The Real Deal New York

‘French Plan’ ahead of its time

Tudor City developer revamped real estate investing, but left a financial mess

May 29, 2009
By Greg Aunapu

Recession aside, New York City developers in today’s day and age are almost guaranteed community opposition to any grandiose projects they propose.

But back in 1925, Tudor City’s swashbuckling developer, Fred Fillmore French, faced no such aggressive challenges when he razed four city blocks at the end of 42nd Street to build the largest residential development in Midtown.

French rode out a number of boom-and-bust cycles during his career. And while he eventually built a grand estate in upstate New York, he died in 1936 in his 50s, leaving little cash and a tangle of financial problems that took decades to resolve.

While best known for Tudor City and Knickerbocker Village on the Lower East Side, his most significant contribution to the city’s real estate landscape may have been “the French Plan,” an investment vehicle that funded hundreds of millions of dollars in New York City developments and paved the way for modern real estate investment trusts.

The French Plan was essentially a way for small investors to own equity in a building, a cutting-edge idea at the time. The idea was pitched in a prospectus, published as a hardcover and in newspaper and magazine advertisements that were up to three pages long.

“Never before, as far as we know, has the man with $100 to invest been given the same terms as the man with $100,000,” the ad stated.

“It was a very democratic, American concept that someone with a basic salary could invest in a piece of their own city,” Alexander Rayden, author of a 2007 study of the French Plan, told The Real Deal.

A first investment

French was born poor in the Bronx to a cigar-maker father and a university-educated mother in 1883. His father died when he was young, leaving French to hawk newspapers, mow lawns and wash windows for money.

But his mother insisted he receive an education, and he eventually won a scholarship to prep school Horace Mann. The 6-foot-2, broad-shouldered youth also attended Princeton for a year before he traveled to the Southwest, where he did some “ranching and mining.” But he soon returned home and took an engineering course at Columbia, according to books and news stories written about his life.

French had a strong work ethic but argued with employers and was fired from a series of temp jobs where he earned as little as $5 to $18 a week, according to his obituary in the New York Times, which also quoted him as saying that by 1907, he found himself “penniless.”

“To collect my wits I sat down in City Hall Park, weak with hunger and fatigue,” he was quoted as saying. He walked five miles up Broadway, where he convinced a Board of Education member he knew to lend him $500 — $10 of which he asked for in cash.

“The amazing good fortune to have $10 with which to relieve an empty stomach made me light headed,” French said. “I walked to the Savoy Hotel and ordered one glorious meal.”

His cash may have been spent immediately, but the meal gave him a craving for the high life.

He used the rest of his borrowed money as a down payment to buy his family’s tiny rental house and leveraged that to raise cash to develop a small building in the Bronx. He parlayed his new cash flow into the purchase of a handful of income-generating properties that started him on a new path.

Building a business

While French’s business was established by the time World War I began, times were lean. He hunkered down in the cellar of his boyhood home, paying himself a $15-a-week salary and an office boy $5 more at $20.

After the war, business boomed, and in 1921, his French Plan took off, allowing him to expand his company to some 300 employees.

According to biographies of French, he gave his staff daily pep talks and wrote inspirational articles for his company newsletter. He argued that Jesus had been the greatest salesman of all time, interpreting the Bible verse “knock and it shall be opened unto you” to mean “keep knocking until the door is opened.” According to Rayden, he added his own tagline: “And if it isn’t opened pretty soon, kick down the door.”

The French Plan was so successful that it financed the colorful Mesopotamian-influenced Fred F. French office building at 551 Fifth Avenue at 45th Street.

Built in 1925, the 38-story Art Deco building was among the tallest in the city at the time.

By 1928, French was living with his wife, Cordelia, and four children in a penthouse at 1010 Fifth Avenue, a 15-story building he developed across from the Metropolitan Museum of Art.

French also built a sprawling lakeside estate in Pawling, N.Y. There he reportedly planted some 60,000 trees and seedlings.

“Around town, people said that Fred F. French built his house so that he could sit on his front porch and look from horizon to horizon and say to himself, ‘It’s all mine,’” wrote James Morrison, the son of French’s doctor, in City Journal in 1998.

Other people’s money

This is how the French Plan worked: A 50 percent bank mortgage was matched by equity investors, who were issued preferred shares that earned around 6 percent. The idea was to repay the principal in 10 years or less, after which the shares would be convertible to common stock in the building. In this way, the investors and French’s company would split ownership of a building, dividing proceeds, while the French Company also profited as general contractor and manager.

“The French Plan was rooted in the real estate tradition of operating with other people’s money,” Rayden wrote in his study “The People’s City: A History of the Influence and Contribution of Mass Real Estate Syndication in the Development of New York City.” Rayden noted that at its height, it boasted some 30,000 investors.

“But,” Rayden said, “French put a substantial amount of money back in his business. He was trying to build a corporate empire and was a true believer in his product.”

On the East Side, French envisioned a project on a truly grand scale: Tudor City would cost $35 million, a stunning figure at the time.

As Tom Shachtman, author of “Skyscraper Dreams: The Real Estate Dynasties of New York,” wrote in his 1991 book, “for some time he had contemplated creation on a scale not earlier imagined for Manhattan: a city-within-a-city, where he could control the siting of all buildings, the vistas, the flow of traffic.”

French put this development where the tenements of “Corcoran’s Roost” — named after the Irish gangster who once reigned there — were plagued by the stench of nearby slaughterhouses. He realized the area was convenient to the rising business district around Grand Central Terminal, three blocks west.

French employed an army of agents to buy up the individual properties secretly, before word could spread that someone was assembling a large parcel to develop.

In just over a month in 1925 French spent $7.5 million on the site, and then he announced plans for an 11-building complex that would eventually house a hotel and 2,800 individual apartments.

“The project needed 10 million bricks, breaking the then-record by 6 million, and had the largest order of electric refrigerators ever made until that time,” said Brian Thompson, a real estate broker who owns Tudor City Living and who wrote his master’s thesis on Tudor City and the French Plan.

Tudor City boasted two 1-acre parks, a miniature 18-hole golf course and tennis courts. Advertisements wooed suburbanites with promises that they could stop commuting like sardines crammed into train cars.

Tudor City, which started going co-op in the 1970s, was a success by all measures and was even profitable during the Great Depression. According to Rayden, by 1930 the property had a $4.5 million rent roll and employed 581 people. By 1936 the buildings were valued near $100 million. The city landmarked all of Tudor City in 1988.

It takes a village

In 1929, after Tudor City was in the ground, French conceived an even bigger project: a $150 million rental complex for 30,000 affluent residents to be called Knickerbocker Village.

Sworn to secrecy, 42 brokers working for dummy companies reportedly spent $5 million buying up land on the Lower East Side, according to a 1937 Time magazine article.

But the Depression shut off the pipeline of investors, causing the French Company to default on $14 million of preferred stock and leaving investors enraged.

In 1933, as President Roosevelt’s New Deal got under way, French convinced the new Reconstruction Finance Corporation to pony up $8 million to fund the first federally financed urban redevelopment plan.

Knickerbocker Village was scaled down to two 13-story buildings comprising 1,592 apartments, which would rent to white-collar workers for about twice the prevailing cost in the area. French’s profits would come from managing the property.

But all was not smooth sailing there. In 1934, with 600 renters set to move in, the apartments were not yet finished. The renters, many of whom were lawyers and journalists, started a tenants’ association, airing a list of grievances that included kitchens and bathrooms without fixtures and inoperable elevators and laundry rooms. When the French Company representatives failed to address the complaints, the tenants launched a rent strike. The following month, management caved, instituted repairs and reimbursed tenants a combined $25,000.

In a study of tenant activism published in 1986, Mark Naison, a professor at Fordham University, argued that the situation was a catalyst for tenant organization.

“The recalcitrance of the French Company became a metaphor for the problems all tenants faced in winning recognition of their rights,” Naison wrote. “They became evangelists for tenant activism in their Lower East Side neighborhood and the city as a whole that led to modern renters’ rights laws.”

Two years after the strike, French suffered a fatal heart attack and died with only $10,000 in his bank account.

Soon after French’s death, his wife, Cordelia, hired Aaron Rabinowitz — a former real estate developer — as head of the firm.

According to a book by Rabinowitz’s son, Alan, his father stabilized the firm, making it one of the few public companies to survive the Depression without bankruptcy reorganization. Eventually, Rabinowitz bought out Cordelia’s interest and spent the next 30 years, until he died, untangling the financial mess and settling lawsuits by various French Plan investors over the defaulted properties. The investors, it seemed, had not understood that their preferred stock positions left them without any liens on the actual underlying buildings.

While he had little to show financially when he died, French was always eyeing his next real estate play. His belief was that the New York area would grow to a population of 30 million. With that, he declared: “You can’t overbuild Manhattan.” TRD

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