The Florida Keys, with their strict limits on growth, have long been a property rights battleground.

But while Keys governments have thus far mostly had their way in the courts against disgruntled property owners, a recent U.S. Supreme Court ruling has the potential to be a gamechanger in the high-stakes disputes over the future of Florida’s southernmost string of islands.

“You will see more cases. Many more cases,” said Key Largo attorney Andrew Tobin, who has served as counsel or co-counsel in several high-profile Keys property-takings cases in recent years.

In the June ruling on Knick v. Township of Scott, Pennsylvania, a divided Supreme Court overturned a 34-year-old precedent that had required property owners who are suing local governments for compensation under the Fifth Amendment takings clause to do so first in state court. That takings clause states that private property cannot be taken for public use without just compensation. Landowners who are forbidden from developing their properties (due to, for example, environmental preservation issues) often sue to dispute the compensation determined by local government. At times, part of the compensation is provided by easing the property owner’s path to development on an alternative property.

The ruling comes as the Keys approach what could be a critical juncture. Under the complex growth laws enforced by Keys governments and overseen by the state of Florida, residential home development is currently slated to be capped out in 2023, meaning that further permits could not be issued. As such, Tobin isn’t the only land-use attorney eager for the opportunity to have federal judges take a new look at issues upon which they’ve struggled to gain traction in the state courts for decades.

“By and large, the idea is that you are going to get a little more attention in federal court, because there are less cases, and you are going to get a judge who is not beholden to the local taxpayers,” said Mark Miller, senior attorney for the Pacific Legal Foundation, a nonprofit property rights advocacy group that has litigated Keys takings cases.

The buildout backstory

Driving the fight are development regulations implemented by Monroe County and Keys cities — but largely at the state’s behest. Since 1974, the Keys have been an “Area of Critical State Concern,” a designation put in place by the Florida Legislature in order to protect the archipelago’s natural resources and ensure that the island chain can be efficiently evacuated ahead of hurricanes. The designation empowers the state with what is essentially veto power over the growth-related decisions of Keys governments. Most notably, the state uses its powers under the Critical Concern Act to determine how many new homes the Keys can support while still being able to safely evacuate all residents in the 126 miles from Key West to the mainland in 24 hours or less. 

The state updates the number of new homes, known colloquially as “buildout,” once a decade. It’s based on the U.S. Census, as well as evacuation modeling done by the Department of Economic Opportunity (DEO). The modeling considers a variety of factors, including, critically, highway capacity. When the evacuation model was updated last, in 2012, the DEO allocated 3,550 residential development rights to the Keys to be used through 2023.

It’s Monroe County and Keys municipalities that actually distribute those building rights, however. They do so under growth ordinances that set annual limits for the number of permits they will award. When the number of permit applicants exceeds the number of available allocations, building rights are distributed under a competitive points process designed to tilt development toward less environmentally sensitive lands.

The 3,550 buildout figure has left Keys governments in a bind, namely because at the time of the last modeling, there were nearly 11,400 undeveloped privately owned parcels Keys-wide. As such, in 2023, owners of more than 7,800 properties could theoretically be stuck with land that had been rendered unbuildable, creating a potential takings liability of $317.7 million, according to a 2013 Monroe County analysis. The county is currently working on an updated analysis, Christine Hurley, assistant county administrator, said.

Keys governments aren’t ignoring these concerns. Just since July 2016, for example, Monroe, aided by the state, has spent or encumbered $14 million for land acquisition, according to a county analysis. The Monroe County’s Rate of Growth Ordinance (ROGO) and other local governmental systems also have mechanisms that encourage property owners to donate sensitive lands to local governments in exchange for easing the path to winning a development allocation on another property. 

In addition, the county government is currently working on an ordinance to delay buildout until 2026 by halving the number of market rate allocations it awards annually. In the meantime, explained Hurley, the hope is that when DEO updates the hurricane model in 2022, the state will raise the buildout number to account for increasing second home ownership in the Keys, as well as other potential factors. 

The legal precedents

Strict development rules in the Keys, especially for environmentally sensitive parcels, have led to a series of takings cases in recent decades. Rulings, though, have mostly favored the state.

In one important 2013 decision, Florida’s 3rd District Court of Appeals (DCA) ruled in favor of the city of Marathon and the state of Florida in a case brought by Gordon and Molly Beyer. The couple had purchased a nine-acre offshore island in 1970, which in 1996 was designated as a bird rookery where development was prohibited. When the Beyers petitioned newly incorporated Marathon for takings compensation, the city offered them not cash, but 16 points in its ROGO system, which it valued at $150,000. The DCA ruled that those points met the reasonable economic expectations for the island.

Also in 2013, the 3rd DCA sided against plaintiffs in the Collins v. Monroe County takings case. In that case, the court reasoned that the property owners had not taken meaningful steps to develop their properties before stricter regulations were put in place, sometimes despite having owned those properties for decades before the onset of the tougher rules. To support the ruling, the DCA cited precedent from another signature Keys takings case opinion — 2003’s Monroe County v. Ambrose.

“It would be unconscionable to allow the landowners to ignore evolving and existing land-use regulations under circumstances when they have not taken any steps in furtherance of developing their land,” the state appellate court opined in Ambrose.

Plaintiffs did win one prominent recent Keys takings case: Galleon Bay v. Monroe County. In 2012, after more than a decade of litigation, the 3rd DCA concluded that because the No Name Key property owners had been approved for 14 platted residential home sites shortly before the imposition of ROGO rules that curtailed development, they could reasonably expect to be allowed to continue with the development process.

Those cases, though, were all litigated in the Florida court system, which until now has been the only option for takings case plaintiffs. But in the aftermath of the Supreme Court’s Knick v. Township ruling, the playing field has been expanded to include federal courts. 

If that concerns Monroe County Attorney Bob Shillinger, he isn’t letting on.

“It doesn’t impact in any substantive way how we would defend these cases,” he said.

In fact, Shillinger added, plaintiffs who file a federal takings case against the county could see the move backfire due to the 11th Amendment, which forbids individuals from suing a state in the federal courts. Monroe County has historically brought the Florida government into takings cases as a defendant. 

“They run the risk of the court finding that because these are state-imposed regulations, the state is an indispensable party, and the case would be subject to dismissal,” Shillinger said.

Key Largo’s Tobin, though, dismissed that notion as “absolutely false.”

“I doubt whether or not I will ever file another takings case in state court,” he said. “The state courts are required to follow the U.S. Supreme Court pronouncements on takings issues. There is no reason to go to state court.”

One issue that plaintiffs’ attorneys are eager to take before a federal court is ROGO point values.

In the Beyers case, the 3rd DCA accepted Marathon’s position that the points have financial worth and that a taking can be avoided by rendering them to a property owner. Presently, under a 2018 resolution, Monroe County values each ROGO point at $30,218.

But the Pacific Legal Foundation’s Miller said he’s not ready to acknowledge that the points have value. Miller also questioned the basis for the 3rd DCA’s ruling in the Collins case.

“There’s a perception that if you don’t develop, you’ve lost your ability to develop forever more. That’s fairly preposterous,” he said.

An issue that does concern Shillinger (and other local Keys officials) is the prospect of reaching buildout for residential development. If buildout is reached, the situation, from a legal standpoint, will change, he said.

“The landscape will shift some, but it doesn’t shift entirely,” he said. “You have to look at what was a reasonable expectation for the property as well as the property owner’s efforts.”

It was drizzling when four development pros recently wedged into a half-moon-shaped banquette at Pastis in the Meatpacking District.

Amid the din of an animated lunch crowd, The Real Deal sat with Starwood’s Barry Sternlicht, HFZ Capital’s Ziel Feldman and Aurora Capital’s Bobby Cayre and Jared Epstein, listening in during their unscripted conversation.

Keith McNally’s iconic French bistro — a trendy eatery favored by celebrities and New York foodies — reopened after a five-year hiatus in June at Gansevoort Row, a 150,000-square-foot space developed by Aurora in partnership with William Gottlieb Real Estate. In 2016, a community group sued to stop the project, but a state appellate court sided with the developers in 2018.

In 2012, the developers bought 9 Ninth (Pastis’ longtime home), striking a $250 million deal with Restoration Hardware to open a showroom at the site. 

Today, Pastis is paying below-market rent, at roughly $125 per foot blended, Epstein said.

“They were key to activating Gansevoort Street,” he said. “At the time they took the lease, the neighborhood was under major construction. Fourteenth Street was a ghost town.”

And Aurora and William Gottlieb are currently working on the Solar Carve, a 10-story office building at 40 Tenth, where Sternlicht’s Starwood leased a full floor this past March.

Asked if he got a good deal, the Starwood chief replied: “No, but it’s a beautiful building.”

“I gave him a verbal favored-nations clause!” exclaimed Cayre, of his agreement to give Starwood Aurora’s best lease terms. “My word means something.”

Over beet salad, salmon tartare and tuna crudo, the conversation hit on the politics, online retail, doughnut vendors and more.

On the Trump administration and the relationship between developers and Mayor Bill de Blasio:

Sternlicht: I give [Trump] credit for one thing: He stopped vilifying business.

Epstein: I think people are more reactive to his comments, not his actual policies.

Feldman: As developers, thank god not myself, [de Blasio] has been actually very good because he’s a mayor who’s very approachable.

Cayre (on de Blasio and the city in general): If you look at property taxes, they’re insane. I think they’re killing the golden goose. At the end of the day there’s a day of reckoning, and we’re seeing it now. Look at retailers going bankrupt left and right. Barneys filed today.

On the ubiquity of online retail and the consolidation of tech companies:

Epstein: Does breaking up a company like Google or Facebook or Amazon have a net negative impact on real estate?

Sternlicht: It might actually be better. Long term, it may not be the end of the world. But short term, it could cause the markets to pause.

Epstein: Sounds like an opportunity.

Feldman: But Amazon puts companies out of business. … On the other hand, it’s almost like a tax refund to the consumer, who’s spending a lot less money to buy the same goods.

Sternlicht: For now, until they wipe out all of retail.

Epstein: So you actually did say that?

Sternlicht: I did. Trump is right. [While] Amazon used the post office to ship their stuff, [it also got] billions and billions of dollars [in tax breaks] while it was an “emerging company.” Like China’s an emerging market? China’s not emerging. And Amazon is not an emerging company. You don’t need to subsidize their growth.

Feldman: But in the short term, the consumer is the beneficiary.

Cayre: Barry, we need you to go to Hermès!

Epstein: Well, you can’t buy Hermès on Amazon. There are still a few companies that are smart enough not to be vendors.

Cayre: Only the ultra-high end. We’re talking about Chanel et al.

Sternlicht: None of the Lauder brands are on Amazon. But the ones that aren’t on there are figuring out another online strategy. [Sternlicht is on the board of Estée Lauder.]

Cayre: We’re seeing a lot of online retailers have a brick-and-mortar presence, and they’re expanding those more and more. I don’t know if that’s enough to take up all the vacant retail space, but … I think ultimately [what] comes back in some sort of fashion is high-street retail on the best streets in the best cities. I don’t know where the rents shake out, though, to be honest with you. That’s the problem.

Feldman: They need it, but at what price?

On the state of physical retail and the broader NYC market:

Cayre: When I’m negotiating with retailers today, I’m the first guy to sit there and tell them that it’s a terrible market and I think you should be taking advantage of me.

Sternlicht: Interestingly, sales are up 2 percent this year in the malls. Where we’re really getting hurt is the serial bankruptcy of the retailer. We’re able to re-let the space … but it requires a lot of money. It’s really the capital cost of turning over these tenants that we didn’t think about. Sears just gave back one of our stores this morning.

Epstein: What about the proliferation of illegal street vendors on every high-traffic retail thoroughfare in Manhattan? This guy’s selling coffee inside Starbucks and outside there are five guys illegally selling coffee and doughnuts.

Sternlicht: There’s a bigger issue in the city, which is the union backbone makes everything incredibly expensive. New York has a cost-of-living issue; people love the city, but they can’t afford to live here. When you’re taxed at 55 percent of your income, you’re at a tipping point.

Feldman: We’re definitely losing [some buyers], but many more are coming here not [just] to live but to spend money, to educate their kids, to buy apartments and to invest lots of money. Look at New York in relation to the rest of the world from a capital flight and safety perspective.

Epstein (agreeing): [New York is like the Knicks.] The Knicks’ James Dolan — what does he have to do? He doesn’t need to bring on the best talent. He doesn’t need to do much, because the Knicks sell out every single night.

The five priciest home listings to hit the market in Los Angeles County over the last week total $133 million and are all on the Westside.

They include three new construction homes, including the top listing: tech exec Farzin Aghaipour’s 17,000-square-foot Bird Streets spec home. The total is just above last week’s $118 million from a week ago.

The data and information was from the Multiple Listings Service and Redfin from Oct. 1-8.

9268 Robin Drive | Bird Streets | $42.5M
The most expensive home to hit the market this week is this spec mansion built by tech exec and developer Farzin Aghaipour. Aghaipour bought the property in 2013 for $5.6 million and commissioned XTEN Architecture to design a 17,000-square-foot home in the modern contemporary style popular for spec mansions. There are six bedrooms and eight bathrooms as well as a gym, infinity pool, and wine cellar. The interiors are fashioned with “stones that were curated across the globe,” according to a listing. Branden Williams with Hilton & Hyland and Kurt Rappaport of Westside Estate Agency have the listing.

1201 Laurel Way | Beverly Hills | $26M
This 2014-built mansion sits on a stepped hilltop with views over the city. It totals 11,200 square feet and includes a home theater, guest house, wine cellar, and a putting green. And according to the listing, there is a “secret Zen garden” on the property. It has six bedrooms and nine bathrooms. It last sold in late 2016 for $33 million and has been on and off the market since. Sally Forster Jones with Compass and Jonathan Nash with Hilton & Hyland have the listing.

12745 Hanover Street | Brentwood | $24M
The oldest home to make the top five, this 9,400-square-foot home was built a decade ago in a Spanish-influenced style. Highlights include a full-size tennis court, a guesthouse, and a pool house with its own fireplace. There’s also an outdoor kitchen area. Mary Lu Tuthill with Coldwell Banker has the listing.

1335 Carla Lane | Beverly Hills | $22M
L.A. architect Paul McClean designed this 9,200-square-foot home in Trousdale Estates. Like many of McClean’s homes and other spec mansions, the home has moveable glass walls that open the interiors to the backyard. It features a 10-car garage and two pools — one in the backyard and another an open-air space in the center of the home. Dustin Nicholas with Nicholas Property Group has the listing.

1105 Rivas Canyon Road | Pacific Palisades | $19M
This new construction home sits on just under two acres near Will Rogers State Historic Park. The eight-bed, 13-bathroom home has tin and hand-coffered wood ceilings as well as limestone and hardwood flooring. The grounds include a hanging garden and a detached guesthouse.

Since returning in February to lead the company he founded 14 years ago, Rich Barton is muscling Zillow into the crowded instant-homebuying market, setting the listings giant on the course for a major overhaul.

The iBuying craze offers sellers a chance to quickly offload their property to Zillow, giving sellers fast access to cash to buy other homes. It’s a business with extremely thin margins, and requires the company to set aside massive amounts of money to make the purchases. The initiative has caused Zillow’s losses to widen, and its stock has also taken a hit.

But Barton feels the move is essential. He was on the board at Netflix when the company made the monumental decision to dive into video streaming even though it had a thriving DVD rental business, and again when it decided to bet the farm on its own original content.

“Netflix was relying on the Saudis for the oil,” Barton said in an interview with The Information. “It was pretty compelling. If we don’t learn how to drill our own oil wells, we’re going to get cut off.”

Barton sees iBuying, pioneered by SoftBank-backed startup Opendoor, to be similarly significant for his business.

It was “an existential threat because if it works and we don’t do it, we get displaced as the marketplace, theoretically,” he told the publication.

Since last year, Barton has shaken up Zillow’s management team, and raised $1.1 billion through a debt offering to build up its iBuying game as it has shifted its business strategy.

The iBuying bet, called Zillow Offers, has come at a price, however.

Zillow said its 2019 second-quarter losses widened to roughly $72 million, compared to just $3 million last year. The Homes segment accounted for most of those losses — some $71.1 million, up from $10.1 million a year ago.

Meanwhile, Zillow’s bet boosted its second-quarter revenues 84 percent year-over-year to $599.6 million, putting it on track to hit an annualized run rate of $1 billion in revenue.

Revenue for Zillow Offers — which debuted last year — totaled $248.9 million for the quarter. Meanwhile, revenues from the mortgage division rose 40 percent to $26.9 million.

“We’re in the early stages of a bold expansion of our company that opens up exciting opportunities for our customers, partners, shareholders and employees,” Barton said in August. Zillow Offers debuted in Sacramento Tuesday, with plans to jump into Los Angeles, Cincinnati, Jacksonville, Oklahoma City, Tampa and Tucson by mid-2020.

Until now, Zillow has made the bulk of its money by selling ads to agents via Premier Agent. Last year, as revenue growth from Premier Agent started to wane, the company bet heavily on iBuying and mortgages — though investors haven’t been completely swayed by the pivot as is evidenced by its stock.

On Tuesday, Zillow’s stock closed at $28.63 a share, down about 44% from its year-high of $50.99 a share on July 10.

The iBuying space includes the likes of Opendoor, virtual brokerage eXp Realty, Redfin, Realogy and Keller Williams.

Competitors offer variations of the i-buying strategy.

Through Express Offers, eXp agents submit properties “to a number of institutional buyers” initially in California, and expanding to 10 more states by the end of 2019, as The Real Deal reported earlier this month.

Under Barton, Zillow has upped activity in iBuying, which began under former CEO Spencer Rascoff, who Barton replaced in February as part of a chain of several shake-ups.

A year ago, Zillow promoted Susan Daimler, who was general manager at Zillow’s New York-based subsidiary StreetEasy, to a newly created national role running Premier Agent. Zillow’s New York operation — which includes StreetEasy, Naked Apartments and Out East — is now being led by Matt Daimler, Susan’s husband.

Barton told the Information that Zillow’s future is built on trading homes where there are razor-thin profit margins. The article says that Zillow charges sellers fees that currently average about 7.5% of the price the company pays for their homes. The upside for Zillow, though, is that the total addressable market, or TAM, for home purchases is much bigger than the advertising market.

Home purchases are “a mindbogglingly larger TAM—$1.8 trillion of secondary market transactions happen a year in the U.S. of homes.” he told the Information. “That’s not rentals. That’s not title, that’s not mortgage. That’s just the homes.”

California has become the third state in the nation to pass rent control legislation.

On Tuesday afternoon, Gov. Gavin Newsom signed into law the sweeping measure, which aims to strike at the heart of California’s housing crisis.

Assembly Bill 1482 sets rent caps and implements “just cause” eviction rules meant to combat rent gouging and landlords who force tenants to vacate in order to raise the rent on a unit.

The governor signed the measure — dubbed the “Tenant Protection Act of 2019” — into law at a ceremony in Oakland. California now joins New York state, which passed sweeping rent reform measures in June; and Oregon, the first to adopt statewide rent control legislation.

Newsom told the crowd assembled for the signing at a senior center in Oakland that the rent control measure was about “protection.” But he said more work is needed, including “preserving existing housing stock against gentrification.” And he added, “Production. We need to build more damn housing.”

Under AB 1482, landlords must limit annual rent increases on apartment buildings that are 15 years or older to no more than 5 percent plus annual inflation. Inflation is typically between 1.5 percent and 3.5 percent. In Los Angeles County, rent prices jumped to an average of $2,320 per month amid growing demand, according to a Marcus & Millichap report over the summer.

Landlords will now also be required to pay relocation assistance to tenants evicted from regulated units unless they meet certain “just cause” criteria, including a breach of a lease or failure to pay rent.

The rent cap and “just cause” rules apply to those apartments that are not already subject to local rent ordinances, such as those in Los Angeles. The new rules take effect Jan. 1, and will expire in 2030, but state lawmakers are expected to extend the measure, industry pros said.

The California Apartment Association — the nation’s largest statewide group representing landlords — successfully lobbied to have AB 1482 remain in effect past its initially planned three years, arguing that a longer term would create more certainty for investors.

While the CAA did not officially endorse AB 1482, it dropped its opposition to the bill by the time the legislature had approved it last month, after having secured a longer sunset period and a handful of other concessions.

Mike Nemeth, a spokesperson for the group, said while the organization didn’t like the bill, it was able to “get it to a point where our members can live with it.”

To back its risky instant home-buying program, Zillow Group opened two credit lines with Credit Suisse and Citibank over the past 14 months totaling $1 billion.

The revolving debt pushed the Seattle-based company’s borrowing to a record level as its earnings fell nearly 75 percent in the first half of 2019 to just above $26 million. Zillow then doubled down last month, when its executives announced plans to sell $1.1 billion in corporate bonds to help fund its iBuying operations.

The online real estate firm’s rising leverage is a big flag to many — especially with signs of a looming recession that could hammer the U.S. home-buying market way before the outstanding debt’s paid off.

Analysts say if a downturn hits the housing market in the next year or so, Zillow takes a double hit: Its advertising would suffer from a reduction in home sales, and the company would take a loss on the value of the unsold homes it’s stuck with.

“This time around, compared to the last cycle, Zillow has more risk from the amount of leverage on its balance sheet,” said Justin Patterson, an analyst at Raymond James who covers the company.

Others in the real estate industry and broader corporate America have also voiced concerns.

U.S. corporate debt rose to $9.8 trillion in the fourth quarter of 2018, roughly 47 percent of the national GDP, according to the Federal Reserve. Low interest rates have made cheap money readily available to large public companies, and as the economic cycle wears on, everyone from the Federal Reserve to Wall Street analysts is sounding the alarm that such heavy credit loads are ticking time bombs in the face of a downturn.

All in all, however, the U.S. real estate industry is far less saddled with debt than it was 10 years ago, when many companies got crushed under their leverage when things turned south.

But many firms — including Zillow, SL Green Realty and Mack-Cali Realty — still rely heavily on debt either to fuel new growth or as a holdover from the last cycle. And there are a number of investment-grade companies with credit ratings on the edge of junk status that risk becoming so-called fallen angels if their ratings drop.

Morris DeFeo, chair of the corporate department at the New York-based law firm Herrick Feinstein, said lenders are competing so vigorously to win borrowers’ business in 2019 that it’s hard to remain disciplined when it comes to leverage.

“There’s almost like a FOMO moment when it comes to the debt markets,” he said, referring to the anxiety some feel when they look at their friends’ Facebook and Instagram pages.

“It’s kind of hard to say ‘no’ when somebody puts a pile of money in front of you with very loose covenants and very good rates,” DeFeo added.

Credit bondage

The International Monetary Fund and other organizations have been flagging the dangers of corporate debt for more than a year now.

There’s also been a steady rise in lending from private equity firms, debt funds and other alternative players that tend to charge higher interest rates than traditional banks. Nonbanks had more than half a trillion dollars’ worth of outstanding loans to midsize companies at the end of 2017, according to estimates from Ares Management cited in the Wall Street Journal. That’s up from roughly $300 billion in 2012.

There are a variety of ways that public companies can borrow from bank and nonbank lenders, including credit facilities (similar to giant credit cards) and loans secured by company assets (similar to large mortgages taken out on properties). Many companies also turn to the corporate bond market — where some of the world’s largest firms issue more than $1 trillion a year.

To be sure, real estate plays a small role in driving U.S. corporate debt through bond sales, while the biggest issuers tend to be Fortune 500 behemoths like Ford Motor and General Electric.

Telecom giants that spend huge sums building out infrastructure, including AT&T, Verizon and Comcast, have been the biggest drivers behind this cycle’s debt. Of the roughly $1.4 trillion in new bonds last year, meanwhile, REITs issued about $25 billion, according to figures from the National Association of Real Estate Investment Trusts. That’s just slightly more than 2 percent of the total.

In the real estate world, Simon Property Group and Prologis issue the most bonds.

When it comes to overall leverage, though, SL Green and the cell phone tower REIT SBA Communications have the highest net debt-to-earnings ratios among the 30-plus real estate firms in the S&P 500, according to figures from S&P Global Market Intelligence.

Both firms’ debt levels are close to 10 times their earnings before interest, taxes, depreciation and amortization, while the rest of the S&P-listed real estate firms hover at around six times.

But Sandler O’Neill analyst Alexander Goldfarb said he didn’t see leverage as an issue for SL Green or its main competitors.

“Coming out of the credit crisis, the REITs effectively resized their balance sheets,” Goldfarb said. “Most of the companies have gotten better.”

Red lines

Other public real estate firms are dealing with debt levels that could come back to bite them as the economy loses steam. In the homebuilder space, both Hovnanian and Beazer Homes remain highly levered.

“Those two were left over from the last recession,” said Ivy Zelman, CEO of the housing industry research firm Zelman & Associates. “They never really cleaned up their act.”

And some firms, like Zillow, have piled on debt late in the cycle.

As Zillow moves ahead with the latest funding rounds to support its iBuying platform, one priced at $600 million that matures in 2024 and the other priced at $500 million that matures in 2026, observers say it could end up with a large portfolio of unsold homes.

Guggenheim Securities analyst Jake Fuller calculated that Zillow could have more than 11,600 unsold homes on its balance sheet by the end of 2020 — a figure that would likely require more than $3 billion in additional financing.

Short-seller Steve Eisman, who famously predicted the subprime housing crisis, has even taken a short position in the online real estate company, and cites Zillow Offers as a weak link when a recession hits and home-buying dries up.

At the same time, many economists and industry analysts are forecasting a significant downturn in 2020 or 2021. Guggenheim predicts that the next recession won’t be as severe as the last one but could be more prolonged than usual because policymakers have fewer tools at their disposal to help spur the economy.

But a spokesperson for Zillow said the company doesn’t think it’s overleveraged and that “the additional capital we raised recently will provide us with increased strategic flexibility and enable us to scale our businesses even more quickly and efficiently.”

Zelman said that while Zillow Offers is attractive to buyers and sellers who want to simplify the process, the company ties up too much capital in the homes it holds.

“From a business model perspective, we’re more skeptical,” she said. “What does this look like in an environment where housing is softer or you’re in more of a buyer’s market versus a seller’s market?”

Ratings slide

New Jersey-based Mack-Cali is another company that’s struggling under the weight of its debt, which may only grow larger.

High vacancies in the REIT’s assets — including office properties in Jersey City and suburban office parks — have driven down the company’s ability to service its debt.

Moody’s downgraded its credit rating for Mack-Cali in December. And in the past year and a half, Fitch has lowered its rating on the company twice.

One of the main reasons is Mack-Cali’s leverage, which stood at roughly $2.7 billion, 9.3 times its earnings, at the end of the second quarter.

“Aside from challenges in their portfolio and where their portfolio is located, they have very high leverage [compared to] their peers,” said Moody’s analyst Philip Kibel.

Poor credit ratings have become an Achilles’ heel for many companies as the corporate bond market expanded in the years since the recession: The largest growing sector of bonds — rated BBB — are just a step above junk status.

Once a company gets downgraded and slips into junk status, it essentially gets cut off from the public markets to secure new debt. And while the number of investment-grade REITs has grown in recent years, there’s still a large chunk near the bottom of the barrel.

Brookfield Property REIT, which the global real estate giant Brookfield Property Partners launched to hold its retail properties after its $15 billion GGP takeover last year, received lower-grade ratings and has been slow to change them.

Moody’s analysts noted that the REIT has strong properties and a stable outlook. But some are concerned it may need to rely on its $1.5 billion credit line to balance cash shortages, and possibly to pay dividends. The company’s “deleveraging will continue, albeit at a slower pace than originally anticipated,” according to Moody’s.

Credit analysts also took Vornado Realty Trust down a notch to BBB in May, after it sold a large retail portfolio stake to Crown Acquisitions for $1.2 billion. S&P said that the sale left Vornado’s competitive position “somewhat weakened,” as it impacted operating margins and reduced the firm’s scale and asset diversity.

And while companies like Brookfield and Vornado have huge balance sheets that help ease concerns over leverage, many smaller players are more exposed — especially in troubled sectors like retail.

When Nicholas Schorsch’s Vereit, one of the country’s largest owners of single-tenant commercial properties, went public in 2015, it got a noninvestment-grade credit rating. ( Vereit was the successor to American Realty Capital, which was mired in an accounting scandal.)

Likewise, Blackstone Group in 2013 spun off retail REIT Brixmor, whose credit ratings have been stuck on the verge of junk status since then. This summer, Brixmor’s former CEO and CFO were charged with accounting fraud for allegedly fudging the company’s income numbers.

A handful of mall operators, including CBL Properties and Washington Prime Group, have also seen their ratings slip.

“In some cases, we’ve seen three-notch downgrades,” said Fitch analyst Steve Boyd. “The issue with [Class] B malls is that they’ve really lost access to the secured mortgage markets.”

Debt diets

Shopping mall owners aren’t the only ones watching their leverage.

Realogy, the country’s largest residential brokerage, for example, had $3.4 billion worth of corporate debt in the fourth quarter of 2018 as its deal volume fell and its profits slid nearly 6 percent. That put the firm’s leverage at 4.6 times its earnings.

Tim Gustavson, Realogy’s interim chief financial officer, said in a statement to Inman News in February that given the “uncertain housing market … you will see us focus on debt paydown.”

Other publicly traded real estate firms are beginning to take similar measures.

Since November, Boston Properties has sold $1.8 billion worth of green bonds to finance projects like the LEED-certified Salesforce building in San Francisco — the tallest U.S. office tower west of Chicago.

But despite the office REIT’s activity in the debt markets, its CEO, Owen Thomas, said he plans to dial that back. With U.S. economic expansion and corporate debt both at record levels, Boston Properties’ appetite for leverage is gone, he said on the firm’s most recent earnings call.

“We don’t want to increase our leverage,” Thomas said, “given where we are with the economy.”

For the first time in years, Los Angeles County’s industrial market showed signs of slowing down, but it wasn’t for lack of demand.

Low availability and high pricing are discouraging leasing, according to a new report from commercial brokerage NAI Capital.

Leasing dropped 44.6 percent year-over-year, but average asking rent held steady at its all-time peak of $1.01 per square foot. Vacancy tightened slightly year-over-year to 2.3 percent.

That’s similar to the dynamics in L.A.’s residential market, where high prices and low supply have led to a slowdown. The median sales price for a home has climbed consistently over the last few years, setting a new record. But the prices are giving prospective buyers pause, and as they keep rising, sales volume has dropped.

In the industrial market, sales volume dropped 40 percent year-over-year in Q3. Last year was one of the strongest on record for the industrial market, with the price of land jumping 25 percent and the market only slowing toward the end of the year because of investor concern over the timing of the cycle, and limited available space.

The trade war with China appears to be tempering demand as well, according to the report. Imports to the key ports of L.A. and Long Beach were down this year through August by 2.4 percent, compared to last year’s 3.1 percent increase. Exports through the ports were down 6.5 percent year over year in the third quarter.

Sales volume has totaled $2.9 billion so far this year. Even with a slower quarter in L.A. County, investors are on pace to set another record for sales for the wider Southern California region.

Through August, sales volume is up 5.5 percent year-over-year, putting the region on pace for $12 billion in sales this year.

Institutional investors are helping to drive the Southern California industrial market. This year saw big plays by giants including Prologis, L.A. specialist Rexford Industrial Realty, and pension fund adviser Alere.

Even as leasing slows, there’s not enough space being built to alleviate the pressure in the near term — 6.9 million square feet of leasing in the third quarter outpaces the 5 million square feet of space under construction.

The drama surrounding the 157-acre Mountain of Beverly Hills didn’t end when the land was sold in foreclosure for a fraction of its sky-high asking price.

Now, the interior minister of Kuwait has filed suit, claiming he was defrauded out of a $163 million investment in the property by its former owner.

Khaled Al-Sabah alleges that Victorino Noval — who owned the Mountain before it was seized in foreclosure — duped him into thinking he would get a 50 percent cut from his years-long investment in the property.

That would have meant a windfall for Al-Sabah had the Mountain sold anywhere near its $1 billion July 2018 asking price. Four months later, the ask was slashed to $650 million.

But Noval’s company, Secured Capital Partners, filed for bankruptcy in May and the property went back to its previous owner for $100,000 at a foreclosure auction.

Meanwhile, Noval used Al-Sabah’s money to finance a “lavish and extravagant lifestyle” replete with aircraft, boats, mansions, exotic dancers, gambling and limousine chauffeurs, according to the lawsuit filed last month in Los Angeles County Superior Court. Al-Sabah, who is seeking $488 million in compensatory damages, is charging fraud and deceit, breach of contract and negligent misrepresentation among the 16 counts in the suit.

Al-Sabah, whose lawyer said is a member of the Kuwaiti royal family, invested in the Mountain with family money, he told The Real Deal. The money was not tied to his official role representing the government, he said.

According to the lawsuit, Al-Sabah met Noval at the Montage Beverly Hills in 2010. Noval told Al-Sabah that for a $20 million investment, he would acquire a 50 percent stake in the Mountain, according to the complaint. Noval allegedly claimed he owned a 100 percent in the Mountain when his stake at the time was just 40 percent. The complaint paints a picture of Noval and his family members having strung along Al-Sabah for years, stating it needed yet more money to refurbish the property, which led to additional wire transfers.

Noval, who also runs a holding company called Tower Park Properties, bought the Mountain in 2004 with Atlanta developer Charles “Chip” Dickens. The Hughes Trust — the estate of Herbalife founder Mark Hughes — was the seller.

Three years ago, Secured Capital Partners acquired the land from Tower Park Properties through a title transfer.

Ronald Richards, a Beverly Hills-based attorney representing Noval,  denied all allegations against his client. Noval,

Richards said his client, who pleaded guilty to mail fraud and tax evasion in 1998, did not recall dealing with Al-Sabah.

“I don’t recall that exact name, no,” Richards said in an interview. He added, “My client does business with people from all over the world.”

Al-Sabah’s lawyer of record is La Habra-based Michael Tusken. Bobby Samini, who said he is special counsel to Al-Sabah on the case, dismissed Richards’ claim that there’s no paper trail supporting the allegations.

There “will be no issue in proving Noval received the money from Al-Sabah.” Samini said. His Beverly Hills firm Samini Cohen Spanos has represented clients like former L.A. Clippers owner Donald Sterling and rapper T-Pain.

Al-Sabah sued after he heard about the foreclosure sale, Samini said. The property is now in the hands of the Hughes Trust, which repurchased the Mountain at a foreclosure auction in August following Secured Capital’s bankruptcy filing.

A Paul Williams-designed Bel Air estate acquired four years ago is back on the market after an extensive renovation, and at a major price bump.

The Spanish-style Bellagio Estate is asking $75 million, more than twice the amount it sold for in 2015, according to the Los Angeles Times.

The 17,700-square-foot mansion has been sold five times since 2005, according to the report. It was overhauled following the 2015 purchase price of $38 million.

The home at 10410 Bellagio Road has seven bedrooms and nine bathrooms. The 1.7-acre property has two pools and spas, an outdoor cabana, tennis court, and a pool house.

Don Ziebell of Oz Architects led the recent renovation, and the work was done by Westside-based JRC Group construction.

The home is the latest $75+ million offering to hit the market in recent weeks. Hollywood producer Joel Silver listed his 26,000-square-foot Malibu estate last week for $77.5 million and the 27,500-square-foot “Glazer Estate” in Beverly Hills, owned by developer Guilford Glazer and his wife Diane, hit the market for $75 million in August.

Built in 1931, the Bel Air home belonged to the late Georgia Frontiere. The former majority owner of the Los Angeles Rams, Frontiere sold the home for $9 million in 2005.

Three years later, it was sold again, this time for $27.5 million. In 2010, a buyer scooped it up at a discount, for $18 million. Another buyer acquired the property a year after that for $19 million, before the latest sale, in 2015, for $38 million.

Paul Williams was one of the city’s most prolific architects and his homes have become increasingly sought after.

A year ago, songwriter Max Martin listed his Williams-designed home in Trousdale Estates for $11.5 million, seven years after paying $3.5 million. [LAT] — Dennis Lynch 

Taxpayers with ties to elected officials have been given favorable treatment by the L.A. county assessor’s office that allowed them to save millions of dollars in property taxes, according to a new whistleblower lawsuit.

The whistleblowers, three employees at the assessor’s office, allege that County Assessor Jeff Prang, his top managers and county lawyers have violated tax codes to benefit property owners by giving them favorable decisions on reassessments, the Los Angeles Times reported. The suit alleged that special tax treatment was a “quid pro quo” for campaign contributions — though none were cited in the suit.

The taxpayers who received special treatment, according to the article, include the Rand Corp., a government-sponsored think tank in Santa Monica, apartment complex and property developers, and a property swap in the wealthy enclave of San Marino involving John Barger, the brother of County Supervisor Kathryn Barger.

The whistleblowers allege they were pressured to unlawfully change unfavorable tax decisions they made during a taxpayer’s reassessment, the LAT reported.They said they were punished when they didn’t go along with their bosses, and effectively were demoted to clerks, the suit states.

Prang’s office said the lawsuit is without merit, and was filed by “disgruntled assessor employees. [LAT] — Pat Maio

Developers should now find it faster and less expensive to build housing across the state.

That’s after Gov. Gavin Newsom on Wednesday signed into law Senate Bill 330 — known as the Housing Crisis Act of 2019 — which prevents certain municipal policies that discourage development. The bill takes effect on Jan. 1 and expires in 2025.

It comes a day after Newsom signed into law the state’s landmark rent control legislation.

SB 330 imposes a ban on raising housing fees, increasing or enforcing parking minimums, or enacting new design standards. It also establishes a 12-month timeline for processing all housing permits, and caps the number of public hearings related to a new housing development.

Authored by state Sen. Nancy Skinner, the bill would effectively boost the number of allowable units in a development and speed up construction timeline. It prohibits local governments from passing other regulations that restricts the development of moderate- and low-income housing or emergency shelters, unless that city can prove the need to do so.

Cities will also be required to allow housing developments that meet existing zoning rules. Skinner argued that some wealthy California cities use strict zoning to block development and are not doing their share to address the state’s housing crisis.

SB 330 requires developers to replace any restricted affordable or rent-controlled units demolished as part of redevelopment. Developers will also be required to pay rehousing fees and give those tenants preference to return at the same rent they had previously been paying.

Some landlords and developers contend that high development costs force them to rent out units at higher rates. In theory, reducing development costs will allow developers to rent for less, industry pros say.

The measure comes at a time when the state housing authority has said Southern California needs to rezone to allow for 1.3 million new housing units in the next decade, and is three times what local governments had previously suggested they needed.

L.A. County alone is short around half a million units affordable to households considered “low-income,” or making between $58,000-$83,000 annually. Around 58 percent of L.A. County renters in that category spend more than a third of their income on rent.

SB 330 calls for a minimum $10,000 fine per unit for local agencies that reject an affordable housing development that otherwise meets zoning. The new law supplements other state-level initiatives to boost housing production.

At Wednesday’s bill-signing, Newsom also signed Assembly Bill 68, which is designed to streamline the process of permitting accessory dwelling units, or so-called granny flats.

A retail arm of Blackstone Group that targets small shopping centers has picked up another one.

ShopCore Properties paid $61 million for the Home Depot-anchored Towne Center East in Signal Hill. ShopCore acquired the property through an entity tied to its San Diego office, property records show.

The seller was New York-based investment firm DRA Advisors, which has owned Towne Center since 2005. The sale was recorded late last month. Neither firm immediately returned requests for comment.

Towne Center East spans 163,000 square feet of rentable space at the corner of Cherry Avenue and Willow Street. It’s anchored by a 103,000-square-foot Home Depot and a 26,500-square-foot PetSmart store, leasing materials show. A Wells Fargo bank branch and a UPS Store are also tenants. A Costco property in the mall is owned separately.

Chicago-based ShopCore owns more than 50 retail properties across the country, the majority of them being retail centers. In July, the firm announced a partnership with co-working firm Industrious to develop a co-working office at ShopCore’s One Colorado property in downtown Pasadena.

In June, ShopCore sold a three-property strip mall portfolio to Publix supermarkets for $70 million.

Mobile homes are no longer just a necessity for the poor. They’ve increasingly become a must-have for some of the world’s richest private equity players.

A 2016 investor pitch from manufactured housing owner and operator RHP Properties boasted that its portfolio of 33,000 lots — stretching across seven states — had “low cash flow volatility and steady year-over-year rent increases” as well as minimal capital expenditures.

The pitch apparently worked on Brookfield Asset Management, which has poured billions of dollars into trailer park sites in the past few years.

The Canadian private equity giant bought a portfolio of manufactured home sites in 13 states from Colony NorthStar for $2 billion that May. The deal included the acquisition of a joint venture backing RHP’s sites, a Brookfield spokesperson confirmed to The Real Deal.

Brookfield, which has more than $350 billion in assets, now owns 130-plus mobile home communities, making it one of the one of the largest manufactured housing investors in the U.S. RHP declined to comment for this story.

The immobility of so many mobile and manufactured homes has caught the attention of private equity firms in a big way. With most low-income renters unable to quickly up and move their properties, institutional real estate investors increasingly see that as a surefire bet — especially in a major downturn.

Douglas Danny, a Marcus & Millichap broker who specializes in manufactured housing sites, called them one of the safest assets in a recession. “From 2008 to 2012, there was no effect whatsoever on manufactured housing,” he said. “Now the new buyer coming into the space is the institutional buyer.”

And a who’s who of global investment giants have poured more than $4 billion into the market in the past four years: Brookfield, Blackstone Group, Apollo Global Management and the Carlyle Group have all snapped up, or flipped, trailer parks in that time.

Janet Sallander, a commercial real estate appraiser at Cushman & Wakefield, said mobile homes have become the “default working-class housing.”

“It simply produces better returns compared to other asset classes,” Sallander said.

Mobile home economics

Due to zoning restrictions and the high cost of land in many areas, there are just 6,250 mobile home parks in the U.S., according to a 2019 Cushman & Wakefield report.

Individual plots are rented out to tenants who purchase their own homes. And unlike aging apartment buildings in more heavily regulated housing markets, owners of these lots only need to provide utilities, while residents are responsible for the maintenance and upkeep of their homes.

Blackstone made its first bet on manufactured housing last year when it bought a $172 million portfolio of 5,200 lots from Ontario-based Tricon Capital Group. Other major players — including the Carlyle Group and Sam Zell’s Equity LifeStyle Properties — are snapping up manufactured home communities, with one analyst calling it “the most recession-proof housing stock in existence,” as TRD previously reported.

“A lot of investors are buying big complexes, if they can find them,” said PJ Mikolajewski, president of Ideal Manufactured Homes and a California Manufactured Housing Institute board member. “And as soon as they buy them, they jack the rents up.”

For Alberto Calvillo, a lifelong construction worker who recently moved his family to a site owned by RHP in Bohemia, New York, it was the most affordable option after he was priced out of another mobile home park in nearby Commack.

Calvillo said he now pays $1,000 a month to rent the land where his 900-square-foot house sits. His extended family gathered at the single-wide home, decked out with custom-fitted green and orange panels, on a Sunday afternoon in September.

“This isn’t a mobile home,” Calvillo said with a laugh as he pointed out the obvious lack of wheels, the custom wraparound deck he built and the new concrete foundation. “I’m going to stay here until I die.”

The average cost of moving such a home is $5,000 if the home has wheels to begin with, according to a 2019 report from the national community group MHAction. So when owners of manufactured homes are priced out, they often need to sell their homes at a loss and are replaced by new homeowner-tenants without any big losses for the site’s owner. The result is a low turnover rate and extremely stable revenues.

“If you have the right underwriting, you can increase rent 5 percent each year,” said Marcus & Millichap’s Danny. “Within three to five years, you’ve gone from a 3 or 4 to a 6 [percent] and the park has gone up in value.”

Documents from Florida-based Sunrise Capital Investment — which cite “superior risk-adjusted returns for investors” — give an inside look at the upsides for those in the business.

Manufactured housing is a “recession-resistant” asset class with low turnover that allows for “consistent rent increases,” the pitch to investors reviewed by TRD notes.

“Demand for our product actually increases as the economy tightens.”

Bullish bets

Carlyle, one of the country’s largest private equity firms, made a splash in 2015 when it bought a manufactured home community in Silicon Valley for $152 million.

Tenants in the area soon complained of exorbitant rent hikes and a deterioration in management responsiveness — sparking new calls for statewide rent control in California. The D.C.-based investment group recently flipped the complex, selling it to Chicago-based Hometown America for $237.4 million this August, according to California property records.

Carlyle did not respond to requests for comment.

The rush of private equity into manufactured homes has also attracted the ire of U.S. senator and presidential candidate Elizabeth Warren, who in May wrote stern letters to Brookfield’s Bruce Flatt, Blackstone’s Stephen Schwarzman, Apollo’s Leon Black and Carlyle’s co-CEOs.

“Unable to afford moving, and unable to sell their manufactured homes, some residents report that they are forced to choose between ‘paying for increase[ed] housing costs … or abandoning their homes,’” her letter reads.

One publication called it a Dodd-Frank moment for manufactured home communities, but Blackstone was unfazed. Wayne Berman, the firm’s head of global government affairs, said in his response to Warren that Blackstone hoped to “raise the bar for customer service within an industry that has not always historically provided a high-quality resident experience.”

“Although we’re a tiny part of the overall market, [we’re] dedicated to professional management, capital investment and resident service,” Matthew Anderson, a Blackstone spokesperson, said in a statement to TRD.

Brookfield is “highly attuned” to the fact that the asset class can include lower-income populations, according to the company, which outlined steps the firm has taken to ensure affordability.

In other cases, though, bullish investment strategies have quickly backfired. At one manufactured housing complex in Akron, New York, which Sunrise Capital purchased for under $4 million in 2017, the firm raised rents to $525 from $280 and cut the 122-lot site’s employee payroll by $30,000, sparking an outcry from tenants.

After the residents organized an eight-month rent strike against their new landlord, the complex was placed into a receivership and the investment firm ceded control to the tenants. Representatives for Sunrise Capital declined to comment.

But those bad bets have yet to deter aggressive investors on the whole, industry sources say.

“It could cost [up to] $10,000 to move a home, depending on how big it is,” Rob Ybarra, a debt and equity broker at CBRE based in Las Vegas, noted. “But if you raise rents 25 or 50 bucks — are you going to pick up and go somewhere else? Probably not.

“That’s one of the really big reasons that people like this property type,” Ybarra added. “It’s a captured audience.”

The post How mobile homes became a billion-dollar, recession-proof industry appeared first on The Real Deal Los Angeles.

A 157-acre mountaintop parcel asks $1 billion but sells for $100,000.

A cavernous airplane hangar built by Howard Hughes is now home to thousands of Googlers.

A $500 million mansion whose developer insists will be for “normal dudes.”

These are the real estate stories of Los Angeles, a city that constantly bewilders, delights and astonishes. Understanding and chronicling the unique trends and quirks of this market is a formidable task, and I’m delighted to announce we’ve just added some terrific journalists to the team to help us do it even better.

Pat Maio is a veteran investigative reporter who has produced award-winning work for the likes of Dow Jones, the Orange County Register and most recently the Los Angeles Business Journal. There, he covered finance and nabbed a rare interview with Colony Capital’s Tom Barrack. Pat will focus more on the commercial real estate market and can be reached at pm@therealdeal.com.

Matthew Blake also comes to us from LABJ, where he covered the media and entertainment business. He previously covered the business of law firms at the Daily Journal. Matt will be focused more on the residential side of things and can be reached at mblake@therealdeal.com.

Pat and Matt will deepen our coverage of the L.A market, which is in the midst of a dramatic transformation: California just became the third state to enact a rent control law; tech and entertainment giants are reshaping the city’s built environment; and even in the face of a slowdown, the most exclusive addresses can fetch nine figures.

Please reach out to them with tips and news about deals, almost-deals, events and more. I would also be delighted to hear your thoughts on the market and what we can do to make our local coverage stronger and more valuable to you. I’m at hs@therealdeal.com.

Thank you for all your support so far. Cheers to what’s ahead.

-Hiten Samtani, Associate Publisher, West Coast

The post Newsroom news: <i>The Real Deal</i> LA brings on 2 veteran journalists appeared first on The Real Deal Los Angeles.

A stroke of the governor’s pen may have put to rest an issue that’s been debated for decades and that cuts to the heart of property rights in the state: Who has access to the pristine beaches of central California’s Hollister Ranch?

Gov. Gavin Newsom on Wednesday signed a bill that gives the public a right to easy access of 8.5 miles of shoreline effectively closed to the public since the 1970s, according to the Los Angeles Times. The measure, Assembly Bill 1680, had wde support.

The coastline of the 14,500-acre property — stretching from Gaviota State Park and Point Concepcion in Santa Barbara County — is one of the state’s best preserved coastal landscapes.
Various groups and state agencies have tried to secure the public’s right to access the coastline, but have met stiff resistance from a group of 1,000 or so people that own Hollister Ranch property.

The Hollister Ranch Owners Association has argued that the stretch of coastline is so well preserved because they have limited public access to it. The owners adhere to strict land use and development rules and have set aside most of Hollister Ranch as cattle ranching land and a nature preserve.

AB 1680 makes it a crime to “impede, delay, or otherwise obstruct” public access to the coastline, punishable by fines.

Last year, the group settled with state agencies to allow access to less than a mile of shoreline, but only by water. Later in the year, a judge allowed public access advocates to challenge that agreement.

State agencies promised in an agreement with owners earlier this year to expand access in an environmentally sustainable way. A representative for the owners said that AB 1680 threatens that effort and risks more litigation. [LAT] — Dennis Lynch 

The post This way to the beach: Lawmakers rule Hollister Ranch pristine property open to public appeared first on The Real Deal Los Angeles.

UPDATED, Oct. 10, 2019, 1:44 p.m: Coca-Cola’s real estate division must be feeling flat.

The soft-drink giant had sold its iconic building at 711 Fifth Avenue in August to Nightingale Properties and Wafra for $909 million. But last month, in an unusual twist, Wafra sold its stake in a deal valuing the property at $937 million.

Coca-Cola had left tens of millions of dollars on the table. Making matters worse, the new buyer was an investment group led by controversial investor Michael Shvo — whose even higher offer of $955 million had been dismissed by the beverage maker months earlier.

The Shvo group’s purchase was one of the largest flips of a New York building in recent memory and a rare example of a trophy property changing hands quickly after a sale. It also raised doubts about whether Coca-Cola lived up to its fiduciary duty.

“The company has the obligation to shareholders to sell at the highest price,” said Ali Dibaj, an analyst with Sanford C. Bernstein & Co. who covers Coca-Cola, while acknowledging that factors such as timing, financing, terms and reputational risk can affect a sale.

Coca-Cola’s choice of the lower bid looked especially dubious when Nightingale’s partnership failed to line up debt to finance the purchase and sued Coca-Cola to get out of it. Then, as the parties pushed on with the sale, sources say, Nightingale separately arranged to flip the building to Shvo — a final insult to the Fortune 500 company.

In interviews with The Real Deal, a dozen people familiar with the matter pointed fingers in several directions. Some said Coca-Cola was leery of the high bidder because Shvo had pleaded guilty to tax fraud in 2018. Others claimed that an influential tenant opposed Shvo’s offer, fearing eviction if he converted the building to a hotel.

The outcome also raised questions about brokerage Cushman & Wakefield, given that the deal went south and that the brokerage represented the seller, Coca-Cola, while also advising the buyer, Nightingale, on another part of the transaction.

Cushman would not say what advice it gave Coca-Cola but alluded to the company’s wariness of the Shvo bid.

“Coca-Cola is one of the largest and most reputable companies in the world,” the brokerage said via email. “They would not choose to do business with anybody with a less than stellar reputation or track record.”

But Morris Missry, an attorney for the Shvo partnership, said correspondence from the seller tells a different story. “Throughout the entire process of the sale of 711 5th Ave., the Coca-Cola company directly and through its agents reached out to representatives of Michael Shvo and the partnership he leads,” he said in a statement.

Coca-Cola and Shvo declined to comment. Nightingale, which now is property manager of the building, did not respond to requests for comment.

The saga has prompted intrigue in the New York real estate industry. Some say Nightingale’s bid — even at nearly $50 million less than Shvo’s initial offering — was still significantly higher than offers by other parties.

“Value is in the eye of the beholder,” said Jon Mechanic, chair of the real estate practice at Fried Frank. “There are a lot of people you and I both know and respect who would not have paid the price that was being paid by the group that ultimately purchased it.”

An opportunity overlooked

Once home to orchestra performances and the headquarters of NBC, 711 Fifth Avenue has been a hallmark address for nine decades. It takes up half a block on perhaps the most expensive retail strip in the world and its office floors are home to prestigious tenants including asset manager Sandler Capital Management and investment bank Allen & Company, whose former president and CEO is a Coca-Cola board member.

The beverage conglomerate acquired the 15-story building in 1983 when it purchased Columbia Pictures, which owned the property. It had toyed with selling it in recent years, but in December began seriously looking for a buyer after determining it wasn’t needed for its New York operations.

Coca-Cola tapped a Cushman team led by heavyweights Doug Harmon and Adam Spies to market the building. Bids came rolling in. According to people familiar with the matter, RFR Holding and Vornado Realty Trust submitted separate offers, one as low as $700 million. (Both firms declined to comment.) By April, two higher bids were on the table: $907 million from a Nightingale-led group and $955 million from Shvo and his partners.

Shvo is an Israeli broker-turned-developer whose eponymous firm is known for buying legacy buildings in New York — and paying top dollar. At 125 Greenwich Street, a residential development Downtown, he paid $100 million more than the site had sold for two years prior, in 2012. On Fifth Avenue, he and Russian billionaire Vladislav Doronin purchased the upper floors of the Crown building for $475 million in 2015.

Shvo’s indictment on tax charges the following year brought his run as a luxury developer to an abrupt halt. But since resolving the tax case last year he’s made a rapid comeback. Shvo assembled an investment-development team consisting of Turkish developer Bilgili Holdings, private equity firm Deutsche Finance America and German pension fund Bayerische Versorgungskammer (BVK) that acquired five properties for $2.8 billion in New York, Los Angeles and Miami.

The Coca-Cola building would have been a crown jewel in the portfolio. Yet despite Shvo’s higher offer, Coca-Cola went with Nightingale.

“It’s puzzling,” said Jay Neveloff, chair of real estate at Kramer Levin, who was not involved in the deal. He allowed that a seller will sometimes choose a lower bid if “the brokerage team feels a higher certainty that the buyer will close.”

But the sale would be anything but smooth.

Nightingale, led by Brooklyn natives Elie Schwartz and Simon Singer, put together an investment team that included longtime financial backer Wafra Capital Partners, a subsidiary of Kuwait’s sovereign wealth fund. The investors put down a $50 million deposit on 711 Fifth Avenue with a commitment to close the deal by the end of June.

They also agreed to an anti-flip provision — a common clause that prevents the bidder from earning a commission by offloading a contract to a third party.

Nightingale’s partners brought in a separate Cushman capital-markets team led by Gideon Gil and Rob Rubano for advice on lining up a debt package. That led to Natixis, a French bank, agreeing to lend $775 million — a hefty 85 percent of the purchase price, increasing the risk of the deal. Natixis did not respond to a request for comment.

Cushman’s involvement on both sides of a transaction was not unusual among full-service firms. But when Coca-Cola took the much lower bid, Cushman’s dual role raised eyebrows — especially once the deal started falling apart.

As the closing date drew near, Natixis withdrew from the transaction for undisclosed reasons. Then Nightingale and its partners defaulted on the deal and on June 28 sued Coca-Cola for breach of contract, claiming the company failed to disclose a detail about a tenant agreement.

With its sale botched and the lower bidder about to drag it into litigation, the beverage maker received an intriguing letter: BVK, the German pension fund behind Shvo’s offer, reiterated its $955 million offer. It even committed to keeping 711 Fifth Avenue as an office property to allay any tenant concerns that the building would be converted to a hotel.

“I can suspect that you and your colleagues would like a quick solution to the sale of this property,” wrote BVK’s head of real estate investment management in the letter, a copy of which was obtained by TRD. “We are ready to work with you around any legal issues that have arisen from this prospective buyer’s suit.”

Coca-Cola ignored the overture. Instead, it reached an agreement with Nightingale and Wafra to claim the $50 million deposit and allow the buyer 45 days to line up a new debt partner. Nightingale withdrew its lawsuit.

As Nightingale and Wafra pursued financing under guidance from Cushman, they considered another option.

According to two people with knowledge of the matter, Shvo approached Nightingale’s Schwartz through an intermediary with an offer to buy the property. But the anti-flip provision forbid Nightingale and Wafra from quickly reselling it to Shvo.

So they engineered a workaround: Shvo and his partners would buy Wafra’s majority interest in the purchasing entity.

Nightingale and Wafra closed on the Coca-Cola building at the end of August, financed by a $700 million six-month-term bridge loan from JPMorgan.

Four weeks later, Shvo’s partner BVK executed the workaround. It purchased Wafra’s majority interest, according to a spokesperson for Wafra, who declined to address why Wafra flipped its stake. Nightingale agreed to remain property manager of the building.

Coca-Cola’s choice

The drama prompted speculation about why Coca-Cola chose a lower offer that proved problematic over one from Shvo that in retrospect was viable.

Two people familiar with the matter said Coca-Cola had spurned Shvo out of concern for its reputation. But emails reviewed by TRD indicate that Shvo and his partners were seen by Cushman as legitimate suitors.

“We will send you a contract in a form that our client feels should be executable,” Spies wrote on April 29 to an attorney representing Shvo. (TRD obtained the draft contract sent to the Shvo team.) In other messages, Cushman brokers ask colleagues at the firm to contact Shvo about retaining them to arrange debt for the acquisition. Even after the Shvo bid was rejected, they invited Shvo’s partnership to provide debt for the winning bid.

Two other sources attributed Shvo’s rejection to lobbying by Allen & Company — a major tenant of 711 Fifth Avenue with a former CEO on Coca-Cola’s board. The sources said Allen cited Shvo’s history of converting properties to hotels and the potential for it to be kicked out of the building. Allen & Company did not respond to requests for comment.

Veterans of the city’s real estate industry also suggested a possible factor that is often present, if unspoken, in negotiations: One bidder can be more appealing to brokerages than others because of its potential for future business. Nightingale hires brokerages more often than Shvo does to sell, lease and finance office properties in the city.

Cushman’s spokesperson declined to comment on that dynamic, and it remains unclear what advice it gave Coca-Cola. Harmon and Spies declined to comment.

A spokesperson for Deutsche Finance America said the ultimate result speaks to its partner’s credibility. “It is because of Michael Shvo’s strong reputation as a top real estate investor that our partnership was able to purchase 711 Fifth Avenue,” the spokesperson said.

On to the next flip

The new owners have been quick to make their mark on the Fifth Avenue building. Hours before news broke of the sale last month, a plaque featuring the logos of Shvo, Bilgili and Deutsche Finance appeared next to the brightly lit entrance.

BVK, which was omitted from the plaque, provided $400 million in equity to buy Wafra’s stake, valuing the property at $937 million. As part of the deal, the new owners have about four months to pay off the outstanding debt to JPMorgan and secure refinancing.

Nightingale and Wafra, for their part, moved on to another deal. Less than a week after Wafra exited the Coca-Cola building, the duo went into contract on a $570 million purchase of the leasehold interest at 111 Wall Street, a 1.1 million-square-foot building owned by Zurich Insurance Group.

Weeks earlier, another investor had put the property under contract, and now appears to be in discussions to sell the property to Nightingale and Wafra, according to people familiar with the deal.

“It could be a situation,” said Mechanic, “where they’ve gone from being the flipper to the flippee.”

Contact David Jeans at dj@therealdeal.com and Rich Bockmann at rb@therealdeal.com

Correction: The upper floors of the Crown building sold in 2015 for $475 million, not $500 million.

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It’s no shock that home prices have been steadily rising in Los Angeles over the last several years, but nowhere has that been as drastic as in fast-gentrifying Inglewood.

The median sales price in the city climbed 63 percent from the high $200,000 range in 2014 to $485,000 last year, according to real estate tracker PropertyShark, which analyzed the L.A. regional housing market. The report also measured the change in median home size and median price per square foot over the same period.

Some of the residential trends L.A. has seen over the last few years are clear from the data, including gentrification, the Westside tech industry’s growth, and the wide-scale replacement of small homes in Beverly Hills with larger spec mansions.

Inglewood is experiencing a surge of investment spurred by large projects in the works, namely the 300-acre L.A. Stadium and Entertainment District anchored by the future home of the L.A. Rams and L.A. Chargers NFL teams. The NBA’s L.A. Clippers franchise has also proposed building a new stadium there.

Multifamily investment in Inglewood has created concerns for renters who find themselves priced out of the city. Officials responded this summer with a local rent control measure.

The PropertyShark report found that nearby Culver City saw the second biggest increase in median prices, with homes in the Westside tech-friendly enclave selling for 60 percent more in 2018 than they did five years before. That spike works out to an increase from $800,000 to around $1.2 million over that period.

Despite the strong pricing growth, the median square footage of homes in both cities remained about the same. That meant both cities saw a 61 percent growth in price per square foot.

All but three of the 67 markets PropertyShark analyzed saw the price of homes grow from 2014-2018 and half of those saw prices appreciate more than 20 percent.

In L.A., the median size of homes sold across the city remained flat over that period, but prices surged 25 percent to $870,000 last year.

Homes are getting significantly larger in many neighborhoods and cities in the L.A. area, though. Homes sold in Redondo Beach last year were 80 percent larger than those sold in 2014, more than anywhere else.

In the pricey Malibu area, homes sold were 38 percent larger and homes sold in Beverly Hills were 32 percent larger last year than five years earlier. Both cities, as well as surrounding areas, have seen developers scoop up properties with small, aging homes in order to replace them with massive mansions four or five times the size.

Beverly Hills began limiting the size of new homes in the city earlier this year, despite strong opposition from many agents and developers.

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The Real Deal’s sixth annual South Florida Real Estate Showcase & Forum is shaping up to once again be the biggest industry event in the region. Mark your calendars for Thursday, Oct. 17 and join us at Mana Wynwood for a full day of programming, networking and viewing the latest real estate projects and products.

Tickets can be purchased here

Ben Carson, head of the U.S. Department of Housing and Urban Development, will be among the roster of speakers at next week’s event.

This is the sixth year TRD is hosting the Miami forum and showcase, which is one of the most highly attended real estate events in the state. Panelists include Ben Carson, head of the U.S. Department of Housing and Urban Development; Grant Cardone, who operates a $1.2 billion property portfolio; Peggy Olin, whose OneWorld Properties has done more than $3 billion in residential sales; and developer Don Peebles.

Panels will include discussions on gender- and race-diversity in the real estate industry, the long-term effects of the co-living and co-working economies, and development. The diversity panel will be led by Peebles, who recently launched a $500 million investment fund for minority and women developers in markets that include South Florida, New York and Los Angeles.

The event — at Mana Wynwood, 318 Northwest 23rd Street, Miami — will run from 11 a.m. to 5 p.m.

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The Los Angeles International Airport office submarket has more than 3 million square feet of supply, with about a third of that vacant. Still, investor demand remains strong.

This week, a North Sea Capital-led partnership paid $45 million for a 300,000-square-foot office tower.

The seller, a partnership of the Roxborough Group and the Ruth Group, bought the building at 5901 W. Century Boulevard two years ago. The duo paid $12.7 million for the 15-story property then undertook some upgrades, and leased up the building. They added 220,000 square feet of new leases, and brought occupancy up to 95 percent, according to Newmark Knight Frank, which advised Roxborough and Ruth.

It’s an anomaly in the surrounding area. Newmark’s third quarter market report found that 30 percent of the office space in the submarket is vacant. That’s twice that of nearby El Segundo and trailing only Carson’s 31 percent vacancy rate for the highest in the L.A. metro area. Newmark’s Kevin Shannon, Michael Moore, Ken White, and Sean Fulp led the deal. The North Sea Capital group represented itself.

The Roxborough and Ruth partnership has been active investors. Last year, the duo paid $107 million for the 443,500-square-foot Gateway Towers office campus in Torrance, with plans to add retail and restaurant space to the property.

The Century Boulevard corridor and area surrounding the airport is dominated by hotels catering to business travelers. While it has 3.4 million square feet of office stock, it’s also historically had some of the highest vacancy rates of any L.A. submarket.
Rents are also cheap compared to neighboring markets.

At $2.25 per square foot, office space is nearly half the price of that in El Segundo; the average for the rest of the South Bay is $3 a foot.

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So-called granny flats have proliferated in Los Angeles and throughout California in the last few years, with homeowners often earning extra money by converting their garages into rental units. Brokers have also gotten in on the business, with some even making it a focus.

There aren’t a lot of grannies living in them anymore.

But these accessory dwelling units have also operated by mostly side-stepping existing building codes. Until now.

As part of a flurry of measures targeting the state’s housing shortage, Gov. Gavin Newsom on Wednesday signed five bills that cut the red tape on converting garages and freestanding backyard homes into ADUs.

In L.A., the new laws will significantly reduce the barriers to building and will ease restrictions, according to brokers who handle ADU properties.

Among the accessory dwelling unit measures, Assembly Bill 881 will reduce the number of permits that local governments can require to slow down backyard home construction. Another, Senate Bill 13, lowers the fee structure for backyard homes, and accelerates getting such homes up to code.

Those may sound like incremental changes, but a handful of granny flat laws that passed in L.A. in 2016 had a major impact, according to the Los Angeles Times. In the last two years alone, the city has received more than 13,000 ADU construction requests.

The new laws could further “ease up restrictions and expedite the overall process,” which would be good for business, said David Lukan, an agent at Compass’ Downtown office. He said the new laws will provide uniformity throughout L.A. County’s 88 municipalities and numerous unincorporated areas.

One key addition, Lukan added, is that a municipality can no longer issue a blanket ban preventing a property owner from building a second ADU.

With the new laws, Global Platinum Properties’ Julio Ruiz said brokers are more concerned about administrative enforcement than legal prohibitions. Ruiz, who handles  ADU properties for the Hancock Park-based brokerage, said some municipalities don’t have the staffing to handle permitting requests, which are now likely to increase.

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