Veteran NYC Real Estate Developers Talk to EisnerAmper: Part 1
June 29, 2017
In this first part of a two-part podcast, host Lisa Knee, tax partner at EisnerAmper, discusses east coast real estate with Daren Hornig from Hornig Capital and Chris Schlank from Savanna. Daren and Chris provide what they look for in a business partner, the condition of their properties and reasons for success, and the challenges of real estate in big cities. Their detail, as well as their camaraderie, combine to provide in-depth and thoughtful explanations to many different real estate issues.
Chris Schlank: Thank you for having us, Lisa.
LK:So, your firms are involved in a bunch of real estate deals together. What do each of you look for in a potential business partner and what strengths do you each bring to the table.
CS: Well, I can tell you we typically don’t do deals with partners because we’re in a fund structure, we are vertically integrated, so we have all aspects of real estate and development under one roof. So, when we do do deals with partners, we’re typically looking for somebody like Daren who’s got an angle, right. Daren’s great at finding deals, he found a great deal out in Bushwick for us that we’ve done together and also a great deal on the Third Avenue Bridge in the Mott Haven section of the Bronx. And when you’re looking for a partner, you’re looking for someone that’s going to bring something to the table that you might not have, and I think Daren brings an incredible sense of energy and very creative thinking about how to find deals. We have a pretty big back of the house and great deal finders, but I think that what we’ve seen is that Daren has the incredible ability to ferret out deals that other people can’t.
DH:Thank you, Chris, that’s the nicest thing you’ve ever said to me.
DH:From my perspective, I look at it pretty much the opposite of Chris. I’m an operating partner model. I do not have a fund; I have my own capital that we put into deals, so what we are out there doing is sourcing deals, as Chris had mentioned, and then when we find a deal that we like, and we underwrite, then typically we’ll lock it up in contract, then we look for outside equity partners. And happily, in two situations, it worked out with Chris and his Savanna team. But what I look for in a partner, first and foremost, is honesty, trust, and integrity, because frankly without those three components, it doesn’t matter how much money somebody has, or how rich my promote is or how big my fees are, it starts with the trust, starts with the handshake. And then once you go through those elements, that you know you can work with somebody, it has a lot to do with the vision and working with this person. When you get into a transaction, in contract, it’s a lot, a lot of work in doing the due diligence in figuring it out and you need to know you have a common vision to work with somebody, to complete the transaction, because these transactions don’t happen in a week, they happen to take two years, three years, in some cases four or more, and you’re really working with this partner day in and day out, so I’m making sure I like the people and I have that trust level to take it to the next level.
CS: I couldn’t agree more. And I think the most important thing is the trust level, because again you are working with somebody day in and day out on deals day in and day out, and in real estate, nothing ever happens, or goes the way you think it’s going to go. There’s constantly traps, you’re constantly hitting walls, on costs, on lease-ups, on everything, and to the extent that you have somebody as a partner who you can sit with and talk rationally, and go over the new business plan, and a revised business plan, because also not only do you have a partner, you’re going to have maybe another partner. In the deal that we have in the Schlitz brewery in Bushwick, we have a partner who owns the fee, and we have the lease hold. You have a bank, right, so there’s many, many different partners in a deal, and then you and your operating partner, or your equity partner, have to sit down and agree on what, where are you going, if the road has changed, and how you disseminate that message to the people that are involved also in the deal.
DH:And the road will change. Alright, it’s very rare you set out on a business plan and that business plan is flawlessly executed, it goes to just uncertainty. When you get into deep construction of existing buildings that sink behind the walls or under the roof that you’ve never seen before or anticipated, so that will change, and obviously the economic climate will change from time to time, based on where, you know, the debt markets are, or the leasing velocity, so you need to be adaptive and the key point, and I say this all the time, is you have to be reasonable. You know, if you’re reasonable, you can make intelligent decisions, but if you’re an unreasonable person, and you’re stuck in your ways for arrogance or anything else, I just will pass over that partner for an opportunity.
CS: Absolutely. Sometimes it’s the deal you said no to, or the deal that you passed on for, it could be any reason, but for the partnership reason is probably one of the best deals you ever did.
LK:So, let’s get back to… You had talked about the Mott Haven property that you had bought in 2015, you closed on a commercial loft building in the Bronx, which rebranded the property as the Bruckner building. Can you talk about this project, which was just completed, and the transformation that was happening around the development, and what role it’s going to play in that neighborhood? And not only that, but where you see the South Bronx in the next ten years.
DH:Sure. I’ll take the first part, as for where the South Bronx is going. And I think the –
CS: It’s the second part actually.
DH: The second part, that’s my first part. The Bronx borough president, Ruben Diaz, I think has the best perspective on this, and I was with him twice last week, talking about the Bronx at a conference. The Bronx is in the first inning. It’s really the borough that has changed the slowest. It’s been the borough that, for whatever reason, hasn’t gotten the respect and capital investment and infrastructure, and I think that it is significantly changing. When you look at Manhattan, you know, Manhattan is really, really, expensive in every facet. Brooklyn has gotten that way, especially along the Brooklyn waterfront, and into Williamsburg and Bushwick, and if you look at Queens, the Queens waterfront, Long Island city, and then moving further east, the Bronx hasn’t quite gotten there yet, but it’s starting to. When we started looking at properties, and I’ve been focusing a lot of time and energy on the outer boroughs, one of the initiatives was the Bronx because of the transportation and proximity to Manhattan, and frankly the pricing. It’s easy to buy a property, if you want to spend the most amount of money, and be the highest bidder; it’s another to find properties in emerging markets that you think are on trend or on growth, and when we started looking at the Bronx, particularly this area in the Mott Haven section, right over the Third Avenue Bridge, it was really an area that had a lot of artists in it, and my father taught me long ago: follow the artists. Unfortunately, I missed Soho, I missed (word?), I missed Williamsburg, I missed Chelsey, well, I got Chelsey a little bit, but I didn’t listen to my father early enough, but I vowed not to make that mistake, and if you look what we did it Bushwick, and now in the Bronx, it’s really to follow the artists. So, when we first found what is now the Bruckner building, 2417 third avenue, it was a 170 thousand square foot loft building.
CS: I think it was 150 thousand back then.
DH:I think it was 145 thousand, and now it’s 172 thousand, and hopefully it’s going to grow again, but we don’t know, maybe it just needs some rain and sunshine. But we looked at the building, it’s an eight-story structure twenty-two-thousand-foot floor plates, ten to twelve foot ceilings, all cement, big lollipop columns, and the bones are there, so when I look at a building, you can’t really change the bones, you can’t change some characteristics, but you can make them better and prettier. And our vision was lock-step from day one of how do we make this a cool, hip, tech-oriented, TAMI-friendly building. And we went through a twelve-million-dollar renovation plan, that I’ll let Chris shed some light on.
CS: I think Mott Haven, Bronx, it’s a great location, right under the Third Avenue Bridge, you know, chip shot from Manhattan. One of the good things, at Savanna, we tend not to want to be the pioneers, we like to go to areas where there’s a little bit of wind to the back, some stuff already going on. You don’t want to be too early or too late. Part of the time, but we felt like the investment in the Bruckner in 2015 was the right time. Somerset Partners and the Chetrit Group had announced the year or so before that they were building two thousand units of housing, immediately adjacent to us, on each side of the Third Avenue Bridge, so we saw, obviously, a lot of good going there. Keith Rubenstein from Somerset, has also over the past year and a half been making individual and private investments in buildings in and around that area, putting in great pizza shops and good coffee shops, and cool dress shops, high couture stores, kind of just individually and personally investing in the area, and that’s how you really make an area. You come in with big plans, but you also have to do the things around the edges that support the infrastructure and get people excited and bring new, exciting people. You know, I think, I would say in retrospect, we probably overspent on the Bruckner building. We did all new windows, which was required. We did brand new façade, you know, we chipped and painted and everything, we did brand new elevators. There’s always a push and a pull when you’re doing development like Bruckner or like the Schlitz brewery in Bushwick where our tendency, and I think Daren’s tendency also, is to overspend a little bit just to go in there and really make it nice, and that attracts people. Build it and they will come. I think in certain secondary, and I call the Bronx secondary markets, I think that business philosophy might be a tad bit flawed, just because it’s very hard to say who the tenant is going to be. I can tell you that when we did the Twitter buildings between Seventeenth Street between Seventh and Eighth Avenue, we knew there were two-hundred-eighty-thousand square feet of vacant space in the best area in New York City, a block from Google. We knew that our tenant was going to be some kind of a TAMI tenant. Did we know it was going to be Twitter? Absolutely not, but we knew that we had to do a massive, massive core gut renovation because we were going to get a really, really high quality tenant. In the Bronx, we had a lot of artists that were living there, artists that were working there. That business plan has yet to be proven out for us in the Bronx, it’s a little bit slower than we thought, so I think the Jury is still out, but we’re still very happy we bought the building. I know we’ll make money; it’s just going to, I think the business plan on that is still changing a little bit on that as we speak.
DH:Yeah, I agree with that. I think some of the biggest challenges in the secondary, tertiary emerging markets is really finding the who, what, when, and how. When you look at both the Bruckner and the Schlitz, I think we bought the asset right, I think we bought the asset in the right location, and we both had exactly the same vision of what we thought the tenants would be there, and the tenants are there, frankly, but they’re coming slower. If these buildings were in Manhattan, they’d be hitting high-point peak pricing. I mean literally, if Schlitz was in New York City, it’d be getting rented a hundred fifty dollars per foot. That’s how great that asset is, and same thing for the Bronx. It would be a mid-town South building in the seventies, eighty dollars per foot rent. When we’re looking at these emerging markets, you don’t have the same velocity flow. People have a tendency right now, and I think this will change over time, how much time I don’t know, that they want to be in Manhattan first, and then they look at these alternative markets. But as Manhattan has gotten more costly, and the vacancy rate has gone down, they’re starting to look elsewhere. And I’m experiencing this right now. I’m developing a building in Ridgewood, the box factory –
CS: It’s so funny because he didn’t invite us to be his partner on that one.
DH:I did invite you, you just didn’t see my vision.
LK: Is that Ridgewood, or Ridgewick? Which one?
DH: I tried to get away with Ridgewick to brand my own area, but it got shut down pretty quickly because nobody knew where they were going in the country, because there is a Ridgewick somewhere, it’s just not in Queens or Brooklyn. But it is Ridgewood, and you were invited, it was probably on the small side, but I did the same thing again. I think I created a product that is going to be by far and away, the nicest building there and early on we haven’t started the marketing yet, but it’s hard. I’ve been doing this over twenty-five years and Chris the same. He has impeccable vision and styles down to the lighting and detail which is great, but both of our visions are costly to execute. And you go into a building, you know, it’s hard to say, I’m going to do this half-assed, and make it okay, I like to do it right, he likes to do it right, together we both do it right, and it looks phenomenal, but the tenancy still wants to pay twenty dollar rents when we are expecting thirty dollar rents because we put on the nicer elevator finishes, we did the lobby and did everything else. So, it’s a balance, like everything else in life, and it’s not easy finding that emerging market balance yet. For me, I think people – there’s a lot of people out there who do absolutely nothing, and just get lucky by the tides of real estate and have done well. That’s not my instinct or my nature, and I would speak the same for the Savanna team.
LK:To hear more from Daren and Chris, listen to Part 2 of this podcast.