one that specialized REITs and private funds are stepping in to fill. Many of these new entrants buy properties, pay off the mortgages and then lease back to the operators, knowing they can get two or three times the typical rent in that area.

But the higher rates most of them charge — 150 to 200 percent in some cases — make it hard for smaller firms to break into the cannabis business, sources say. And that’s creating an uneven playing field in the industry.

“It’s very difficult for any company other than, say, a large multistate operator to be able to afford the cost of operating,” Schweber said, “because the real estate is as critical to their welfare as any other component of their business.”

That landscape is further kept in check by a limited number of licenses per state, which caps the number of competitive players — even in big recreational markets like Los Angeles and Denver.

In L.A., landlords still have “all the leverage in the world” over would-be tenants, said Ali Mourad, a broker at Sperry Commercial who’s worked with both cannabis tenants and landlords.

The city is expected to allow another 200 licenses over the next few years, but the process can be complicated and expensive, Mourad said. Cannabis companies have to secure a lease before they can get a license, which makes it even harder for property owners to commit to lease agreements.

“It’s still really complicated, and that’s caused confusion on the landlord side,” Mourad said. “And there’s still a stigma there. Then you have zoning restrictions, so operators are really limited to where they can go.”

Limited supply

Where there’s resistance, however, there’s also opportunity, as shown by the investors and lenders that have pounced on the burgeoning business.

The publicly traded Canadian cannabis firm Harvest Health & Recreation partnered with two family offices late last year to form a $100 million real estate fund called Aina We Would, for example. Harvest, which spun off its property holdings, will finance acquisitions and new construction projects while pursuing its own investments through the fund, including land purchases and sale-and-leaseback deals.

Aina We Would lends to other companies at an interest rate of about 12 percent, which accounts for the legal risks it takes on, said Harvest Health President Steve Gutterman. He argued that it’s a good price, citing a going rate closer to 16 percent.

A number of similar funds and REITs have cropped up in California.

Inception Companies, a private investment firm based in Beverly Hills, launched a $50 million cannabis REIT last August. Inception is also focusing on leaseback deals with marijuana companies. And the popular L.A.-based retailer MedMen Enterprises partnered with the family office Stable Road Capital in January to form a cannabis REIT called Treehouse. Similar to Harvest, Medmen spun off its real estate assets in a deal valued at about $100 million, financed in part by Treehouse’s first capital raise of $133 million.

While there are several risks to investing in cannabis-related property, the financial upsides can be significant.

San Diego-based Innovative Industrial, which specializes in medical-use marijuana farms, was the country’s best-performing REIT in 2018, netting investors a 117 percent profit — beating out Vornado Realty Trust, SL Green and other large traditional real estate players.

Massocca of Ladenburg Thalmann said companies focused on triple-net lease deals pay cap rates in the single digits for less desirable real estate, like properties leased to tenants with bad credit. Innovative Industrial, on the other hand, is investing at cap rates in the low to mid teens, which means there’s plenty of room for it to improve a property’s fundamentals, he noted. The REIT’s performance “has risen dramatically” in the past few months, Massocca added.

At the same time, the field of financiers in the pot and real estate arena is still narrow, said Dan Leimel, CEO of the private real estate investment firm Pelorus Equity Group. The company, based in Newport Beach, California, launched its own $100 million debt and equity fund targeting cannabis-related real estate in September.

“It’s not a robust market in a sense that there’s a lot of players,” Leimel said. “Is it robust for those of us in it? Yeah.”

MedMen’s dispensary storefront at Ashkenazy Acquisition’s 433 Fifth Avenue

Jason Thomas, founder of the Denver-based cannabis real estate brokerage Avalon Realty Advisors, said there were “less than 10 large-cap” players, but estimated there were several hundred smaller investors with somewhere between $3 million and $5 million to deploy. Many are one-off investors working in local markets, he said.

But as more states legalize, REITs and private funds are jockeying to establish themselves in those markets. And the industry could be in for a major shift if the federal government lifts financing restrictions and institutional lenders flood the market.

The New York Times reported last month that nearly all of the 2020 Democratic presidential candidates favor legalization and have framed it as a racial justice issue, since nonwhite offenders are disproportionality imprisoned over marijuana offenses. Meanwhile, President Donald Trump has sent mixed signals on the issue but has said that he would back a bill protecting cannabis businesses with state licenses, the paper reported.

Leimel said increased competition pushes him to sharpen his business model. He argued that his firm will thrive on value-add deals, especially in cases where banks may only lend a portion of what operators need to build out a space or expand operations.

If and when “federal restrictions are lifted, we’re going to beat banks all day on that,” Leimel said.

A tighter lid

MedMen opened its first Manhattan dispensary last year — a sleek storefront at Ashkenazy Acquisition’s 433 Fifth Avenue that’s been compared to an Apple store.

Zeeshan Hyder, MedMen’s chief corporate development officer, said the posh location was very intentional. “Our retail strategy includes being a first mover in attractive consumer markets,” he told TRD by email, noting that the Fifth Avenue lease deal “is an extension of the playbook we’ve executed on in California.”

Hyder cited the regulatory and legal environment, including zoning laws, as the biggest challenge his company faces in New York.

And those invested in the cannabis industry in New York could face even more hurdles if the state legalizes recreational use. Curaleaf’s Bodner said that when it comes to selling marijuana even for medical use, “New York is the most highly regulated state in the country.”

New York’s limited number of licenses allow those companies to operate a total of 40 medical dispensaries in the state of nearly 20 million residents, Bodner noted.

Florida, by comparison, has seven times the number of dispensaries per capita, while California authorities have issued over 10,000 commercial cannabis licenses to businesses in the state and has 49 active medical licenses.

New York City could be further hampered by density issues. Of the 10 companies licensed to grow and dispense marijuana in the state in 2019, for example, none are growing in the five boroughs. The closest ones are more than an hour north of the city in Orange County, and one operation grows in Monroe County near Lake Ontario.

But while the number of dispensaries in New York remains capped, that’s led to better quality control. “We have the best product in the country,” Bodner said about the consistency of the state’s medical marijuana — including its potency.

“You look around at other states where licenses have been issued to people who perhaps don’t have the background of professional growers, and the market becomes flooded and prices implode,” she added. “Things go to the black market.”

It remains to be seen how and when New York lawmakers will address legalization for recreational use. For months, it looked as though Albany would deal with legalization in the state budget process, wrapping on April 1. But in late March, Gov. Andrew Cuomo said the prospect of getting legalization done through the budget process was unlikely, signaling that it may get picked up later this year in the legislative session.

By comparison, in the two years after Colorado legalized pot for recreational use, grow house leases in metro Denver rose two to three times higher than average warehouse rents in top cultivation submarkets, according to CBRE. And industrial buildings occupied by cannabis companies in that market saw their sales prices rise more than 17 percent between 2014 and 2017, from $98 to $115 per square foot.

Denver’s City Council did not cap dispensaries and grow operations until April 2016, which slowed what was until then strong demand for space and likely tempered rent growth, sources say.

In California, which legalized recreational marijuana just last year, the values of state-compliant properties in the Los Angeles area have risen by as much as 50 percent, Pelorus’ Leimel said. That growth has been strongest with industrial buildings in blighted desert areas in northern L.A. County, he noted. Property values increase not only due to the higher rents, but also because some cannabis companies are investing millions to accommodate large-scale growth operations.

“These are high-tech spaces,” Leimel said. “Some of them look like hospitals.”

Similar strains

The picture in Illinois is similar to New York, with most of the growth operations taking place far outside the city.

Tim McGraw, CEO of the California-based development and property management firm Canna-Hub, said that on top of the high costs in both markets, “there’s typically more bureaucracy in a big city.”

“Why would you want to deal with it?” he asked.

Still, some investors are ready to dive head first into New York.

Leimel said his fund has been closely tracking the state’s cannabis market and political environment — and he suspects others are doing the same.

If New York legalizes recreational use, many think the landscape will look a lot different than it does on the West Coast. Avalon’s Thomas said the volume of licensing will play a big part in how real estate is impacted.

“A state that has a shallow pool of licenses that will likely go to the most qualified applicants is not going to perpetuate a massive green rush for properties,” he noted, “because maybe we’re talking about a dozen stores and the same amount of cultivation locations.”

Brian Staffa, founder of the New Jersey cannabis consulting firm BSC Group, said East Coast states have kept a tighter cap on licenses overall.

How and where a state distributes its licenses is also important, he added. A state like New York would be wise to allow more cultivation licenses in rural areas and more retail locations in the city, Staffa said. That could revitalize areas with obsolete and disused industrial space.

But he cautioned that there may be just a few winners in New York real estate when all is said and done. Staffa said it’s important that developers and property owners carefully analyze demand before building too big.

“Mistake No. 1 is misreading the potential market to drive project size,” he said, noting that some developers in legal states “have built out at such a scale in markets that couldn’t support it and they just bled and bled.”

—Additional reporting by Eddie Small in New York and Joe Ward in Chicago

Dick Wolf and the Hope Ranch home (Credit: Getty Images)

For his latest, production, “Law & Order’s” Dick Wolf didn’t create a new spinoff. He bought a new mansion outside Santa Barbara.

The celebrated television producer paid $14.8 million for a spec home in Hope Ranch for his wife, Noelle Lippman, according to Yolanda’s Little Black Book. The two are reportedly in divorce proceedings.

The home, built on 2.3 acres, was completed in 2017 and had initially been asking $17.5 million. The 11,200-square-foot home is in a modern style with Spanish influences. The grounds include a 75-foot-long backyard pool and a cactus garden.

Hope Ranch is an unincorporated community west of Santa Barbara, popular with equestrians for its more than two dozen miles of riding trails.

The area saw a surge in activity last year after Montecito was hit by mudslides caused by the Thomas Fire. The median sales price had jumped 21 percent year-over-year to $3.4 million by mid-2018.

Hope Ranch seems to be having a moment, but it’s unlikely to unseat Montecito as Santa Barbara County’s premier neighborhood. Both the mudslides and the Skirball Fire of late 2017 slowed the market there, but it recovered quickly.

Wolf himself lives in Montecito. [Yolanda] — Dennis Lynch

Debbie Reynolds and her former dance studio (Credit: Flickr and Google Maps)

The North Hollywood property that used to house Debbie Reynolds’ dance studio is on its way out.

Investor Alan Kleinman filed plans for a 119-unit mixed-use project on the nearly 1-acre site at 6514 N. Lankershim Boulevard, records show. The complex would include 4,800 square feet of ground-floor retail space.

Kleinman purchased the property for $6.1 million in the fall of 2017, one day before it was set to go to auction as part of a larger estate sale of Reynolds’ assets.

Reynolds died at the age of 84 in December 2016, just a day after her daughter, the actress, writer and “Star Wars” star, Carrie Fisher. Reynolds was a Hollywood staple whose career spanned some 70 years. She starred in films, television, and on stage, and was nominated for an Academy Award for Best Actress for her portrayal of the titular character in 1964’s “The Unsinkable Molly Brown.”

Reynolds was also a dancer and cabaret performer, and danced with Gene Kelly in “Singin’ in the Rain.”

She opened the Debbie Reynolds Dance Studio in 1979, and after an unsuccessful effort to landmark it, it closed in November and was torn down in February. The studio has since moved to Burbank.
Kleinman’s multifamily project isn’t his first in the Valley. He started work on a 170-unit project in Van Nuys in 2017.

Kleinman is taking advantage of the property’s eligibility under the city’s Transit Oriented Communities program for density bonuses and other incentives. The program provides those incentives for developers who build affordable units near transit. The program has proven popular for infill developments in particular.

A rendering of the project (Credit: Instagram)

Struggling Rust Belt cities are working to turn around their fortunes by redeveloping vacant industrial plants — and are using a familiar, if risky, financing mechanism to jump start the process.

Post-industrial cities in the Midwest and beyond are turning to local-government bonds to fund ambitious redevelopment projects, according to Bloomberg. The project could help the cities move beyond their manufacturing heydays, though the bond issuances and the bet on real estate could be a gamble.

In Fort Wayne, Indiana, city officials are issuing $45 million in bonds to help turn a former GE plant into a 30-acre mixed-use complex featuring apartments, retail and office space. Over 20 years, the $440 million development is expected to bring in more than $100 million to local coffers.

The Fort Wayne project and others like it seeks to create the trendy live-work-play developments that have come to bigger cities. The hope is the new development can lure young, educated workers who may be priced out of cities like San Francisco and New York, developers told Bloomberg.

The strategy has proved successful in some cases.

In Allentown, Pennsylvania, the city used tax-exempt bonds to finance a retail, dining and office complex. After the exodus of Bethlehem Steel and Mack Trucks, the development has helped lure some big employers to the downtown, including Bank of America.

The Fort Wayne project has already seen a number of employers, including Indiana University, announce plans to move into the development. [Bloomberg] — Joe Ward

James McClain

It’s been a whirlwind year for James McClain, the former Compass employee and — formerly — hidden force behind celebrity real estate gossip blog, Yolanda’s Little Black Book.

Less than a year after being outed as “Yolanda,” McClain has struck a deal with Variety’s parent company, Penske Media Corporation, to launch a new real estate news venture.

McClain said his decision to sell the Los Angeles-focused blog was fueled by what he called its growing popularity, and his need for additional staffing.

“It was getting really difficult to run it independently because of all the time it takes to research, write a story, and edit,” McClain said in an interview with The Real Deal. “It just became this beautiful monster where I’m trying to run this blog all on my own and it wasn’t a feasible business model.”

McClain kept his identity a secret since creating the blog in 2016, choosing to hide behind the name “Yolanda Yakketyyak and the “real estate yenta.”

But the mystery was solved last June, when an investigation by the Los Angeles Times revealed McClain, a former Compass finance manager who had been laid off, created the site.

At the time of the unmasking, Compass released a statement saying it would “prosecute this individual to the fullest extent of the law.” The firm believed that McClain may have used company resources to extract his real estate scoops. It’s unclear whether Compass ever attempted to take such a step, and a representative for the brokerage declined to comment.

McClain declined to comment on the terms of the deal. He said it was possible coverage could stretch beyond L.A. and into other major cities.

Since launching in early 2016, Yolanda had been an enigma to the real estate industry. The blog often publishes high-profile — and high-priced — residential deals before they closed, revealing personal information about buyers and sellers in addition to private financing terms.

“I had no idea how to look at property records before but it was something that I learned how to do, and it just kind of happened naturally,” McClain said. “I was the only person crazy enough to spend so much time on it and was fascinated by it.”

Variety has been beefing up its celebrity news content for several years. In 2014, the entertainment trade publication hired Mark David, who had founded “Real Estalker,” to serve as its real estate editor.

In a final blog post early Monday morning explaining the departure, McClain explained his decision. Staying in character, he said “Yolanda” had been hired to join Variety as an editor-at-large and to co-found Dirt.com, a new standalone media brand. “Life is great,” it went on to say. “And we only get one shot at it, kids.”

Los Angeles (Credit: iStock)

Los Angeles and Orange County homeowners collectively have $760 billion in real estate equity, tops in the nation.

With median-priced homes remaining out of reach.

for average-earning residents in the U.S., residents in those two counties that can afford high-priced homes collectively own $760 billion in “tappable equity,” according to a study by real estate analyst Black Knight, as reported by Curbed.

That $750 billion number comes despite a $40-billion drop since last summer, according to the report.

L.A.’s equity dwarfs the $395-billion mark in New York City, and is twice that of the entire state of Texas. The real estate values were determined by calculating the amount of funds that can be accessed by selling, taking out loans or making a cash-out refinance to replace mortgages with larger loans.

Median home prices are at near record-highs even as the market continues to slow. A February report showed that the average annual wage wasn’t enough to afford a median-priced home in Los Angeles County. [Curbed] — Gregory Cornfield

8942 Wilshire Boulevard, Neil Bluhm of Walton Street Capital, and 4525 Wilshire Boulevard (Credit: Wikipedia)

A Dutch investment firm has expanded its West Coast presence with a $154 million deal for two office buildings on Wilshire Boulevard.

Amsterdam-based Breevest paid $107.5 million for 8942 Wilshire Boulevard, and $46.5 million for 4525 Wilshire Boulevard, records show. The deal closed last week.

The seller was a joint venture of El Segundo-based Ocean West Capital Partners and an entity tied to Chicago-based Walton Street Capital.

Breevast confirmed the sale in a release Monday but did not provide the sellers.

The company secured separate debt financing deals for the two properties. Aareal Capital Corporation provided $64 million for the 8942 Wilshire property, an 83,000-square-foot building leased entirely by Paradigm Talent Agency. Ocean West and Walton bought the property for $40.5 million in 2014.

Zions Bancorporation provided a $24.4 million acquisition loan for 4525 Wilshire Boulevard. The 76,000-square-foot office building was 90 percent leased when Ocean West and Walton Street purchased it in 2016 for $22.7 million.

Breevast’s portfolio is heavy on European properties, but it’s made some moves in the Western U.S. The firm has developed in Rancho Cucamonga in the San Gabriel Mountains, San Francisco and Reno, Nevada over the last two decades.

It sold a spec office development in San Francisco in January to Kilroy Realty Corporation for $146 million, according to the The Registry, a real estate news site. That property is leased to cloud storage company Dropbox. The firm also developed a 16,000-square-foot spec home in Beverly Hills in 2013 that it sold during construction.

Bruce Karsh and 21 Oakmont Drive (Credit: Zillow)

Bruce Karsh, billionaire co-founder of Oaktree Capital Management, has sold his Brentwood estate, The Real Deal has learned.

Karsh unloaded the mansion for $33.5 million, about $4 million less than what he paid for it in 2014 when he acquired it from fellow co-founder Howard Marks. The two started the private equity firm that specializes in distressed debt in 1995. Last month, Brookfield Asset Management paid $4.7 billion for a 62 percent stake in Los Angeles-based Oaktree Capital.

Karsh sold the 2-acre, 8,600-square-foot home through an LLC, called H25A, deed records show. The buying entity was masked behind an LLC, 12 Oak Properties LLC, which is controlled by an attorney.

Located on Oakmont Drive, the Georgian Regency-style residence includes six bedrooms and 10 bathrooms. Amenities include an art studio, racquetball court, oval swimming pool and spa. There’s also a guest house on site.

Karsh first listed the home for sale in June 2018 for $42 million. He then re-listed it at $37.5 million in late September, records show. The was designed interior decorator Michael Smith, who was hired by the Obamas for the White House’s residential quarters in 2008.

Linda May of Hilton & Hyland had the listing.

In May 2018, Karsh traded up, buying a home in Holmby Hills for $69 million. The Howard Backen-designed residence was owned by the late movie studio executive, Brad Grey. Marks, meanwhile, has a hefty real estate portfolio of his own.

Bruce Isackson and the UCLA campus

Two real estate executives pleaded guilty Monday to charges in the college admissions scandal, and now face prison time.  Ten other parents charged in the case, including actress Felicity Huffman, also admitted to various charges in which federal authorities alleged they paid bribes to secure their children acceptance into elite universities, including Stanford, Georgetown and Yale.

Bruce Isackson, a real estate developer based in the Bay Area — and his wife, Davina Isackson — pleaded guilty to one felony count of conspiracy to commit mail fraud and honest-services mail fraud, according to the Wall Street Journal. Isackson, president of WP Investments, also pleaded to money laundering and tax fraud. Both agreed to become cooperating witnesses, according to the report.

They allegedly paid $600,000 to ensure their two children enrollment at the University of California, Los Angeles and the University of Southern California. They could face anywhere between 27 to 46 months in prison for their roles in the scheme.

Irvine-based Crown Realty CEO Robert Flaxman pleaded to conspiracy to commit mail fraud and honest services mail fraud. He faces up to 14 months in prison.

A total of 33 people were charged in the wide-reaching investigation, dubbed “Operation Varsity Blues.” Miami-based real estate developer Robert Zangrillo is among those still facing charges. It’s possible there will be more guilty pleas later this month, according to the Journal. Actress Lori Loughlin also still faces charges. [WSJ] — Natalie Hoberman

10.6 percent of U.S. home sales in the fourth quarter of 2018 were flips (Credit: iStock)

During the housing boom that preceded the 2008 financial crisis, house flipping became symbol of the runaway speculation that led to the economy’s downfall.

Over a decade later, flips makes up nearly as large a share of home sales as they did back in 2006, according to housing analytics firm CoreLogic. But the market has changed in ways that make this less of a concern than in the past, the Wall Street Journal reported.

“Flippers are very different today than they were in the past,” CoreLogic deputy chief economist Ralph McLaughlin told the Journal. “Even though we see hype and hysteria in popular culture, this isn’t necessarily something to worry about.”

CoreLogic found that 10.6 percent of U.S. home sales in the fourth quarter of 2018 were flips, having been owned for less than two years, close to the 2006 house flip rate of 11.3 percent.

At the same time, the median profit for flips today is more than twice what it was twelve years ago, which gives sellers more of a cushion in case of a market downturn. Accounting for overall home price increases, flippers made nearly 23 profit in profit on flips in the fourth quarter. In 2006, that number was just 6 percent.

The market has also become more institutionalized, with corporate sellers making up more than 40 percent of flippers today, the highest rate on record. Companies like Opendoor and units of Zillow and Redfin are all getting into the house flipping game, helping to reduce hassle for sellers.

Nevertheless, the time pressure involved in house flipping means flippers are still more vulnerable than long-term buyers in the event of a downturn, and as more players have begun to enter the space, business is getting more difficult than it used to.

The most popular markets for house flipping today include Birmingham, Alabama and Memphis, Tennessee. [WSJ] — Kevin Sun

Jim Parsons (Credit: Getty Images)

“The Big Bang Theory” star Jim Parsons has exited Los Feliz with a bit of a whimper.

The Emmy-winning actor sold his home in the neighborhood for a hair under $7 million, $2 million less than what he first listed it for in July, according to the Los Angeles Times.

In 2014, Parsons paid $6.3 million for the pad from “Twilight” star Robert Pattinson. Celebrities have flocked to the increasingly trendy neighborhood, where homes are selling well.

Jim Parsons’ now-former home in Los Feliz

Actress and activist Angelina Jolie paid $24.5 million for the longtime home of legendary director Cecil B. DeMille, recording the highest residential sale in Los Feliz in 2017. Actress Connie Britten put down roots there in 2017.

A smaller home owned by DeMille next to Jolie’s spread sold for just under asking price in December.

Parson’s Spanish Colonial-style home was built in 1922, and has antique black-and-white floor tiling, original wood beams and arched doorways. The 4,000-square-foot home has three bedrooms, 3.5 baths, and a maid’s room. It was designed by Stiles O. Clements, the architect of the El Capitan Theater, according to Variety.

The backyard slopes down to a lagoon-style swimming pool with fountains and waterfalls. The property totals 1.5 acres.

Parsons and Pattinson are the latest in a succession of celebrities that have owned the home. Los Angeles Lakers great Kareem Abdul-Jabbar, actor Tim Curry, and Oscar-winning cinematographer Robert Richardson each owned the home at one point. [LAT] — Dennis Lynch 

Mobile home owners may be finding themselves stuck.

Private equity firms like the Carlyle Group, TPG and Blackstone are increasingly buying up mobile home parks across the country, raising rents and pushing tenants out of their properties, according to the British comedian John Oliver.

The host of “Last Week Tonight with John Oliver” put a spotlight on the asset class in Sunday’s episode of the HBO show, taking on the institutional investors that have purchased likely more than 100,000 home sites in the U.S., he said.

Roughly 20 million Americans live in mobile home parks, which comes out to 1 in every 18 people. Most mobile homeowners own their houses and rent the land underneath them, which is “financially catastrophic,” Oliver said.

When a mobile home park owner sells the land to a major developer or private equity firm, the buyer will then typically raise rents, pushing people out of their properties. Because it can cost tens of thousands of dollars to move the homes, jacking up the rents can lead people to walk away from their mobile homes, Oliver said.

Sam Zell’s Equity LifeStyle Properties and Carlyle have been buying up such properties in South Florida, where developers are already constrained by land. In December, Equity LifeStyle paid nearly $50 million, or about $53,000 per lot, mobile home park near Riviera Beach.

Unlike traditional houses, mobile homes depreciate in value. Oliver shared a clip where finance host Dave Ramsay compares buying a mobile home to buying a car. “Cars go down in value. Mobile homes go down in value. It’s a car you sleep in,” Ramsey said.

While the homes are affordable, interest rates can exceed 15 percent and buyers are often faced with predatory practices and exorbitant fees, Oliver said.

“Mobile homes may be a terrible investment for people buying them, but they’ve been an incredible investment for Warren Buffett,” he said, adding that the Buffett-owned Clayton Homes, the largest manufacturer of mobile homes, generated pre-tax earnings of $911 million last year.

One solution for mobile homeowners would be to band together and buy their parks themselves, the talk show host said. Many states lack legislation giving the homeowners the right of first refusal if a large investment firm or developer were to make an offer on a property.