Savanna’s spending spree

By David Jones | June 01, 2011 07:41PM


Chris Schlank (left), managing partner and founder of Savanna, and fellow managing partner Nicholas Bienstock
 As the market struggles to recover its footing, a few brave souls have dipped their toes into the water of New York’s turbulent real estate investment world. Meanwhile, a small but growing firm called Savanna Partners is diving into the commercial office market headfirst, with a half-dozen debt acquisitions in the past 12 months, and plans for several more by the end of 2011.

Other than Los Angeles-based CIM Group, or Ziel Feldman’s HFZ, few companies have made as much of a splash here lately, and none have come close in the office market. The firm closed its second real estate fund earlier this year, with $550 million from a variety of investors ranging from pension funds to insurance companies and wealthy invidivuals. In addition, the team-oriented company’s lack of bureaucracy — combined with a deep bench of analysts and impressive fund-raising prowess — has made it the firm to watch this year.

While rival firms stand on the sidelines waiting for the capital markets to move, Savanna is putting itself forward as a firm ready, willing and able to make deals happen, often before anyone else sees them coming.

“If you look at the office market over the last 24 months, the value destruction that we’ve seen has been fast and furious,” said Chris Schlank, a managing partner and founder of Savanna in 1992. “What that did is create tremendous distress in deals that were capitalized in 2005, 2006 and 2007.”

What seemingly sets apart Savanna from rival funds is the company’s ability to pounce on deals, and come through with funds hours or days after a contract has been signed.

“It was very impressive how they were able to assemble a team of varied professionals and do due diligence in such a short period of time,” said Massey Knakal Realty Services chairman Bob Knakal, who represented Capital One in last year’s sale of $60 million in mortgage debt at 5 Hanover Square to Savanna. “They just had people [who] were immediately able to swing into action. That’s something that is not typical.”

Savanna acquired 5 Hanover Square, a 325,000-square-foot office tower, for $51.5 million in October 2010, eventually taking over the property from developer Kent Swig and working out a deal to upgrade the property while retaining Swig as the property manager and leasing agent. Savanna got a $47 million loan from Los Angeles-based Mesa West Capital to renovate 5 Hanover and build out new spaces at the building, and has signed several new leases, including a 10-year deal with Odyssey Financial Technologies, with asking rents around $30 per square foot.

It’s an act they’re ready to repeat: Just last month, Savanna acquired the $75 million senior mortgage at Swig’s 80 Broad Street at a discount, and is expected to foreclose on that note as well.

“I have had a longstanding relationship with the principals at Savanna and we have been working cooperatively to take advantage of opportunities to buy discounted mortgages in the marketplace, starting with 5 Hanover and 80 Broad Street,” Swig said in an e-mailed statement.

Late last month, Savanna announced it had acquired 100 Wall Street from Lehman Brothers Holdings through a UCC foreclosure auction. The 29-story, 504,000-square-foot office building is 77 percent occupied, and lists law firm Harris Beach, the Bank of Taiwan and the New York Stock Exchange as tenants.

Savanna’s activity in a still-uncertain market has prompted some to question the wisdom of Schlank and fellow Savanna managing partner Nicholas Bienstock. But the fund doesn’t just parachute in with blinders on before negotiating a deal, according to Woody Heller, executive managing director and head of the capital transactions group at the commercial real estate services firm Studley.

Heller said Savanna does an incredible amount of due diligence on a property before sitting down at the table, telling The Real Deal: “I have never been rubbed, scrubbed and massaged as scrupulously in my life.”

Heller represented Bronx-based Chedward Realty Corp. in the $135 million sale of 1375 Broadway, a 513,000-square-foot office building that Savanna acquired in December 2010. As part of that deal, Savanna bought the fee ownership from Chedward for $89 million, and the long-term net lease from Statecourt Enterprises for $46 million, according to real estate data provider Propertyshark.com.

Savanna, with a relatively small staff of 17 professionals, looks and acts like few other real estate funds in the business today.

“They’re unusual, because not only are they private equity fund managers, but they’re also long-term owners and operators, and they understand what that means,” said Herrick, Feinstein attorney Laurie Grasso, who has represented Savanna for the past 15 years.

Instead of simply foreclosing on the debt they’ve acquired, she noted, Savanna tries to work out deals with the prior owners and operators to keep them in the property as managers, in part because judicial foreclosures can take 18 to 24 months in New York, wasting precious time and money.

Schlank, 44, and Bienstock, 45, first met each other as teenagers growing up in Manhattan, and both received master’s degrees from Columbia University’s School of Architecture. Schlank then became a project manager at the Westside Federation for senior housing, a nonprofit developer for low-income residents. He founded Savanna Partners at the height of the early-1990s real estate crash in New York, focusing on developing and repositioning small- to medium-sized residential buildings.

Bienstock, meanwhile, got his MBA and worked for Chemical Bank and Capital Trust before joining his old friend Schlank at Savanna in 1999.

In 2006, Savanna launched its first private equity fund, a $313 million vehicle, with plans to buy more than $1 billion in new investment and development projects. The fund focused on a range of mezzanine debt purchases, joint-venture deals and direct acquisitions.

Savanna and a joint-venture partner, New York-based Hudson Realty Capital, in 2008 sold their 1.3 million-square-foot Bristol Business Center in Bristol, Conn., for a record $60.5 million, doubling the purchase price after just one year of ownership. The owners had extended 600,000 square feet of long-term leases to tenants ranging from Firestone Building Products and Arett Sales to Clark Steel.

But in an increasingly frothy market, the firm decided to put the brakes on potential new deals.

In 2008, Savanna agreed to buy 282 acres of land near Stewart International Airport in Newburgh, N.Y., with plans to develop a project called Hudson International Business Center, a 1 million-square-foot distribution complex plus a 60-room hotel. The deal, which was contingent on obtaining regulatory approvals from the local municipality, never closed.

Bienstock said Savanna is now in talks with the property’s current owners to restructure the terms of the deal if they are able to get those government approvals.

One of Savanna’s most innovative deals, industry insiders said, was 104 West 40th Street. The firm acquired the defaulted first mortgage from ING USA, and waded through a minefield of legal disputes between the previous owners, Manhattan-based Mermel & McClain and Principal Real Estate of Iowa, who bought the building in 2007 for $140 million, according to court records.

According to documents filed in New York State Supreme Court, Mermel & McClain accused Principal of failing to make a $14 million capital contribution and working out a secret deal to sell the 210,000-square-foot property and orchestrate a “short sale” to Savanna. Principal, in court documents, alleged that its partner never submitted a valid business plan.

Lawyers for Mermel & McClain declined comment.

The loan-to-own acquisition, led by Kevin Chisolm, managing director of the Savanna Real Estate Fund, was considered so innovative that he provided a case study to college students at the Columbia Business School in December 2010.

Savanna is now offering a full floor of pre-built office space, designed by architect Robert Finger of the firm Fogarty Finger, in the building for lease. The 6,610-square-foot space on the 19th floor includes eight full suites, two executive offices overlooking Bryant Park, a conference room, reception area and pantry.

Mitchell Konsker, vice chairman at Jones Lang Lasalle, says that Savanna is very hands-on in their approach to working with tenants and investing in new acquisitions, noting that Schlank and Bienstock will personally sit down with the principals of a prospective tenant to get a deal done.

“They infuse capital into the buildings, and they always have a long-term view,” Konsker told The Real Deal. “They’re in with the tenants; they’re in with the brokerage community.”

Savanna has also recently acquired 2 Rector Square, where developer Laurence Gluck of Stellar Management faced a $110 million foreclosure suit from Bank of America in July 2010, a year after the city’s Department of Transportation vacated a 72,000-square-foot space in the building.

Savanna “purchased a B-note at a discount from Wachovia when they were trying to generate cash at a moment of financial crisis,” Schlank said.

Savanna provided Gluck a mezzanine loan to help Stellar pay for the costs of bringing new tenants into the building. More than 65,000 square feet of leases have been signed since then, with asking rents in the mid-$30s per square foot. New tenants include Five Star Electrical, which agreed to lease 18,000 square feet, and NEE Consulting, a Manhattan-based accounting firm, which agreed to relocate from 40 Rector under a 4,000-square-foot lease that runs for more than 10 years.

“Having worked with Savanna to successfully recap 2 Rector Street, we have firsthand knowledge of their technical skills and ability to bolster the financial stability of an individual asset,” Gluck said in an e-mail. “Beyond 2 Rector, Savanna has also proven to be one of the most opportunistic investment and development firms in the NYC market today by identifying and unlocking value from a host of complex deals.”