The Real Deal New York

Andrew Farkas: The sequel

The mogul has returned to build another giant brokerage empire, with a focus on distressed properties

November 01, 2011
By David Jones

Andrew Farkas
F. Scott Fitzgerald once said, “There are no second acts in American lives.” But billionaire investor Andrew Farkas is proving that there are — at least in real estate. Farkas — who built Insignia Financial Group into one of the largest real estate brokerages in the country in the 1990s — is carving out a sequel for himself that could rival his most prolific run of the past 20 years.

Last year, his firm snapped up the country’s third-largest special loan servicer, Centerline Holding Corp. Then, in August, he bought JER Partners, another special servicer, and he’s agreed to buy the massive brokerage house NAI Global. In addition, just last month news broke that he’s buying a significant stake in the struggling commercial brokerage Grubb & Ellis.

“I am simply replicating a strategy that I deployed with Insignia,” Farkas told The Real Deal in an interview last month at his Fifth Avenue office. “The good news being, I don’t have to learn anything new.”

Indeed, Farkas, the scion of the Alexander’s department store chain, has a history of using his personal wealth to build super-brokerages. And, he’s currently using that model to create a conglomerate of different companies that can manage nearly every aspect of a distressed real estate transaction.

An industry executive familiar with ongoing negotiations between Farkas and NAI said employees at NAI had been anxiously awaiting Farkas’s arrival because of his deep pockets and successful track record.

“Since the beginning of the year, [NAI employees] have been looking forward to the day when the Messiah was going to arrive,” the executive told The Real Deal.

NAI, while a considerable dealmaker in certain real estate markets, has a limited profile in New York compared to Grubb & Ellis, which, despite a number of high-profile defections, has a long track record in New York. (National Real Estate Investor shows that NAI did $45 billion of commercial deals in 2010, while Grubb did $12.1 billion.)

Sources familiar with the NAI discussions say the original deal terms are being renegotiated and that the deal, which was originally slated to close in the third quarter, is dragging into the fourth quarter.

Sources also say the Grubb & Ellis negotiations have complicated the NAI deal. They say one possible resolution would be having Farkas acquire NAI brokerages only in markets that don’t compete with Grubb, particularly overseas.

A spokesperson for Farkas has repeatedly stated that he cannot comment on the NAI deal because it has not yet closed. NAI officials also declined to comment.

But Bob Knakal, president of commercial real estate brokerage Massey Knakal, gave Farkas a vote of confidence.

“Andrew was extraordinarily successful when he did it the last time, and I think probably the goal is to increase market share and take advantage of economies of scale,” he said.

First acquisition tear

After starting as a Wall Street trader at the old Salomon Brothers, Farkas launched Insignia in 1990 with about $5 million in family money.

The grandson of Alexander’s founder George Farkas, he built Insignia into one of the largest and most successful brokerages in the country. On his watch, the South Carolina-based company had 55,000 apartments in its portfolio.

Insignia was built out of the ashes of the real estate downturn following the 1987 stock market crash. Farkas grew it through the purchase of billions in distressed assets, including the 1991 purchase of real estate syndicator U.S. Shelter Corp. in Greenville, S.C.

But by 1996, it had acquired the Edward S. Gordon Company, then the biggest and most dominant commercial brokerage and property management firm in New York, for $74 million. And by 1998, Insignia either owned or managed more than 350,000 residential units and 200 million square feet of commercial space.

That same year, Farkas sold Insignia’s residential management business (with the exception of its New York City portfolio) to Denver-based Apartment Investment and Management Co. for $910 million. He then renamed the remaining company Insignia/ESG and relocated the headquarters to Manhattan.

Following the sale, in 1999 Insignia acquired the Douglas Elliman residential brokerage from the Millstein family for $65 million.

But despite the bold moves to expand and restructure the portfolio, the performance of Insignia/ESG began to fall short of expectations.

Sources familiar with the business said the combination of Elliman’s residential brokerage and the Edward S. Gordon commercial brokerage did not mix well.

“The residential real estate brokers were just not of the caliber of the commercial brokers,” noted a veteran broker who worked with the firm in the late 1990s.

Shares of Insignia languished in the $10 to $12 range during the tech boom of the 1990s. Then in 2003, Farkas sold the residential brokerage arm to Dottie Herman of Prudential Long Island Realty and Howard Lorber for $72 million in preparation for a sale of the remaining business to Los Angeles-based CB Richard Ellis.

The sale to CBRE, also in 2003 — in which CBRE paid $256 million in cash and agreed to pay off $155 million in debt and preferred stock — created the nation’s largest commercial real estate services business and gave CBRE a long-awaited entrance into the New York market.

After selling Insignia, Farkas formed a privately held merchant bank called Island Capital, and a subsidiary firm called Island Global Yachting, which acquired marinas and land used by luxury yacht owners and boat charter firms.

It was also during this period that Farkas turned around his controversial relationship with Andrew Cuomo, the former secretary of Housing and Urban Development. During his tenure, Cuomo had investigated landlord Bruce Rozet, who was accused of accepting kickbacks from a management firm that Insignia later took control of.

In 1998, Insignia settled for $7.4 million. More interesting to observers is that the bitter relationship between Farkas and Cuomo warmed up so much that after Farkas launched Island Capital, he hired Cuomo as a vice president.

Cuomo left the firm in 2006, to prepare for his run for attorney general, but his former boss became the finance co-chairman of his campaign — a move that stunned many in the industry and the political world.

The relationship was also scrutinized in the 2010 gubernatorial race, when Cuomo successfully ran against Tea Party candidate Carl Paladino. A Farkas spokesperson declined to comment on his relationship with Cuomo.

Despite questions raised by the Cuomo controversy, Farkas has kept his legacy intact as an iconic dealmaker.

Acquisition tear, take two

This time around, Farkas is again going after distressed and undervalued assets, but has waded into a much more sophisticated and complex set of deals.

In late August, his C-III Capital Partners (an affiliate of Island Capital Group) signed a deal to buy the special servicing arm of JER Partners, which manages $35.5 billion in specially serviced loans nationwide.

The companies will manage a combined 14,000 loans with an aggregate balance of $152 billion, $17 billion of which are currently in special servicing.

The acquisition came on the heels of Farkas’s purchase of Centerline last year.

He’s also recently started up a new round of acquisitions. Just last month, C-III announced the deal to invest $10 million in Grubb & Ellis.

Grubb & Ellis had previously been in negotiations with Colony Capital, but that deal stalled earlier this year. Grubb & Ellis officials declined comment.

Under the new agreement, C-III will buy $4 million of Colony Capital’s existing investment and the two will jointly own 100 percent of Grubb’s senior secured debt.

The acquisition gives Grubb, whose stock has been on life support (it was at 46 cents a share last month), a renewed sense of stability.

And, sources say, Farkas and Colony are negotiating a much broader transaction with Grubb than just the $10 million investment. They say the two firms are looking to hammer out a deal that could give them total control of the firm.

A targeted expansion

Farkas told The Real Deal that his goal is to leverage the various products and services of these companies to help investors gain access to capital and create a single point of contact for nearly everything required to restructure a deal.

“To the extent there are more defaults in underlying loans, there’s more opportunity to provide capital [to resolve these situations],” said Farkas. “In doing so, we are able to insert ourselves into the ownership positions or the capital stacks that are having financial difficulties.”

Rival brokerages such as CBRE, Jones Lang LaSalle and Cushman & Wakefield will be the main target of Farkas’s expansion, and some executives agreed that large corporate clients will be attracted to a one-stop point of service on certain loan deals.

“Grubb & Ellis would hold a lot more value to Andrew Farkas and Colony Capital than it would to just stand-alone investors,” said Sandy Monaghan, managing director of Cushman & Wakefield’s capital markets group. “The inherent value within Farkas and his group is that Farkas controls a lot of product through his special servicing arm.”

Larry Longua, director of the REIT Center and an associate professor at NYU’s Schack Institute of Real Estate, said from his perspective, “It looked like a high-risk gamble back then and this is a high-risk gamble.

“This is kind of the ice age. We’re not going to see the levels of growth 20 years ago. It’s going to take a lot longer, and it’s going to cost a lot more for [Farkas] to replicate what he did before,” he said.

Monaghan pointed out that Farkas is not alone in trying to build out a multilayered platform of real estate services.

For example, BCG Partners — a financial brokerage led by Howard Lutnick, chairman and CEO of investment fund Cantor Fitzgerald — completed a deal last month to snap up Newmark & Company Real Estate. A spokesman for BCG said the company does not comment on future strategy.

There are other firms that could give Farkas a run for his money, especially on the special-servicing side.

For example, Fortress Investment Group, the $43 billion fund manager known for foreclosing on the Sheffield condominium near Columbus Circle, has expanded into the special-servicing and real estate finance sectors.

Meanwhile, Miami-based LNR Property, the world’s largest special servicer of real estate loans, has also taken steps to diversify its business, putting it in the crosshairs of Farkas’s expanding empire.

As the economy continues to stall in the U.S., and the European debt crisis continues to rattle global markets, firms like LNR and CWCapital will continue to pursue their strategies to diversify in competition with Farkas.

But Farkas noted that the longer the economy is in distress, the more his company will thrive.

“The truth is, the more challenging the climate, the better it is for our strategy of distressed investment,” he said.