Williamsburg whiz kids facing major markdown on $1B retail portfolio

The developer that brought the first Apple store to Brooklyn and bet big on the borough’s retail market is in for some humbling news.

RedSky Capital’s partner on the $1 billion portfolio they share is about to write down the value of that real estate by as much as a third.

The partner, Manhattan-based investment firm JZ Capital Partners, is bowing to the reality that prime Brooklyn retail rents have sunk and some RedSky projects have slowed.

RedSky, founded in 2006 by Ben Bernstein and Ben Stokes, is the biggest retail landlord in Williamsburg, where it has brought in brands including Sephora, Sweetgreen, Urban Outfitters and Toms. The company has also assembled a huge mixed-use development site in Downtown Brooklyn and another in Greenpoint, and has bought up properties in Miami’s Wynwood neighborhood and Design District.

But JZ Capital Partners made a surprise announcement in late October that its portion of the real estate portfolio — last valued at $443 million as of the end of February — could be written down by somewhere between $50 million and $150 million. And as the London Stock Exchange-listed firm’s returns have underperformed, it’s halting new investments – including new real estate deals – as it works on a liquidation plan to return capital to shareholders.

A spokesperson for RedSky Capital told The Real Deal that JZ Capital Partners’ planned writedown won’t affect RedSky’s business plan.

“The value of our real estate has not decreased and we are fully confident in our ability to secure financing going forward,’ the spokesperson wrote in an email. The company “remain[s] focused on executing on our business plans in 2020 and beyond.”

But industry sources point to the drop in retail asking rents in areas like Williamsburg where RedSky’s portfolio is heavily concentrated as evidence of the company’s exposure to Brooklyn’s retail woes.

Asking rents on the prime stretch of Bedford Avenue between Grand and North 8th streets have been falling since they peaked at an average of $393 per square foot in the summer of 2017, according to the Real Estate Board of New York’s most recent Brooklyn retail report.

Average asking rents were down 17 percent to $326 per square foot this last summer, according to REBNY.

JZ Capital will host its mid-year earnings call Wednesday morning.

Myrto Charamis, an analyst at Numis Securities who covers JZ Capital, said the company has posted  “very small” returns for a long time, and that the real estate holdings dragged down performance.

“The development cost was always working against any returns that the rest of the portfolio had,” she said. “The cost of the developments definitely had a negative impact on the annual performance of the fund.”

GOOD WHILE IT LASTED

Ben Bernstein and Ben Stokes — known in real estate circles as “The Bens” — began buying properties as newly minted grads out of Cornell University, where they were squash teammates.

The 20-somethings initially flew under the radar, but started turning heads early this decade by making purchases that others couldn’t quite make sense of in up-and-coming neighborhoods.

“They must have access to cheap capital, because they would buy things at prices that I couldn’t make pencil out,” said one competitor.

RedSky found its source of low-cost financing thanks to a personal friendship between Ben Bernstein’s father, Jonathan Bernstein, and JZ Capital co-founder David Zalaznick, sources told TRD.

Jonathan Bernstein, a real estate attorney and principal at Coventry Real Estate Advisors, appears to be involved in some of RedSky’s projects. He is a partner on the Greenpoint development site at 18 India Street, where the company filed plans to build a 40-story apartment building with 470 rental units and took out a $57 million loan in September 2018.

18 India Street in Greenpoint (Credit: Google Maps)

Jonathan signed as the mortgagor on the loan provided by Seven Valleys, the family firm of Chinese billionaires Zhang Xin and Pan Shiyi, who head the developer Soho China.

But the RedSky spokesperson said the company is now planning to put the Greenpoint site up for sale.

RedSky’s Fulton Street development site (Credit: Google Maps)

In the meantime, the company’s large Fulton Street development in Downtown Brooklyn has been dragging on. RedSky has now spent more than seven years putting together a triangle-shaped development site to build an apartment tower across the street from JDS Development’s supertall at 9 Dekalb Avenue.

There are two sites in the middle of the assemblage that RedSky doesn’t own, 559 and 563 Fulton Street. But RedSky and JZ Capital have indicated they’ll move forward with two separate projects around those sites.

RedSky and JZ Capital sold a minority stake in the Fulton Street development site in December to California-based developer HomeFed Corporation. HomeFed is owned by the financial firm Jefferies, which is also a major shareholder in JZ Capital.

A spokesperson for JZ Capital told The Real Deal that the company “look[s] to continuing our relationship with RedSky and remain[s] focused on maximizing value in 2020.”