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John Kilroy Sr. and his sail boat (Credit: Scuttlebutt Sailing News)
John Kilroy, who kicked off his career with only $100 in his pocket and turned it into $6 billion real estate behemoth Kilroy Realty, died Thursday. He was 94.
His firm is now one of the biggest on the West Coast with a 13.7 million-square-foot portfolio in Southern California, the Bay Area and Seattle, the L.A. Times reported.
Kilroy died at Cedars-Sinai Medical Center from complications of aging, his foundation announced.
One of Kilroy’s signature business strategies was to build near major airports to accommodate America’s emerging jet-setting culture, John Cushman, the former chairman of Cushman & Wakefield, told the Times. In L.A., his company’s properties include the massive Columbia Square redevelopment, Sunset Media Center and the six-structure Academy project in Hollywood.
His son, John Kilroy Jr., has been the company’s CEO since 1981.
The late Kilroy, who was born in Ruby, Alaska, was also an avid sailor and former yachting champion. He won the lifetime achievement award from the National Sailing Hall of Fame in 2014.
He is survived by his wife, eight children, 17 grandchildren and 20 great-grandchildren. [LAT] — Cathaleen Chen
Howard Lorber and Leonard Steinberg
From the New York website: Leonard Steinberg and Herve Senequier are suing Douglas Elliman for unpaid commissions, more than two years after leaving the company for Compass.
The commissions are related to the closings of several new development deals brokered by the pair’s LuxuryLoft team before the move, according to the suit, which was filed Tuesday in New York State Supreme Court.
Steinberg and Senequier claim they and their team are owed upwards of $500,000, though the complaint doesn’t identify which new development deals they claim to have brokered. The pair worked at Elliman from November 2001 until May 2014. Steinberg then became president of venture-capital backed brokerage Compass.
A representative for Elliman did not immediately respond to a request for comment, while both Steinberg and a Compass spokesperson declined to comment.
The brokers allege that, when they left Elliman, they came to an arrangement with chairman Howard Lorber whereby the company would continue to pay them all outstanding commissions on transactions in contract at the agreed upon splits at the time they were earned. The deals were expected to take as long as two years to close, since they were in new development projects.
Steinberg and Senequier argued that the arrangement was more than fair to Elliman, since they left behind numerous other listings they’d brought to the firm but had not yet sold. The commissions from those deals would go to Elliman brokers, they said in the complaint.
The brokers allege that Elliman kept its end of the bargain for one year and then began paying commissions at a much lower rate than was originally agreed upon. In November, Steinberg allegedly reached out to Lorber to discuss and put their agreement in writing, adding a provision that prohibited Steinberg and Senequier from poaching from Elliman for 18 months. But, by April, Elliman stopped paying commissions entirely, alleging the non-solicitation agreement had been breached, the suit claims.
“Rather than comply with its obligations, Douglas Elliman made vague and unsubstantiated accusations that plaintiffs Steinberg and Senequier violated their non-solicitation obligations,” the suit says.
Steinberg closed sales and signed contracts for over $500 million in 2013, the year before he and Senequier jumped ship to Compass, The Real Deal reported in its May 2015 issue.
The Chetrits’ Flatotel condo project on 52nd Street
From the September New York issue: In 2012, Joseph Chetrit, a Moroccan real estate investor known for his New York City developments, allegedly flew to Geneva to meet Nicolas Bourg, a Belgium-based real estate fund manager, to talk about raising equity for several new projects.
Bourg was representing an investment fund backed with money allegedly stolen by two Kazakhstani investors — Viktor Khrapunov, the former mayor of Almaty, the largest city in Kazakhstan, and Mukhtar Ablyazov, the former chairman of the country’s BTA Bank. The two were eager to place their money in the U.S., and New York City seemed like a good bet for unloading a serious amount of cash quickly.
In order to make a deal, the Kazakhstanis offered Chetrit unusually favorable terms, agreeing to provide 75 percent of the cash needed to build the developer’s Flatotel condo project at 135 West 52nd Street for only 50 percent of the project’s profits. The difference effectively amounted to an above-market “promote fee” for Chetrit.
It was the perfect solution for the developer, but there was a catch: Between the two of them, Khrapunov and Ablyazov were facing criminal charges in Kazakhstan, the U.K. and Switzerland over allegations that they’d stolen more than $4 billion through embezzlement and corrupt deals in Kazakhstan. They had fled their home country to avoid arrest, and their assets were frozen in all three nations. In other words, the money was dirty.
According to a lawsuit brought last year against companies controlled by Chetrit and his brother, Meyer, by the city of Almaty and BTA, the developer was well aware of the situation. The suit — which spelled out all of the above-mentioned details — said Chetrit was so wary of detection that he even used code names to refer to his partners, including “Jose” and “Pedro.”
“The situation was made unequivocally clear to Chetrit,” according to the complaint, which was filed in New York’s Southern District and claimed the developer was complicit in laundering the money through New York real estate.
“Chetrit expressed sympathy with the situation, since his own family had faced political sanctions in Morocco,” Almaty and BTA claimed.
While the suit was settled last year — with Chetrit agreeing to cooperate with Almaty and BTA in their claims against Ablyazov and Khrapunov — the case provides a window into how illicit money is increasingly being stashed in U.S. commercial real estate and what procedures exist (or don’t) to prevent it.
In 2006, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) identified 9,528 suspicious commercial real estate transactions in the U.S. in a 10-year period starting in 1996.
While the agency didn’t release statistics for New York City and did not return multiple requests for comment for this story, it found that suspicious activity had tripled in the next five years leading up to 2011. Half of those cases came from just five states: New York, California, Florida, Georgia and Illinois.
“It’s a systemic issue,” said Nuri Katz of Apex Capital, a Montreal-based firm that helps foreign investors get citizenship in other countries and has helped Russian investors place their money in U.S. real estate.
“You can’t blame just a bank, or a seller, or a buyer. You need to look at, federally, why is the U.S. not watching out for these things? Why is the U.S. encouraging unknown money to come in?” Katz said in an interview with The Real Deal.
Indeed, while Chetrit’s dealings with the Kazakhs read like a scene from “Catch Me If You Can,” the case is just one of many in which illicit funds are flowing into properties here.
One of the highest-profile cases involved the laundering of cash from a state-investor Malaysian economic development fund — 1Malaysia Development Bhd, or 1MDB — which prosecutors say bankrolled the Park Lane Hotel on Central Park South. The scandal rocked the financial world, ensnaring developers, major global banks, political figures and even a Hollywood actor along the way.
While the 1MDB case may be extreme, the risk of getting tangled up in shady deals seems to be on the rise. That’s partly because the temptation to turn to foreign funding sources is higher than ever for developers, as traditional financing for many condo projects has dried up amid rumblings of a potential supply glut.
Developer Sharif El-Gamal of Soho Properties, for instance, told TRD that in order to score the money to build his condo at 45 Park Place, he syndicated a deal with a network of overseas financiers that included Malaysia’s Malayan Banking Berhad, Kuwait’s Warba Bank and a Saudi investment firm led by the Al Subeaei family.
While that deal has not been linked to money laundering in any way, it shows the extent to which foreign investors and lenders have become involved in complex transactions in New York.
“Some of the largest and most-established developers in New York City are not able to procure financing,” El-Gamal said.
As more developers look to untested investors in foreign countries for capital, it has become increasingly difficult — even for those with the best of intentions — to vet potential partners, sources said. And then there are those willing to overlook red flags in order to get a project off the ground.
“There will be people that will take money from any source that gives it to them,” said Jonathan Adelsberg, a partner at the New York-based law firm Herrick Feinstein.
Follow the money
In the case of the Park Lane Hotel, even some of the city’s top real estate players and financial institutions failed to spot dirty cash from a key investor: Malaysian billionaire Jho Low
In the fall of 2009, Low suddenly bounded onto the New York party scene seemingly out of the blue.
The pudgy Wharton grad quickly caused a stir with his lavish lifestyle, spending hundreds of thousands of dollars a night at Manhattan clubs. Rows of Cadillac Escalades were often parked outside the venues he was partying in.
He also bankrolled Leonardo DiCaprio’s 2013 film, “The Wolf of Wall Street,” after meeting the actor on the nightlife scene.
For his 28th birthday, Low threw himself a four-day party at Caesars Palace in Las Vegas. Caged lions and tigers dotted the pool area. Actress and model Megan Fox was flown in to hang out with him, the New York Post reported on Page Six.
But questions about the source of Low’s wealth soon began to surface. Some said he was in construction, others said it was “family money.” Few asked questions, opting instead to bask in the glow of his wealth.
Like many of New York’s richest residents, Low soon began investing in real estate, providing capital to some of the city’s most active developers, including Steve Witkoff, who was seeking financing for his planned redevelopment of the Park Lane Hotel. An unnamed real estate attorney introduced the pair, and Low ultimately invested upwards of $200 million in the project, making him the majority equity investor, with an 85 percent stake, according to papers later filed in U.S. District Court in Los Angeles as part of an effort by the U.S. Department of Justice to seize Low’s stake in the building.
A rendering of the Witkoff Group’s 1 Park Lane
Together Witkoff and Low planned to knock down the aging hotel to make way for a 1,210-foot-tall, 88-unit condo tower. The project, dubbed 1 Park Lane, was set to cost $1.7 billion, with expected revenue of $2.3 billion.
But even Witkoff doesn’t appear to have uncovered the source of the young Malaysian’s fortune.
In October 2013, as Witkoff and Low finalized the terms of a deal with Wells Fargo and Criterion Real Estate Capital for $525 million in acquisition financing, a principal at the Witkoff Group emailed Low asking for details about where his capital was coming from, according to the DOJ’s court documents.
“We are getting down to the end with the lender, they are asking for specifics on where the money on your side of the deal is coming from given it is international money,” the email said.
Low responded the same day: “Low Family Capital built from our Grandparents, down to the third generation now.” The Witkoff principal replied: “Ok, thanks Jho, just didn’t know if there were any other minority investors on your side, I will let the bank know.”
In reality, the DOJ alleged that Low’s money was illegally siphoned from 1MDB into the accounts of Prime Minister Najib Razak and his associates, who included Low’s father, Larry, and brother, Szen.
Authorities say Low headed Good Star Ltd, a company that received a massive $1.03 billion from the fund. So it’s not surprising he was able to drop so much cash on real estate, art and partying in New York. He allegedly moved money between accounts in Singapore, Switzerland and New York “in a manner intended to conceal” the origin of the money.
(Click to enlarge)
Sources close to the deal told TRD that there were no warning signs before the Low scandal broke. Low was based in the U.S., attended meetings in New York and was one of the lead investors on Sony’s $2.2 billion purchase of EMI Music Publishing, before his deal with Witkoff. He had references from global leaders. At the time he completed the Park Lane deal, he was already in discussions with other major developers, including the Related Companies and Extell Development. “I had no clue there was anything amiss with Jho Low, but probably Steve [Witkoff] just gave him a better deal than I was ready to give him,” Extell’s Gary Barnett told TRD. “Thank God we’re not involved with that.”
Low’s ability to move such vast amounts of cash undetected speaks to the lack of oversight that’s often common on these kinds of transactions, sources said. The fact that the checks and balances that financial institutions — particularly those as large as Wells Fargo — must perform under federal law did not catch Low in the act remains unexplained.
In court documents, however, DOJ prosecutors spelled out Low’s complex maneuverings and the series of wire transfers that enabled him to move hundreds of millions of dollars through at least eight banks across the globe between March and November 2013, when Witkoff closed on the Park Lane.
On Nov. 12, 2013, Low allegedly wired more than $218 million from an account with Swiss bank BSI — later implicated in the 1MDB scandal — in Singapore to a Citibank account in New York controlled by his global law firm DLA Piper. Then, following a capital call from the developer on Nov. 20, he moved $202.2 million from the DLA Piper account to a JPMorgan account maintained by Commonwealth Land Title Insurance, the escrow agent for the Park Lane deal.
Witkoff, who has not been accused of any criminal wrongdoing, said he’s cooperating with authorities and told TRD that he and his partners had “no knowledge whatsoever” of any of Low’s alleged crimes when the two went into business together. He also said the situation would not impact his project.
“The recent actions taken by the government against Jho Low will in no way impede our ability to bring the Park Lane project to a successful conclusion,” he said.
Multiple developers and brokers, however, questioned how developers could know so little about their equity partners.
But Low was not the only one to go unnoticed after transferring massive sums.
In the case of the Kazakhstani investors, the movement of $34 million to the Chetrits’ Flatotel and $6 million to the developer’s conversion of the Cabrini Medical Center in Gramercy was equally brazen.
The investors had stored their allegedly ill-gotten gains in an account with FBME, a Cyprus-based bank. FBME was widely understood to be a bank through which money-laundering transactions could be routed, including on behalf of drug traffickers and even members of the Islamic militant group Hezbollah, according to the complaint filed against Chetrit by Almaty and BTA. FBME was later added as a defendant in the suit.
In 2014, FinCEN designated the bank a concern and found that the institution was regularly used by customers to facilitate laundering, terrorist financing and transnational organized crime. The Kazakhs allegedly first attempted to transfer the funds through banks in Luxembourg, but the banks refused to accept wire transfers — partly because of the pending investigations. Then, Chetrit allegedly told Bourg to transfer the funds directly into an escrow account held by his personal and corporate attorneys, according to court documents. The funds were transferred May 20, 2013, directly from FBME to Chetrit’s attorneys.
Breaking the locks
While the scope of Low and the Kazakhs’ schemes are rare, sources said smaller amounts of illicit money slide into commercial real estate with relative ease regularly.
“At the end of the day, there are a lot of locks on a lot of doors, but people are still going to break through the locks and get in,” Herrick Feinstein’s Adelsberg said.
FinCEN’s analysis backs that up.
It shows that dirty money is not just a problem on high-profile deals. Most of the suspicious deals — some 45 percent — were for loans under $1 million. And just 8 percent of deals were valued at $10 million or more.
Still, it’s the high-profile cases that often drive the movement for change and have more far-reaching consequences.
The 1MDB scandal, for example, has also touched Extell’s Barnett, who partnered on his One57 condo development with Abu Dhabi-based Aabar Investments and privately held investor Tasameem Real Estate Co. (Aabar’s parent company — International Petroleum Investment — has come under scrutiny as part of the 1MDB investigation.)
Aabar’s former chief executive Mohamed al-Husseiny stepped down from his post earlier this year after allegations surfaced that he was in cahoots with Low. Sources said that both al-Husseiny and the Malaysian prime minister even provided fraudulent references for Low in his dealings with New York City developers.
Barnett told TRD that he signed the deal with the two funds in late 2007 or early 2008 — years before the 1MDB plot was ever even hatched. As for al-Husseiny, Barnett said he met him just twice.
The developer said it may actually be a blessing in disguise that money is being stashed in real estate rather than in assets that can be physically moved.
“The good thing about having these people investing in real estate is that the Department of Justice now has something they can sell and probably get hundreds of millions of dollars out of,” Barnett said. “If that was art or jewelry, it would be long gone. It would be out of the country. This way, they can get the goods.”
And the government is seizing — or attempting to seize — some NYC properties.
In another recent money-laundering case, the DOJ tried to take control of a 36-story office building at 650 Fifth Avenue, home to tenants such as retail giant Juicy Couture. The feds first alleged in 2008 that the building’s owner — the Islamic cultural nonprofit Alavi Foundation — knew that its minority stakeholder, Assa Corp., was backed by state-controlled Bank Melli out of Iran. (Economic sanctions imposed by the U.S. prevent Iranian entities from buying real estate here.)
It was also alleged that Assa had improperly transferred rental income generated from the building to Bank Melli.
In July, a federal appeals court overruled a lower court, deciding that, for now, the building cannot be seized, but experts say the case exposes major blind spots in oversight of these transactions.
“It just shows how easy it is to use the anonymous ownership concept in real estate to get around even sanction laws,” said Heather Lowe, director of government affairs at Global Financial Integrity, a Washington, D.C.-based nonprofit that focuses on illicit financing. “It’s amazing to think that Juicy Couture was paying rent to the Iranian government and nobody knew.”
But it’s not just money from America’s international adversaries that is cause for concern. It seems any developer who accepts capital from foreign investors is at risk.
Subrata Roy, the head of Sahara India Pariwar, the majority owner of the Plaza Hotel, is currently in jail over his own alleged real estate fraud scheme involving illegal fund-raising in the public markets in India. While the case did not involve money laundering, it’s yet another example of foreign investors parking dirty cash in New York commercial real estate.
The oversight problem
The fact that corrupt money is entering the U.S. is not lost on FinCEN.
650 Fifth Avenue, which the U.S. government tried to
seize in connection with a moneylaundering case.
In January, in a bid to combat money laundering, the Treasury Department launched a pilot program tracking all-cash purchases of luxury residential property made through shell companies in New York and Miami, an initiative that’s since been expanded to parts of California and Texas.
However, some industry insiders and lawyers who specialize in white-collar crime say the regulations missed the mark by failing to address money laundering in commercial property, which they argue is more vulnerable to abuse. That potential for abuse stems from the complex ownership structures in commercial deals.
“It’s deep cover. You can really hide behind it a lot easier than you can hide behind residential, where records are much more publicly available,” Apex’s Katz said.
FinCEN’s disproportionate focus on residential deals may even have unintentionally funneled more fraud into the commercial sector, said Andrew Bigart, an attorney at Venable.
“Anyone who’s interested in money laundering will find the path of least resistance,” he said. “As FinCEN has tightened the gaps with residential, it’s possible you might see some of that money flow into the commercial real estate sector.”
Attorney Ed Mermelstein, who often deals with clients from Russia and Eastern Europe, noted that on commercial deals, it’s not uncommon to have five, 10 or 15 limited partners in addition to general partners.
“Almost every party comes into the deal behind a legal entity,” he said. “If you start looking at the ownership tree, it winds up having so many branches that even attorneys get lost.”
Matthew Schwartz of Boies, Schiller & Flexner — a former prosecutor who represented Almaty and BTA in their case against the Chetrits — also noted that commercial real estate is often an ideal vehicle for money launderers.
“Residential properties, particularly if they’re investment properties, can have some of the same features, but, in general, they tend to be more straightforward,” he said.
A recent investigation by the New York Times into Chinese insurer Anbang Insurance Group highlighted just how complicated (and potentially dubious) the ownership web can get.
The newspaper found that Anbang, which recently bought the Waldorf Astoria Hotel for nearly $2 billion, is actually owned by a web of LLCs linked to a group of villagers in rural Pingyang County in China. Many of the villagers appear to be relatives of Anbang’s chairman Wu Xiaohui, who’s married to the granddaughter of legendary Communist Party leader Deng Xiaoping, prompting speculation that he was stashing stocks under the names of relatives, a process dubbed “white gloves.”
While Anbang has not been accused of any wrongdoing, it withdrew a bid to buy Iowa insurer Fidelity & Guaranty Life for $1.6 billion after U.S. regulators inquired into the details of its shareholders.
But ramping up oversight on the commercial sector may be easier said than done.
“I think FinCEN would very much like to expand its reach to the commercial real estate industry; I don’t think they think there’s less risk,” said Laura Marshall, a former Assistant U.S. Attorney who is now at law firm Hunton & Williams. “But the government works at its own pace.”
And even with evidence mounting that action is needed, that pace has been slow.
Exacerbating the problem is that many in the real estate industry are not trained to spot suspicious behavior, said Marshall.
Part of FinCEN’s decision to focus on illicit money in residential real estate — rather than commercial — may simply be a product of the fact that it was an easier fix, Boies’ Schwartz said. Until recently, all-cash residential transactions were completely bypassing “Know Your Customer” requirements — which were passed in 2002 and require all U.S. banks to collect information on a borrower’s identity and run security checks to ensure the customer’s name doesn’t appear on terrorist or criminal watch lists. The new LLC disclosure rules easily closed that gap.
In commercial real estate, problems are harder to identify — and most transactions already involve banks bound by KYC regulations.
Still, some said KYC requirements in the U.S. aren’t effective when it comes to flagging suspicious transactions — in part because enforcement is lax and not everyone adheres to the rules.
“It’s actually really embarrassing,” said Apex’s Katz. “They probably know who the principal sponsors are, but for minority investors, there really isn’t this emphasis on KYC. That’s why these things are happening in the United States.”
Still, FinCEN is beginning to take steps in the financial sector that could trickle down and create more scrutiny in commercial real estate — and actually identify minority investors.
In May 2018, FinCEN will begin requiring financial institutions to verify the true identities of beneficial owners — those with at least a 20 percent stake — of any legal entity opening a new account. They will also have to develop risk profiles and monitor those individuals on an ongoing basis.
As a result of these soon-to-be-implemented requirements, some developers are likely to start limiting the amount of money they’ll accept from individuals outside of traditional real estate circles. That, of course, will allow them to avoid increased scrutiny on their deals.
And some banks are already taking note.
“Some of our financial services clients are considering putting more scrutiny on large cash wire transactions involving real estate as a result of what is being perceived as heightened risk,” said Chris Faherty, a senior manager in the Investigation & Dispute Services practice at Ernst & Young.
Facing the fallout
The volatile capital markets may make it tempting for some developers to turn a blind eye to corruption and other potential pitfalls, sources said.
“When you’re someone who’s in desperate need of capital, it’s hard to ask tough questions,” said Venable attorney Ed Wilson. “I look at 1MDB and think some of these people involved probably had an idea.”
But the DOJ’s move in July to seize Low’s stake in the Park Lane could actually benefit the iconic property — if the government sells it and injects the project with new capital. After trading for $660 million in 2013, the hotel today could fetch $1 billion, sources told TRD. And that cash infusion could reignite lucrative condo plans, which Witkoff shelved earlier this year.
For Chetrit, who has not been the subject of any criminal investigation, the fallout from the partnership has nevertheless been more damaging.
In May, a New York State Supreme Court judge ordered a court-appointed monitor to oversee distribution of the funds the two Kazakhstani men invested in the Flatotel project — a move the Chetrits strongly fought, arguing that it would taint the project for potential buyers.
“The uniform perception of the marketplace, regardless of the exact details of the receivership, will be that the project is experiencing extreme financial distress,” Lee Eichen, a consultant for Chetrit, said in court papers. “This will lead to strong hesitation by prospective buyers (and the broker community at large), who will be reluctant to become involved in a project that they perceive may ultimately fail.”
As of May, there were still 22 unsold units at the 109-unit condo, representing an expected $148 million in revenue, or roughly 40 percent of the condo’s total projected sellout, court papers show. The Kazakhstanis will not be able to access the money they invested, pending an investigation.
Chetrit did not return TRD’s requests for comment, but a spokesperson previously told the Wall Street Journal that the claims had been “voluntarily dismissed with prejudice.”
Meanwhile, a spokesperson for Ablyazov’s family previously denied all accusations, saying they were politically motivated.
In general, it’s rare for developers to face prosecution in cases where they are caught in the crosshairs of shady investors.
Even developers’ own sources of wealth have often been a source of mystery and speculation.
Barnett, for instance, reportedly made his initial fortune in the diamond business, while the Chetrits trace their money back to textiles in Morocco.
But at the end of the day, KYC rules only apply to financial institutions, according to Schwartz of Boies, Schiller & Flexner.
“Other market participants don’t have that same legal responsibility but, in this day and age, everyone who is involved in business has some KYC responsibilities,” he said.
Industry experts said the U.S. is behind other countries in terms of KYC requirements. “The KYC rules in the U.S. are adhered to, to a much lesser extent than in almost any other country,” Katz said.
In addition, the U.S. doesn’t comply with financial reporting requirements set up by the international group known as the Organisation for Economic Cooperation and Development. That means that other countries report back to the U.S. government on bank accounts set up by U.S. citizens abroad, but the U.S. does not reciprocate, making it a favored offshore jurisdiction for international citizens looking to hide capital.
Many nonprofits and anticorruption activists are calling for greater accountability for developers, and even the brokers and attorneys who facilitate these deals.
“Many of the larger real estate companies will say, ‘Well, we don’t do any cash transactions, and the big banks are doing the due diligence, so we don’t have any obligation,’ ” said Shruti Shah, a vice president at anticorruption nonprofit Transparency International-USA. “But for any anti-money-laundering system to function well in any country, you need multiple checks and balances. It’s not enough that financial institutions are required to do due diligence. 1MDB shows that.”
Global Financial Integrity’s Lowe agreed, noting that law firms might be the best starting point.
“These people are handling huge amounts of money and there’s absolutely no reason why they shouldn’t have to do some due diligence checks,” she said.
“When someone comes to us for the purposes of defense, that is an area where you don’t report on what they’re telling you. That would be totally counter to the concept of justice,” she added. “But where an attorney is involved in transactional work, there’s no reason why they can’t look into who their clients are.”
Andy Singer, chairman and CEO of the Singer & Bassuk Organization, a Manhattan-based finance brokerage firm, said it’s in the developer’s best interest to vet their partners to avoid embarrassment or seeing the deal fall apart. “Self-preservation should be driving it,” he said.
Even so, the Hudson Companies’ David Kramer noted at the end of the day there’s still an element of luck.
“It’s hard to assess sometimes,” he said. “Today’s business hero, Enron, could be tomorrow’s criminal defendant. You can’t assume it’s all foolproof.”
Mermelstein said some New York developers simply refuse to take foreign money. In general, he added, the intensity of due diligence is “significantly higher” than it was just a year ago.
No developer “wants to have a knock on the door six months down the road, where an investigator is coming in looking for a former government official from Sudan,” he said.
The Glendale City Center at 101 North Brand Boulevard
Beacon Capital Partners has struck a deal to buy the 408,000-square-foot Glendale City Center office for $128.5 million, or about $315 per square foot. The price is $20 million cheaper than the $148.5 million, or $365 per square foot, Legacy Partners paid in 2007.
The seller, PGIM Real EState, obtained the property in 2014 from Legacy Partners when the latter defaulted on the $122.5 million loan it had provided, CRE Weekly reported.
Located at 101 North Brand Boulevard, the office complex has 19 stories, an attached eight-level parking garage and ground floor retail anchored by an Olive Garden and California Pizza Kitchen.
Across the street from the Glendale Galleria shopping mall, the center is about 90 percent occupied with tenants including Pacific Global Investment Management and Legalzoom. Additional amenities include an electric car charging station.
As of the end of last year, Glendale’s office submarket spanned 6.6 million square feet and saw a vacancy rate of just under 13 percent. Asking rents averaged $2.55 a square foot a month. [CREW] — Cathaleen Chen
Taylor Ing, Bryan Jacobs and Drew Sanden
Cushman & Wakefield has poached another one. Bryan Jacobs will join the firm’s Downtown Los Angeles office as the new executive vice president of enterprise solutions and head of global operational outsourcing, according to a company release.
Previously JLL’s executive managing director for solution development, Jacobs will report to Michael Casolo, Cushman’s president of enterprise solutions for global occupier services. He was hired alongside Brian Velo, who will be the firm’s executive vice president of enterprise solutions, operating out of the Chicago office.
Meanwhile, Cushman broker Marc Renard has been promoted to executive vice chairman of the company’s capital markets group. He joined the firm in 1983.
It’s win-some-and-lose-some for the real estate brokerage. It also lost two leasing veterans — Taylor Ing and Drew Sanden — to none other than Newmark Grubb Knight Frank. They will be the senior managing directors of the Inland Empire, San Gabriel Valley and North Orange County.
At Cushman, Ing and Sanden were executive and associator directors, respectively. The pair will now work with senior associate Scott Maples out of the NGKF’s Ontario, California office. The team will collectively oversee more than 2 million square feet of office property.
Single-family homebuilder Benchmark Communities also has a new hire: Shane Bouchard, who will be the firm’s Southern California operations division president. A member of the Building Industry Association, Bouchard was hired from Frontier Communities, where he was the vice president of operations for three years. There, he was able to increase the firm’s annual volume of new sales.
In his new role, Bouchard will oversee all of sales, marketing, land development and construction for Benchmark’s SoCal operations.
Waterstone Apartment Homes at 9901 Lurline Avenue and Chris McGibbon, managing director of TIAA’s real estate investments in the U.S. (Credit: Rent.com, TH Real Estate)
The real estate arm of pension fund TIAA recently acquired a 348-unit apartment complex in Chatsworth for $72.5 million, or about $208,000 per unit, The Real Deal has learned.
The seller was Foster City-based Legacy Partners Residential, which reached the end of its planned 10-year holding period, according to the deal’s brokers at Marcus & Millichap’s Institutional Property Advisors (IPA) division.
Under Legacy’s ownership, the 1971-built property at 9901 Lurline Avenue, dubbed the Waterstone Apartment Homes, underwent exterior renovations and in-unit upgrades. But more is planned under its new guard.
“It’s a value-add buy,” IPA’s Greg Harris told TRD.
Harris represented both the seller and the buyer, alongside colleagues Ron Harris, Kevin Green, Joseph Grabiec and Paul Darrow.
“[TIAA] came into the offer with a strong idea of the San Fernando Valley’s demographics, job base and transit accommodations,” Darrow said. “Even after renovations, they feel they could rent the units at a discount compared to new construction in the area.”
Located just a block from the Topanga Westfield shopping mall and a mile from the Chatsworth Metrolink station, the apartments’ amenities include a clubhouse with pool tables and a lighted tennis court.
TIAA sold its 87,100-square-foot Northpark Village Square for $58 million in July, TRD reported.
Sean Rad and his rad pad at 10776 Wilshire Boulevard (Credit: The Agency, Getty)
Guess it wasn’t a match after all.
Tinder CEO Sean Rad is selling his Wilshire Corridor penthouse for a smidgen below $9 million. The asking price would give him a fast and sweet profit of $1.5 million less than a year after scoring the pad.
The dating app co-founder first acquired the 5,300-square-foot property in late 2015, Variety reported, just months after he was reinstated as CEO after being briefly ousted over a sexual harassment lawsuit filed by Tinder co-founder Whitney Wolfe, who went on to found Bumble.
The Agency’s Brendan Fitzpatrick has the listing.
The three-bedroom condo in the Carlyle at 10776 Wilshire Boulevard features 13-foot ceilings, double bathrooms in the master suite and multiple terraces that face the Santa Monica mountains.
Rad is opting for a more wholesome spread — a 5,085-square-foot family house — just above the Sunset Strip. He bought the gated home for $7.65 million, Variety reported, from film exec Paul Hanneman. In March, Rad listed another Wilshire Corridor condo for $1.8 million. [Variety] — Cathaleen Chen
Lantana Santa Monica (via Lantanasantamonica.com); Mark Laderman and Collin Komae
Two Tishman Speyer alumni are striking it out on their own, and they aren’t starting small.
Artisan Partners, led by former Tishman execs Mark Laderman and Collin Komae, is in contract to buy the four-building Lantana office campus in Santa Monica for roughly $400 million, The Real Deal has learned. Artisan’s partner on the deal is Brightstone Capital Group on behalf of an investor, sources said.
The seller, Atlanta-based Jamestown, will rake in $825 per square foot on the sale of the 484,840-square-foot campus with buildings at 2900 and 3000 West Olympic, as well as 3003 and 3301 Exposition Boulevards. The deal is among the largest in a flurry of major Westside office trades, including Minskoff Equities’ pending purchase of the Bluffs at Playa Vista for a price in the $400 million ballpark, or roughly $800 a square foot.
Artisan, Brightstone and Jamestown could not be reached for comment, but sources said the buyers plan to renovate the Olympic side of the campus, which is home to Mark Burnett Productions, One Three Television, and a slew of other entertainment firms. The two buildings on the Exposition side are fully leased to multi-level marketing firm Beachbody, the maker of P90X. The firm’s headquarters span 200,000 square feet on Exposition boulevard. CoStar shows all four buildings as fully leased, but sources said there is a small percentage of vacancy on the Olympic side.
Stephen Somer of Eastdil Secured brokered the deal, but declined to comment. It was first marketed by Eastdil in late 2015, but it didn’t sell. The campus was never officially placed back on the market, and the buyers made an offer on the property without an asking price, sources said.
Jamestown will see a significant profit on Lantana, which it purchased in 2013 for $328.4 million, or $681 a square foot, from Houston-based Lionstone Investments.
Major office properties have been trading with regularity on the Westside. Boston Properties acquired a 50 percent stake in Santa Monica’s Colorado Center for $513 million, or roughly $911 a square foot, in a deal that closed in June. Over the summer, a fund managed by Houston-based Hines sold a 19-story office tower at 12100 Wilshire Boulevard to Santa Monica-based REIT Douglas Emmett for $225 million, or close to $616 per square foot.
This will be Artisan’s first major acquisition. Laderman and Komae co-founded the firm earlier this year, after resigning from Tishman.
Petra Ecclestone Stunt and the Spelling mansion at 594 South Mapleton Drive (Credit: Wikipedia Commons, Getty)
The Spelling mansion in Holmby Hills may beat out the Playboy Mansion for the deal of the year.
For the second time in five years, the 56,000-square-foot French chateau-style compound, dubbed The Manor, has hit the market. Its $200 million asking price is nearly twice what Twinkies heir Daren Metropoulos paid for the Playboy Mansion earlier this year.
The seller, British heiress Petra Stunt, acquired the five-acre estate in 2011 for $85 million. Stunt, the 27-year-old daughter of business magnate and Formula One chief Bernie Ecclestone, completed an extensive renovation of the property. At one point, she was employing up to 500 workers.
The freshly revamped seven-bedroom manor has a two-lane bowling alley and a service wing. It features a 30-foot-high entry, wine cellar, a beauty salon with massage and tanning rooms, a double staircase and a gym. The master bedroom suite alone spans 7,000 square feet with its own living room, kitchen and two-level closet. Outside, there is space to park 100 cars. The mansion, which was built in the late 1990s by Tori Spelling’s father, the late TV producer Aaron Spelling, has 123 rooms in total.
Under Stunt’s ownership, the basement was transformed into a nightclub, a giant exotic fish tank was hauled into the study, walls were clad in velvet and there were “little crystals everywhere,” according to a 2012 interview she gave to W magazine.
Rick Hilton and David Kramer of Hilton & Hyland have the listing. [WSJ] — Cathaleen Chen
From the New York print issue: J. Kyle Bass is famous for predicting the U.S. housing crisis and making millions of dollars shorting subprime mortgage bonds in 2008. So when the hedge fund manager announced this February that he shorted the obscure residential real estate investment trust United Development Funding IV, its other investors apparently decided it was best to get out of the way.
Within a day of Bass publishing an open letter announcing his short, the Dallas-based REIT’s share price had dropped by 30 percent. Within a week, those shares had fallen by 69 percent and then stopped trading entirely after the FBI raided the headquarters of its parent company.
The hedge fund manager had won again.
Bass, who accused UDF of running a Ponzi scheme, wasn’t betting against any particular submarket, let alone the real estate industry as a whole. But his bet stands for something broader — that shorting real estate is increasingly back in vogue.
It’s been close to nine years since a handful of hedge fund managers made a fortune betting against the toxic residential mortgage-backed securities (RMBS) market, which was immortalized in Michael Lewis’ book (and the subsequent film) “The Big Short.” Now, a growing number of observers are cautioning that the next real estate downturn is about to begin, if it hasn’t already. This decline creates potential opportunities for cynics to benefit from other people’s losses.
The question now is: Are we about to witness the next big short? If so, it could largely involve commercial properties and companies, as well as publicly traded residential firms similar to UDF, industry sources say.
“The debate has intensified over the last couple of months,” Richard Hill, head of U.S. REIT equity and commercial real estate debt research at Morgan Stanley, told The Real Deal. Hill added that his clients are increasingly asking about shorting options for commercial mortgage-backed securities (CMBS).
Short order
On the one hand, the opportunities for short selling real estate today seem far fewer than they were in 2006 and 2007. For a successful short, it’s not enough to predict that the market will take a turn for the worst. One must also bet that most other investors are underestimating how severe the problem is, which would leave asset prices overvalued.
Prior to the 2008 financial crisis, a few skeptics predicted that the housing market would collapse entirely — sending a shock to the U.S. and global financial systems — while the majority argued that the market was essentially unbreakable. This stark difference of opinion led to enormous profits for those who bet on the worst-case scenario.
Today, differences of opinion are far more nuanced. Virtually no one is predicting an all-out collapse. Instead, bulls and bears disagree over whether the real estate business is merely slowing down or entering a downturn, and over which sectors will be hardest hit. That creates shorting opportunities in certain corners of the market, but a repeat of the wins and losses seen during the last collapse seem far-fetched. And the U.S. housing industry is widely considered stable.
In commercial real estate, however, new cracks are starting to show, as several sectors may be near or past their peaks.
First, a larger share of investment in commercial properties than ever before is now in public hands. In August 2016, the National Association of Real Estate Investment Trusts’s REIT index — which tracks the performance of the industry — was 53 percent above its precrisis peak. Since 2008, 68 real estate companies have gone public, according to NAREIT. Meanwhile, in recent years, CMBS issuance has exploded (though it still remains below precrisis record levels).
That growth matters because publicly traded real estate is much easier to short than its private counterpart. And the less private real estate becomes, the more likely shorting is to occur.
“We’re now seven years into a recovery, and the sense is there’s probably more downside risk than upside opportunity,” said Douglas Hercher, a principal at the hospitality investment sales brokerage Robert Douglas.
As of mid-August, 3.8 percent of all REIT shares (around 557 million shares) were held in a short position, according to the New York investment banking shop Sandler O’Neill. That’s slightly below the 4 percent average for all U.S. stocks, and a far cry from retail and consumer durables, where 4.8 percent of shares are shorted.
But shorting in the publicly traded real estate arena appears to be on the rise, according to multiple sources. The percentage of shares being shorted in the Vanguard Group’s REIT exchange-traded fund — a leading fund that tracks the values of a range of REIT stocks — nearly doubled, to 3 percent in mid-September, from a low of 1.7 percent in April 2015.
“The issue with shorting REITs is that because they are generally pretty high yielding, it’s actually relatively expensive to short them,” said Edward Mui, a REIT analyst at Morningstar. “This forces short sellers to have a strong conviction,” he added.
In simplified terms, investors short REITs by borrowing shares and selling them, then agreeing to buy them back and return them to the lender at some point in the future. If the share price falls in the interim, the investor will spend less money buying them back than he or she made selling them — and can keep the difference as a profit.
Kyle Bass
But while the shares are borrowed, the investor has to pay the lender the equivalent of any dividends on the stock. REITs tend to pay out higher dividends on average than other stock market categories; as a result, shorting them is comparatively more expensive, according to sources. On average, REIT share prices are also more stable than other stocks, including financial and tech firms, which also presents a disadvantage for those looking to take a short position.
“You’ve got such predictable and sustainable earnings, don’t you want to short companies that are less predictable?” Brad Thomas, an investor and columnist who co-wrote the book “The Intelligent REIT Investor,” told TRD.
Despite these headwinds, short investors are currently doubling down on two types of REITs: data centers and hotels. As of August 15, 11.1 percent of data center REIT shares (around 28.4 million shares) were being shorted, according to Sandler O’Neill. Meanwhile, 8.1 percent of hotel REIT shares were being shorted, and because the hotel industry is much larger, that amounts to around 171 million shares.
Prime targets
Both data centers and hotels face high uncertainty during financial downturns, which makes them ideal candidates for shorting. Data center REITs depend on a healthy tech sector, said Sandler O’Neill analyst Alex Goldfarb, and with warning signs of a bursting tech bubble increasing, bears have plenty of reasons to bet against them.
San Francisco-based Digital Realty Trust, the most heavily shorted REIT at 18.4 percent, saw its volume of short interest increase by nearly 20 percent between mid-August and mid-September, according to data from the U.K. research firm IHS Markit. Digital Realty, which owns close to 90 percent of the buildings in its portfolio, has leasehold interests in three Manhattan data centers, located at 60 Hudson Street, 32 Avenue of the Americas and 111 Eighth Avenue. A Sept. 26 report by Citibank argued that the REIT’s high level of shorting is “due to its forward equity offering.”
Digital Realty is looking to issue new stocks to fund the acquisition of eight data centers in Europe, a spokesperson for the company told TRD. “Once the forward sale agreements have been settled, we would expect to see short interest return to more normalized levels,” the spokesperson said.
From left: Alex Goldfarb, Douglas Hercher and Darrell Wheeler
Among hotel REITs, Pebblebrook Hotel Trust (14.6 percent), Host Hotels & Resorts (12.4) and LaSalle Hotel Properties (12.1) were the most-shorted stocks as of mid-August. Pebblebrook owns six upscale Manhattan hotels, including The Benjamin at 125 East 50th Street and the Affinia Manhattan at 371 7th Avenue. Host Hotels also owns six Manhattan properties, including New York Marriott Marquis and Westin Grand Central. LaSalle owns four New York hotels, including the Park Central and The Roger. Representatives for the three hotel REITs were unavailable for comment.
U.S. hotels are struggling with the rise of Airbnb, a strong U.S. dollar, a looming supply glut in Manhattan, and fears over an economic slowdown. “Hotels tend to be the canary in the coal mine,” said Hercher of Robert Douglas. Because hotel guests take rooms on a short-term basis, revenues tend to fall more quickly in economic downturns compared with office and residential properties.
Wes Golladay, a hotel analyst at RBC Capital Markets, said the surge in new supply and a recent dip in business travel amid falling corporate profits have formed the biggest clouds over the hotel industry this year.
“Pebblebrook and LaSalle are both geared toward business travelers,” he said. “That is their bread and butter and that is the part that is soft.”
But there are strong differences of opinion over how big of a threat these factors are. While many believe that Airbnb poses an ongoing threat to the hotel industry, hospitality executives often counter that renting a room in a stranger’s apartment can never compete with a clean hotel. And some analysts argue that Airbnb’s impact is already priced in.
In Manhattan, one of the world’s top hospitality markets, hotel revenues and cap rates have fallen since mid-2015, though industry insiders often claim the hotel market will rebound in the next few years.
“I think we’re going to turn the corner by the third quarter of next year,” Hercher said, speaking of New York’s hotel market. “Every other market in the country would kill to have New York’s numbers.”
Beyond hotels and data centers, major short positions on REITs are scarce, but examples can still be found.
Mack-Cali Realty Trust saw 6.7 percent of its shares being shorted as of mid-August, down slightly from 7.1 percent at the end of July, according to Sandler O’Neill. The New Jersey-based REIT struggled in the years following the financial crisis amid a broader weakness in the suburban office market — its primary source of revenue. In June 2015, the company hired a new CEO, Brookfield Office Properties veteran Mitch Rudin, and embarked on a turnaround strategy. Mack-Cali’s share price rose 65 percent, to $27.81 as of Sept. 28, up from $16.90 in May 2015.
Although some investors believe that the bulls have gotten a little ahead of themselves, so far those skeptics are in the minority. John W. Guinee III, an analyst at the financial services firm Stifel, Nicolaus & Co., argued that Mack-Cali’s stock “looks very cheap to us and most knowledgeable investors.”
SL Green Realty Corp., New York City’s largest office landlord, has also seen above-average shorting (5.4 percent) amid concerns over a supply glut in the Manhattan office market. Fellow office REITs Vornado Realty Trust (1.6 percent) and Boston Properties (1.9) remain less of a target for short sellers.
The big unknown is whether REIT shorting will increase in the near future. Morgan Stanley’s Hill, for one, said a growing number of his clients are taking a “more cautious” view on the REIT market.
Much depends on the Federal Reserve’s interest rate policy — or rather the market’s expectations of it. “If you have the view that interest rates are going up, then yeah you’re going to short the group,” said Goldfarb of Sandler O’Neill, referring to REITs as a whole.
Higher Treasury yields typically translate to higher mortgage rates and make bonds look more attractive compared to real estate. That puts downward pressure on property prices and by extension REIT stocks, according to sources. But so far, all analysts interviewed for this story said they expect Treasury yields to remain low for the foreseeable future.
A second factor that could encourage shorting is largely bureaucratic. In September, REITs received their own classification in the S&P 500 and MSCI stock indices, where they were previously grouped with financial and insurance firms. Several observers have argued that the change could increase visibility and investor interest. But conversely, it could also boost shorting.
The more educated investors become, the more they notice opportunities for short bets, said Mui of Morningstar, noting that the more exposure the asset class gets, “the more blood will be in the water.”
The CMBS effect
In “The Big Short” before the last financial crisis, CMBS played second fiddle to the subprime residential mortgages that caused the housing bubble to burst. Even though hedge funds such as Los Angeles-based Lahde Capital Management had placed big bets to short CMBS during that time, the most outrageous profits were made on RMBS.
Today, that dynamic looks fairly different. While the U.S. housing market is widely considered stable, market bears now see overleveraged commercial real estate deals as a potential target.
And much like the case with REITs, CMBS shorting is on the upswing, according to multiple sources. One good indicator is the dollar volume of long bets on post-2012 CMBS indices minus the dollar volume of short bets. If the sum is growing, long bets dominate. If it is falling, short bets likely take up a larger share of the market.
As of Aug. 26, the net sum stood at $4.76 billion, down from $5.21 billion six months ago and $6.49 billion a year ago, data from the post-trade financial services firm the Depository Trust & Clearing Corporation show.
Investors short securitized commercial debt deals by buying derivatives on indices known as CMBX — which track CMBS performance.
Digital Realty has a long-term lease on 60 Hudson Street, which could be a target for short sellers as the tech economy softens.
“When people say ‘Hey, I need to short real estate,’ they get pointed to the CMBX,” one analyst told TRD on condition of anonymity.
There are currently nine such indices — CMBX.1 to CMBX.9 — and each one tracks the performance of a basket of specific CMBS transactions, usually issued within a year. CMBX.1 to CMBX.5 track CMBS issued prior to 2008, while CMBX.6 to CMBX.9 are based on post-crisis bonds.
The most aggressive short bets are currently being placed on loans tied to retail deals closed in 2012, which happen to be part of the CMBX.6 index, according to Hill. “There has been a significant debate about CMBX.6 over the past months given the prevalence of loans secured by malls,” he said.
A flurry of store closures across the U.S. has sent retail valuations down from 2012 levels, sparking fears that mall owners who bought or refinanced their properties at peak prices could default on their loans. “In some cases, the loan-to-value ratios of these loans are now approaching 100 percent and that’s only a few years afterwards,” Hill said.
A recent Morningstar Credit Ratings report found that mass store closures by department store giant Macy’s could impact as much as $3.64 billion in CMBS issued since 2010. Meanwhile, Sears, JCPenney, and Sports Authority pose their own threats.
And it’s not just securitized retail debt that’s feeling the heat. As of Aug. 26, the CMBX.8 — based on all CMBS deals issued in 2014 — was one of the few indices where investors placed more short bets than long bets in its BB tranche, at a net difference of $50.3 million. These bonds suffer from looser underwriting standards and are heavily exposed to multifamily buildings in now-struggling oil producing regions such as Houston and parts of North Dakota, as well as underperforming hotels.
While 2012 deals at least benefited from a continued market boom in 2013 and 2014, which drove up asset values, 2014 deals closed at peak prices and are generally more vulnerable to a downturn, Hill explained.
Darrell Wheeler, head of structured finance research at S&P Global, said new CMBS deals issued in 2016 could be even more at risk if the real estate market goes south. Traditionally, 70 or more individual mortgages have supported a CMBS pool, he said, but this year a growing number of multi-loan conduits consist of only 25 to 40. With fewer loans in a CMBS transaction, one or two of them defaulting would have a bigger impact on the value of the whole. The CMBS market is also now exposed to a high volume of interest-only loans on commercial properties, Wheeler added.
Those factors alone create several opportunities for market skeptics to go short.
And as with REITs, 2016 is a year of big bureaucratic changes for the CMBS, which could raise the stakes for those taking short bets. This December, new risk retention rules will go into effect requiring CMBS issuers to keep a portion of their loans on their books. The requirement will make it more expensive for banks to originate securitized commercial real estate loans while weeding out the bad seeds.
“Many firms have assessed that the market will be more volatile than prior years,” said Sean Barrie, a research analyst at the CMBS data firm Trepp. “The regulation has caused some lenders to pull their loans back from the securitization sector, and a few have stepped out of the conduit lending game altogether.”
It doesn’t help that the market is bumping up against the much-decried “Wall of Maturities” — a staggering $105.8 billion in CMBS deals set to expire by 2018.
“We have been vocal that we think the refinancing rate for loans coming due in 2017 will be lower than the market anticipates,” said Hill. “And we think the default rate will be higher.”
Private affairs
In theory, virtually every American is either going short or long on the private real estate sector. Whether they want to or not, apartment renters short the housing market: They benefit from a real estate downturn because it drives down their rental payments. Homeowners, by contrast, go long on the market: They benefit from asset appreciation and increased rental income during a market upswing.
For institutional investors, however, shorting real estate assets that change hands privately rather than on stock or bond markets is a tricky bet. While REIT stocks and CMBS bonds are constantly being traded — which makes their prices fluctuate and shorting all the more possible — private commercial property values are much harder to forecast. Investors may believe that office buildings in certain parts of Manhattan will be worth less in the coming year, but if none of them trade during that time, any change in value remains hypothetical.
To get around that, those looking to short private real estate use the National Council of Real Estate Investment Fiduciaries’ Property Index (NPI). The index tracks the returns on private U.S. real estate owned by institutional investors. A handful of banks hold licenses to issue derivatives on the index, meaning investors can place long or short bets on its performance. But the NPI index tracks only a small share of the U.S. real estate market and is based on property appraisals rather than actual sales.
Shorting private real estate played virtually no role in the U.S. before 2008. As of December 2007, a mere $500 million in derivative trades on the NPI had been completed. The index has no relevant data for 2016, according to a spokesperson.
But private real estate derivatives are still virtually nonexistent today, said Kelly Haughton, CEO of Global Index Group, a company that creates and markets
derivatives across a range of industries. Haughton is currently working on a private real estate derivative, he told TRD. “We believe there’s a lot of demand for these kinds of securities and has been for quite some time,” he said.
Pointing to economist Robert Shiller, who found that markets often behave irrationally and are prone to crashes, Haughton added: “If things get irrationally exuberant, you want to have a tool that allows you to bet it’s irrational and that it will come back down.”
Haughton’s future customers, and many of the investors who currently short REITs and CMBS, are betting that there is more trouble ahead for the real estate industry than most people realize. If they are right, the New York market may soon deal with more conservative REITs and less accessible CMBS financing.
But at least the city has deep-pocketed Chinese investors, right?
It turns out Bass has something to say about that. Not long after his short of UDF, the hedge fund manager had picked a new, much larger target: China. He argued that the country was on the verge of a financial crisis amid a surge in bad bank loans, and he took foreign exchange positions betting on a steep devaluation in the yuan, China’s currency, .
“There are so many perfect parallels to the U.S. mortgage credit system or the European banking system and the Chinese banking system,” Bass said in a July interview with Real Vision TV, which brands itself as the “Netflix of finance.”
“There are things that go on in those systems that show you there are problems. We see it starting now.”
177 East Colorado Boulevard
Newport Beach-based real estate firm Saunders Property has put a 321,000-square-foot Pasadena office building on the market, two years after buying it from AT&T.
The Class A property, at 177 East Colorado Boulevard, is expected to fetch as much as $128 million, or $400 per square foot, according to Real Estate Alert. That’s a tidy profit over the $81 million Saunders paid for it in 2014. Eastdil Secured has the listing.
Saunders completed a major $24 million renovation of the property and brought it to 88 percent leased, signing tenants such as WeWork and iRobot. AT&T still occupies 101,000 square feet. The average remaining lease term for the building’s tenants is close to nine years.
New retail tenants include Hot 8 Yoga studio and a Fleming’s Steakhouse. [REA] — Katherine Clarke
From the New York website: Congress thought it extended the EB-5 visa program at the end of September — but did it?
A letter from the Congressional Research Service, which serves as a research arm for Congress, questions whether the EB-5 Regional Center Program, which earmarks green cards for investors in development projects, was lawfully extended. The continuing resolution, issued Sept. 30, was slated to keep the program up and running until Dec. 9, and lawmakers could hash out terms for a potential long-term authorization during that period.
But in the letter, dated Oct.3 and reviewed by The Real Deal, CRS cites a legal technicality which may mean the program is no longer legally funded. The program, it says, was subject to certain “sunset provisions” that see it expire unless explicit legislative action was taken to extend it. Since no legislation was technically passed to extend the program, it may have lapsed. That means the Regional Center Program, which helps developers raise billions of dollars for real estate projects, may no longer be active.
The letter was sent in response to a request from legislators, who were unclear on the status of the program.
If that is, in fact, the case, the government could have opened itself up to litigation from thousands of investors who wouldn’t get the green cards they were promised, sources said.
“If it has expired, it means they can no longer process regional center investors filings,” said one EB-5 expert, who spoke on the condition of anonymity. “There would be no more issuing of green cards. The ramifications would be huge.”
Representatives for both the Senate Judiciary Committee and CRS did not immediately respond to requests for comment.
A botched renewal would just be the latest in a long line of controversies related to the program, which many have argued is rife with fraud and abuse.
Detractors claim it favors projects in wealthy parts of the country and can be used to bring dirty money into the U.S., while proponents say it promotes development and creates jobs. Real estate developers, who’ve tapped the program for cheap capital, have actively lobbied to keep it alive.
The L.A. Times building at 202 West 1st Street (Credit: Getty)
The Onni Group is already forging ahead with plans to develop a parking lot formerly used by L.A. Times employees.
The Vancouver-based developer filed plans Tuesday for a 30-story mixed-use project on the Second Street site, just one week after it acquired the entire L.A. Times complex for $105 million.
The project calls for 107 condo units and 534,044 square feet of office space, Curbed reported.
Onni’s plans for the remainder of the Times site, which comprises three buildings, including a moderne-style structure along Spring Street, have not yet been announced. A Metro station is currently being constructed across the site between Broadway and Spring Street. [Curbed] — Cathaleen Chen
L&R CEO Nathan Cohen and the parking lot at 433 South Main Street
No property is immune from the looming wrath of the Neighborhood Integrity Initiative — not even parking lots.
An unknown private developer, in contract to buy a 19,019-square-foot lot in Downtown Los Angeles, anonymously filed plans Tuesday for a 196-unit apartment complex on his prospective new property. The plans were preemptively filed in order to get the project approved before the Neighborhood Integrity Initiative could go into effect, Adam Tischer of Colliers, who has the listing along with Mark Tarcynski, told The Real Deal.
The seller of the site at 433 South Main Street is the L&R Group of Companies, the parent entity of Joe’s Auto Parks, who owns it in a partnership with the Pasadena-based System Property Development Company.
The in-contract buyer is working with the selling partnership to entitle the property, with the former spearheading — and bankrolling — the efforts, Tischer said. In addition to the apartments, the potential project would include 6,344 square feet of ground floor commercial space, according to planning documents.
The sale isn’t scheduled to close until 2017, Tischer said. The nearly half-acre lot is valued at $2.3 million, or $118 per square foot, according to CoStar’s 2016 assessment.
The Neighborhood Integrity Initiative was officially approved for the ballot Thursday, and if approved by voters, it would impose a two-year moratorium on any new development that requires zoning changes.
“If the devastating Neighborhood Integrity Initiative passes, land that is already entitled will become among the most valuable properties in the city,” Tischer said.
If the current transaction falls through, he added, the current owner would have the opportunity to sell at a premium rate.
L&R owns more than 80 Downtown parking lots, but has recently ventured into mixed-use development. The landlord owns two office buildings and a warehouse between Broadway and South Main Street, and two South Park sites that have projects in the works.
Its massive Circa development, in partnership with Jamison Services and Hankey Investment, broke ground earlier this year and is slated to deliver in 2017. L&R is also partnering with developer Geoff Palmer on a 10-story, 439-unit apartment building to rise one of its parking lots just north of Olympic Boulevard.
Bob Hope at the property in Toluca Lake (Getty Images)
An effort to preserve a house built by late entertainer Bob Hope in 1939 could have unintended consequences for his children and the charitable foundation that bears his name.
Last month, Los Angeles City Councilmember David Ryu introduced “emergency legislation,” asking the city to immediately consider the now-15,000-square-foot Toluca Lake mansion, where Hope reportedly entertained the likes of Frank Sinatra, as a historic and cultural monument. The motion was a reaction to demolition permits filed by its current owner — Hope’s daughter, television producer Linda Hope. Ryu’s motion was passed unanimously by City Council.
But Craig Strong, the listing agent on the property, told the Hollywood Reporter that the city’s rushed move hurt his client’s ability to sell the property. Now, continued upkeep will take a toll on the proceeds she plans to donate to her parents’ charitable organization, the Bob & Dolores Hope Foundation, he said.
“The closing was just two weeks away and the city didn’t ask what was going on — they just acted,” Strong told THR. “So while we wait on the City, Linda continues to maintain the 5-plus acres and home which ultimately cuts into the proceeds that go to the charitable organizations. Ask the city how they feel about that.”
The reaction to the demolition permits, Strong said, was overblown, as they were only filed for smaller structures on the property, including a pool house. He said the would-be buyer actually wanted to restore the main house, before the motion halted the sale entirely.
If the house does indeed get historical designation, it could be hard for a potential buyer to swallow, Strong told THR.
“The way the house was built and added on over the years, it needs to be remodeled correctly or redone completely, which would be difficult if it was historic,” he said. “It’s not to say that someone couldn’t do it, but I feel that someone would want to make it their own.”
Ryu said in a stement that “it’s important that the city’s historic-cultural resources are celebrated and rich architecture preserved for future generations.” [THR] — Hannah Miet
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From left: Edward Roski, Jr., Rick Caruso and Donald Sterling
The famous 19th Century economist John Stuart Mill once said that “landlords grow rich in their sleep.”
It’s no surprise then that the Forbes 400 annual rich list is packed with real estate moguls from across the country. Read on for a list of the Southern California real estate players who made the cut this year.
1. Donald Bren, #27, $15.2 billion
Irvine Company’s Bren, of Newport Beach, beat out every other California billionaire in the field with a reported net worth of $15.2 billion. At 1.1 million square feet, the second phase of Irvine Company’s Playa Vista project, Villas, is one of the biggest developments currently under construction in L.A.
2. Edward Roski, Jr., #110, $4.9 billion
Roski, Jr., the president of Majestic Realty, landed at No. 110 on the list with a net worth of $4.9 billion. Majestic, headquartered in Southern California, has a 76.5-million square-foot portfolio that includes industrial, office, and retail space, as well as sports, entertainment and hospitality projects, according to its website.
3. Rick Caruso, #156, $3.7 billion
Perhaps most famous of the SoCal real estate billionaires to those outside the industry is Caruso at No. 156. The Grove developer, who lives in Brentwood, boasts a net worth of $3.7 billion (the same as Donald Trump). These days, the retail mogul is working on a complete overhaul of downtown Pacific Palisades to create Palisades Village, which will comprise retail buildings, restaurants, a supermarket, a movie theater and a park.
4. Donald Sterling, #190, $3.4 billion
Donald Sterling, the controversial former owner of the L.A. Clippers, lands at No. 190 on the list, Sterling has a net worth of $3.4 billion and a portfolio that spans from the Westside to Koreatown. His properties include an office building at 9429 Wilshire Boulevard in Beverly Hills and the Santa Monica Bay Club.
5. George Argyros, #335, $2.1 billion
Barely making the cut at No. 335, Argyros of Arnel & Associates began accruing his net worth of $2.1 billion as a stockholder in a Kansas-based software company, DST Systems. He founded Arnel in 1968 and now owns 5,500 apartments in Orange County and and additional 2 million square feet of retail and office properties in Southern California. [Forbes] — Cathaleen Chen
Coffee Bean and Tea Leaf in Midtown (credit: Coffee Bean and Tea Leaf)
From the New York website: Trendy java joint chain Coffee Bean & Tea Leaf has shuttered all 12 of its New York City locations.
The chain of Los Angeles-based stores featured on shows like “Entourage” and “The Hills” closed down the dozen franchise locations over the weekend, the West Side Rag reported.
“All NYC stores were franchised and unfortunately are closing,” a spokesperson for the company told the blog. “We value the brand’s loyal following in the Big Apple and intend to swiftly bring The Coffee Bean & Tea Leaf hand-crafted coffees and teas . . . back to New York City,”.
On the Upper West Side, the chain had locations at 77th Street and Broadway, 79th Street and Columbus Avenue and 86th Street and Amsterdam Avenue. Signs on the stores informed passersby that they would be “reopening soon.”
The java spot follows chains like Organic Juice and Pie Face that have shut down en masse in recent years. [West Side Rag] – Rich Bockmann
