One-on-One with Richard LeFrak Part 1
EisnerAmper Real Estate Services Group Partner Lisa Knee interviews LeFrak Organization Chairman and CEO Richard LeFrak on his start in commercial real estate and the importance of family legacy. Richard shares his perspectives on the development of the Ellipse residential project, the history of 40 West 57th Street on Billionaires Row, the return of millennials to forgotten neighborhoods, and the state of affordable housing and construction costs in New York City.
Lisa Knee: Hi I'm Lisa Knee with EisnerAmper, and I have the pleasure today of sitting with titan Richard LeFrak from LeFrak Industries.
Richard LeFrak: Well thank you for coming.
LK: So I wish the cameras were rolling before because we had a lot of great history lessons on your family, and your 100 year history of being in the real estate business. So if you could give us a little bit of a history lesson as to how your family started in real estate, and maybe some of the earlier projects and how it's led you to where we are today.
RL: The firm was founded by my grandfather, Harry LeFrak. The firm was really turned into something amazing by my late father, Sam LeFrak. I hope Richard LeFrak did his share to turn it from something a little bigger than he found it, and my two sons, Harrison and Jamie, will hopefully carry on his legacy- or are carrying on his legacy now- and I don't know how long I'll be here, but I know if I’m still here in 20 years this firm will be bigger, better, and smarter than it is today. The actual business was started by my grandfather shortly after the turn of the century. He was an immigrant who came to the United States as a young man, and actually started off as a tradesman. He was a glazier. He kind of became a small subcontractor and then with the intrepid spirit that those immigrants had that came here really to get a better life, I guess, he started and did some small developments with partners. He was not an educated man in the sense that he had a formal education, but he was a clever man. He made his way, and he started building walk-ups, and small projects in Brooklyn which is where he lived and that ultimately became this.
LK: You refer to your sons being in the business with you, and you are a second generation so now we are…
RL: No third.
LK: Third generation and so now we’re fourth generation.
RL: We are.
LK: And how important is that famous family legacy to you, and was that instilled right away?
RL: That's the most important thing for me because I'm not really working for money at this point. I had the privilege of having the experience of working with my father and working with my sons, and for me that's as good as it gets.
LK: So I think most of New Yorkers traditionally know from the big project in Queens 5,000 units is that accurate?
RL: Yes well my late dad, who was in many ways the real genius and driving force behind the company -because he really took it to a completely different level from my grandfather - recognized after World War II that there was a huge shortage of housing for middle income families. He had a very intense determination to get things done, and he decided he could do it with very little help from the government. He would build affordable housing, and somehow through the force of his will, get it done at a price that people could afford without government subsidies. He was very prolific in the early ‘50s until his death of course. The project he's mostly known for is LeFrak City. It’s LeFrak but everybody says Lef-rak in New York. So LeFrak City which was 5,000 unit apartment complex in Queens on a Long Island Expressway. Of course when people come from the airports they say I went past LeFrak City. He built that between 1959 and 1968. It contains 5,000 apartments and we're still very proud to have our name on it. We still own it, and in the last seven or eight years it's been going through a major upgrade and renovation. Actually, we've spent almost three times as much in restoring it as he did in building it.
RL: But it's still a great asset. It’s fully occupied a lovely family still lives there. It’s kind of a melting pot of New York with the cross-section of everybody who you would expect. People say you know. Queens is a borough of immigrants. And we have a in a big cross section of the population there, but we’re still very proud of it we have our name on it. It’s kind of a legacy asset that I would never ever sell because it's really one of the touchstones of our success and one of the landmarks of our success.
LK: So keeping with the theme of like legacy assets that you would never sell, that you were very proud of. As you walk in, you see the entire layout of your New Jersey waterfront project -which I’m not sure people appreciate how massive it is, and what a great undertaking. And the new building Ellipse which we were looking at circular, and just to make sure we note that it's residential and it's not going to be a condominium.
RL: Right it’s not a condominium.
LK: Could you talk to us about how you completely redid the waterfront there and what your vision is and long-term?
RL: Well it was a great opportunity that came our way just by accident. We were the original developers in Battery Park City, and built the first big project down there in 1980 when it was touch and go whether it would be bankrupted by the government. By circumstances, and at that time everybody said you're crazy who's going to live downtown- pretty funny today when you hear that, but in those days there was nobody live downtown. It was Wall Street. You had an office, and that was that. Through let's say some miscommunication or hypocrisy from the government officials at that time, we were supposed to continue on. After we built the first six buildings, and kept going, and they had a change of heart. We got a random call from the developer in New Jersey. a famous developer, a shopping center developer named Mel Simon- who is the giant Simon company today- and he said I have this property in New Jersey on the waterfront and the bank told me that if I get you guys involved that they would finance it for us, because there are not too many developers who can take things on of that size.
So my late father went out to look at the property and called me on the phone, and said,” Richard you have to come out and take a look at this. it's something I've been dreaming about my whole life.” now if you saw what he was dreaming about, you could think he should have been put in a home because it was just an old railroad yard with abandoned industrial buildings on it. There was nothing there, except that it was in Jersey City. In those days it was considered sketchy at best. But he recognized the potential of being able to create something from scratch of great size. I went out, of course, and took a look and it was like being put in the middle of the desert. And I said where do I start, there are no roads here, there's nothing here. Where is my point place, and my beginning? With a lot of hard work we sketched up a plan and took advantage of three things that were part of the landscape there. Number one it was over a mile of riverfront. Number two it had a big path station that was totally underutilized that had direct service to downtown and Midtown. And it was big enough so that you could create your own community that was probably 17 or 18 million feet ago. Since then we've built, I don't know 17 or 18 high-rise apartment buildings with about 6,000 apartments in it. I think we have about eight or nine office buildings, two hotels, a regional shopping mall, marinas, or parks recreation. And I think we still have enough land to develop to put another 5,000 apartments on. So we're really not even two-thirds finished with it yet. For me, it's been a lifetime of work and I've had the privilege, and I say it's a privilege of creating a city from scratch. I made plenty of mistakes, and we made plenty of mistakes, but we did many things right too. The whole regeneration of the waterfront in Jersey, I believe that we were instrumental in waking people up to the potential. Of course today if you stand on the West Side highway and look across the river there's a whole skyline.
LK: Yes and it’s beautiful.
RL: When we went there in 1982. It didn't look like that. It wasn't remotely like that but it took a lot of imagination; a lot of hard work, lots of sleepless nights. I have to say that my father recognized the potential even though at that time he was 65 or 66 years old, and it was a 40 year project, and he was saying “let’s go for it,” and we did. And we’ve had good luck.
LK: So I want to still stay in the New York area, where at 40 West 57th is today. A beautiful commercial space. Can you talk to us a little bit about this project and why this location?
RL: We bought this property in, I think 1969. If you were on 57th Street west of Fifth Avenue you were on the wrong side of town.
LK: Which we are.
RL: Right we’re just west of Fifth Avenue. What was funny, was that's just the way the world was. So we developed this building, and originally it was for a company called the E.R. Squibb Company, which was a pharmaceutical company that has now been subsumed and merged away. It was a major office project in Manhattan, and it's been very successful. We owned it since we built it, and it's another (again another) family heirloom that will never be sold; or we have no intention of selling it. Scribb Real Estate, of course, 57th Street is now Billionaires Row -some of the best properties in New York are within a block walk from here. So we're very proud of this building, and you know, the fact that we've been able to keep it inside our family.
LK: It's also what urbanization. Going back to urbanization, and what people are looking for in terms of community, and what they're looking for- at first everybody wanted to be out in the suburbs, now everyone's coming back.
RL: Well you know my joke is always, “that's not a joke.” But the thing I sometimes say at these events when I speak is, the Millennials did not discover Brooklyn. There were three million people that lived there before they showed up.
LK: That’s true.
RL: They rediscovered Brooklyn. But there’s always been a lot of these neighborhoods that were, let's say forgotten, that have now been revitalized, reenergized. A lot of that is due to the fact that young people are more adventuresome. The don't world doesn't start or stop on the east side of Manhattan. For them, they're willing to go to places like Queens, like Brooklyn, like Jersey City, and say, “listen, I can find something there for me too, and as long as they have peers, and friends, and social life, and amenities that satisfy them they're much more adventuresome.” I think that's good because that's helping the city. It’s helping all these cities to revive the downtowns and older neighborhoods.
LK: So continuing in the New York marketplace, do you think that people are still your portfolio was built on affordable housing that's been the mantra of your family
RL: I wouldn't say affordable. I would say rental housing.
LK: Rental housing. Okay.
RL: We were affordable in the beginning now we’re more…
RL: Well yes upscale.
LK: Do you think it's increasingly difficult now to have affordable housing in the Manhattan and other gateway city areas?
RL: Yes. It requires lots of changes in the government to subsidize or other ways because the cost of the bricks doesn't change whether you're selling a condominium for $4,000 of foot or an affordable housing project. the basic cost of the building is the same, so the only thing that can vary is the land and subsidies associated with taxes or other operating expenses that you have interests in. for example, if you've noticed that the regulatory patterns in every city New York not particularly, all of them- they’ve gotten increasingly more expensive to build., it's not a business that lends itself much to technology I mean there is some technology involved, but if you watch how they put bricks up, it's the same way as the Egyptians used to do it. It’s not that different, it's a business of hands. There is some ability to standardize things now and to make some technological manufacturing advantages, but it creates a big problem because you now have a whole class of people that just can't afford- based on the salaries and wages that they make- to pay the cost of housing here and they're expecting.
I haven't seen the last set of figures but I think they're expecting the population in New York to grow by a million people in the next 20 years. My question would be, where are you going to put them all? So you've seen some things, which frankly reversion. You’re seeing these micro-apartments now and that's really a reduction in people’s standard of living. You know, you used to live in 500 feet. Now, I’m going to give you 300 feet for living. I think there's going to have to be some radical changes, and now people look at these things. If we're going to accommodate our needs for affordable housing, for accommodating a working-class people, we have to do that.
LK: So I want to thank you so much for sharing the afternoon with us and for your insights on real estate and more specifically telling us about your family and your history thank you very much.
RL: Thank you for coming.
In the third part of this interview, LeFrak Organization Chairman and CEO Richard LeFrak shares his perspectives on the effect of Brexit on US foreign capital, where we are in the development cycle and the possibility of a correction in 2017, technology in real estate, and the amenities changing the CRE landscape with EisnerAmper Real Estate Services Group Partner Lisa Knee.
LeFrak Organization Chairman and CEO Richard LeFrak discusses diversification and expansion, joint ventures, and hot locations across the US for development with EisnerAmper Real Estate Services Group Partner Lisa Knee in the second part of this interview.