Forget “other people’s money.” Ours works just fine: Google’s parent Alphabet closed on its purchase of the Chelsea Market building from Jamestown last week. The price tag? $2.4 billion. The debt on the deal? Zero.
When Google made its record purchase of 111 Eighth Avenue in 2010, it took out a $470 million loan from Bank of America. Given that it paid $1.8 billion for the property, the loan was modest – the deal was just over 26 percent leveraged. But this time, the $800 billion company, which has more cash on hand than any firm not named Apple or Microsoft, opted to skip the bank visit entirely.
“Neither a borrower nor a lender be; / For loan oft loses both itself and friend”: Gary Barnett’s Extell Development first issued bonds on the Tel Aviv Stock Exchange in 2014. In total, he’s raised about $480 million from Israel investors at rates far more favorable than he would get in the U.S. But what he’s saved in interest he’s had to pay for in drama.
In 2016, the developer had to visit Israel reportedly to try and quell investors’ concerns about New York’s luxury condo market. He then had to host them stateside, so that they could check out what they were putting their money in. To deal with the speculation among some investors that Extell is in over its head and that’s it going to have a hard time repaying its debt, he’s tried different tactics: he’s been diplomatic, he’s been a realist, he’s been combative.
The latest hubbub is over a $75 million shareholder dividend that Extell announced earlier this month. The recipient of that dividend would be Barnett himself.
“I’m the owner of the company, I’ve been supporting it in every way,” Barnett told my colleague Chava Gourarie. “We got very substantial transactions done at the end of the year and early this year, so of course I’m going to take a dividend. It was always anticipated.”
But his decision didn’t go down so well in Israel. The country’s answer to Moody’s downgraded the developer’s bonds, two Extell board members resigned, and the bonds fell sharply. Bondholders also demanded access to the company’s documents.
And then there were three: Fidelity National Financial agreed to pay $1.2 billion for rival Stewart, making the already starved-for-competition title industry a further oligopoly. Together, the Big 4 in the space (Fidelity, First American, Old Republic and Stewart) control about 90 percent of the $15 billion industry. If the acquisition goes through, Fidelity alone will handle nearly half of the nationwide title business.
It’s still remarkable to me that no real alternative to the traditional providers has made a dent. The actual business of being a title insurer is not very complicated.
Some believe that blockchain might emerge as a viable solution, potentially slashing transaction and documentation costs, minimizing fraud and improving accuracy. But the existing players’ have such entrenched relationships with developers and lenders that it’ll take some doing to dislodge them.
“On the appointed day and venue, the girl chooses from an assembly of suitors. When the girl identifies the husband of her choice, she garlands him and a marriage ceremony is held immediately.”
That’s Wikipedia’s description of a swayamvara, an ancient Indian ceremony where a maiden makes her pick from a pool of eligible young men. When it came time, however, for Forest City to make its choice – despite initially attracting 50 potential buyers – the firm balked.
In a surprise move, the REIT chose not to go through with a sale. Instead, it opted to shift further control away from the Ratner family, and James Ratner will give up his chairmanship.
That’s not to say a sale is completely off the table. Norman Oder has a new and deeply-researched look at the company that I urge you to check out. My take: At the moment, it doesn’t really seem set up to carry out any serious development, nor does it have a stable full of Marc Holliday/Andrew Mathias-types to see it thrive as an owner/operator.
(Paydirt is a weekly column that riffs on the biggest NYC real estate news of the moment, providing analysis and historical context on the deals and players that make this town tick. Read more from Paydirt here.)