In real estate circles, describing a firm as a “flipper” is somewhat like characterizing a politician as “calculating.” Sure, on its face, being viewed as a savvy decision maker — or, in this case, a dealmaker — could be embraced as flattery. But in these worlds, both words carry a negative connotation. So, just like Hillary Clinton’s supporters would prefer you call her “judicious,” champions of Broadway Partners would prefer you call the firm “wise.”
Take last May: Broadway, which has been the third-biggest Manhattan building buyer in the past year, and which has acquired office assets with a reported value of more than $14 billion since 2000, purchased 660 Madison Avenue for about $215 million.
Now, one year later, 660 Madison — which was Broadway’s first buy in Manhattan before it snapped up countless other properties — is on the market for a cool $300 million. If sold for this price, Broadway would realize an $85 million profit.
According to some, Broadway fits the typical model of the “flipper” approach to investing, though there are signs they may be changing their approach in favor of managing their buildings longer-term.
Though he did not grant an interview for this article, Broadway chief executive officer Scott Lawlor reported last summer that his firm had sold or was in contract to sell 13 buildings it had held for an average of two and a half years, also noting that yearly returns, at the time, averaged over 38 percent.
Historically, investors have looked to hold onto a building for at least five to 10 years. In that time, they would often make improvements and raise rents in order to increase cash flow and fetch a higher price when they were ready to sell. More recently, that’s changed: Buyers are tossing the conventional timeline out the window.
“They [Broadway] saw a run-up in value,” observed Dan Fasulo, director of market analysis at Real Capital Analytics in Manhattan. “A lot of these buyers who are flipping properties aren’t necessarily flippers. Why not achieve your five-year business plan in year one if you have the opportunity?”
In other words, if the marketplace allows, it would be foolish not to pull the trigger.
Just don’t use the f-word.
Real estate attorney Stuart Saft, a 30-year industry veteran, explains.
“Flipping deals has been around probably since the first real estate deal,” said Saft, of the law firm LeBoeuf, Lamb, Greene & MacRae. “Sellers are never happy about contracting with someone who is going to flip because it indicates to the seller that they could have gotten a higher price. But in a softening real estate market, it also provides the sellers with another way to liquidate their investment and pass the risk onto someone else.”
Broadway has purchased $3.9 billion in Manhattan real estate over the past year, including deals both closed and in contract, according to data provided by Real Capital Analytics.
Broadway’s building purchases include 280 Park Avenue, 450 West 33rd Street, 100 Wall Street and 237 Park Avenue.
The company was launched eight years ago by the 42-year-old Lawlor, who attended the Columbia School of Architecture. Lawlor worked at the Fortress Investment Group, a real estate investment firm, before creating Broadway. His hires have come from fields including real estate, finance, politics and law, according to the New York Observer.
Reflecting in the New York Times on his approach to the business, Lawlor said last year, “I can hit a three-run homer, or I can roll the dice and get a grand slam in a few months.”
The business is about a neat combination of smarts and serendipity, Lawlor seemed to be saying. No mention of the dreaded f-word.
“Flipping real estate in many circles is perceived as typical American greed run amok,” claims Doug Crowe, host of the Springboard Real Estate Investment Hour, a weekly Chicago-area radio talk show about real estate.
But the perception from other investors is two-fold, added Crowe, a 20-year real estate veteran and director of the Springboard Group, an investor education academy.
“For young developers and like-minded investors, a sense of jealously often filters through as they think, ‘Wow, they made a ton, I wish that was me.’”
In commercial real estate, Crowe said, the seduction of fast cash is strong. Yet Crowe said brokers typically would rather work with investors with a longer time horizon than with investors looking for a quick profit.
“Most real estate brokerage firms prefer to deal with investors who invest for the long-term,” Crowe said. “Flippers are here today and gone tomorrow. Brokers see them as customers, not clients.”
Regardless, Broadway continues to cement its status as an important player beyond Manhattan. Recent buys include the John Hancock Tower in Boston’s Back Bay. The 60-story, 1.7-million-square-foot office property is the tallest building in New England. They’re also owners of the Citigroup Center, a 48-story office tower in downtown Los Angeles.
Also, in February the company acquired a portfolio of more than $3.3 billion from Beacon Capital Partners. The deal closed last month; locally, the portfolio included 237 Park Avenue and 100 Wall Street.
A potential pitfall associated with launching your portfolio as a flipper, and then making the transition to property manager — as some view Broadway’s evolution — is the significant learning curve, said David Wasserman, a professor of finance at New York University’s Stern School of Business. In baseball language, it’s like making the jump from the minor leagues to The Show, and then switching positions.
“You’re going from a finance guy to an operating guy,” Wasserman explained.
Wasserman also pointed out that gaining a reputation as a flipper — rightly or wrongly — can cause jitters among tenants.
“If you’re known as short-term, people are going to be worried about who their next landlord is going to be,” Wasserman said.
Erik Schmall, corporate managing director with Manhattan real estate brokerage firm Studley, agreed that jealously can come into play when others in the industry dismiss a firm’s legitimacy with insulting labels.
“I know they used to be brokers and became buyers and are pretty big right now, obviously,” Schmall said. “These guys on the brokerage end were successful with buying smaller buildings and are now obviously in the big leagues.
“I just wish I was a Broadway partner,” Schmall chuckled.