Witkoff: the savvy strategist

The developer’s plan for juggling $1.5 billion in projects involves turning on a dime

Jan.January 01, 2014 07:00 AM
Steve Witkoff

Steve Witkoff

It was the kind of chance encounter Steven Witkoff could only have dreamt about back when he was a young attorney pulling 90-hour workweeks at Dreyer & Traub in the late 1970s.

Back then, the firm’s swashbuckling clients included Peter Kalikow, Donald Trump, Arthur Cohen, and — the standout in Witkoff’s eyes — Howard Lorber, who cruised around in a cream-colored Rolls Royce convertible with the top down smoking a cigar.

Decades later, in the early 2000s, Witkoff, then a developer, was driving on Fifth Avenue when he spotted the straight-talking, Bronx-born Lorber outside the GM Building, carless in the rain, and unable to get a cab.

Witkoff, the CEO of the Witkoff Group, picked him up, thus striking up a friendship. Eventually that friendship would cross over into business when in 2011 Witkoff recruited Lorber to partner with him on a $190 million bid for the former International Toy Center building at 1107 Broadway. The 380,000-square-foot building, which they renamed 10 Madison Square West, has since been converted into 125 condos, where current listings range from $3.5 million to $18.5 million.

“A lot of times, people think it’s a very complicated procedure to work with partners, and sometimes it is,” said Witkoff. “But sometimes you get fortunate enough to have a relationship like I have with Howard, and it becomes not complicated at all.”

The deal was the first of many between the two moguls and is illustrative of the business model that the 40-person Witkoff Group has employed on many of its projects. It’s currently spending roughly $1.5 billion on construction costs alone at projects it has underway, mostly in New York.

Unlike other mega-players like Extell Development, Silverstein Properties or the Related Companies, the Witkoff Group almost always teams up, not just with equity partners, but with other industry figures who bring specialized expertise to its deals. In addition to the Vector Group, the firm is currently working with Fisher Brothers, the Macklowe Group, Ian Schrager, and a slew of others.

Multiple sources told The Real Deal that Witkoff’s charisma and outsized personality is a key component of his business success.

Jonathan Mechanic, chairman of the real estate division at the law firm Fried Frank, said that while Witkoff has a “broad array of talents and is knowledgeable in multiple areas,” he’s especially skilled at establishing long-term relationships with potential business partners.

“He often partners in particular circumstances with people who have a special experience that might be beneficial to the partnership,” said Mechanic, who has helped Witkoff engineer deals with major players like Goldman Sachs. “And he plays in enough different spaces that he does it more than others.”

Witkoff’s partnerships, of course, also reduce his own financial exposure and allow him to pursue multiple projects at once. (According to Real Capital Analytics, he currently has at least nine New York City projects in the works.)

“He’s a rich dude, but when you are getting into the size deals he is working on, you’re not going to risk your entire net worth on one development. You are certainly going to want to take on partners,” said Dan Fasulo, managing director of RCA.

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Keeping options open

The fact that Witkoff’s chance car ride with Lorber developed into a valuable business relationship does not come as much of a surprise to anyone who knows the 57-year-old Witkoff.

Peter D’Arcy, the regional president for New York City at M&T Bank, who has provided Witkoff with hundreds of millions of loans over the past decade, said Witkoff’s people skills “pretty much help him in all circumstances,” noting that Witkoff “prides himself on being relatable to not just his peers, but … to the guys on the construction site.”

Witkoff and Lorber, along with Winthrop Realty Trust, joined forces to buy the highly coveted 701 Seventh Avenue in the heart of Times Square and replace it with a 39-story mixed-use development anchored by a roughly 200,000-square-foot Marriott Edition Hotel with five floors of retail. The planned development will be one of the biggest in the area in the last 25 years. (TRD was told in the fall that the transaction was valued at $2 billion.)

“A lot of people looked at the deal,” Witkoff said. “The key was getting a Marriott Edition to come here.… Now we have a roughly 500-room hotel in a hotel submarket that has perhaps the highest occupancy in New York City.”

Witkoff’s proclivity for teaming up with different partners on projects that require different expertise fits perfectly with another key component of his approach — an emphasis on executing deals in many different areas of the market.

Witkoff learned the value of having that flexibility early on, when he purchased 10 Hanover Square from the Helmsley family in 1996 for $15 million, intending to convert it to residential, but famously changing course and leasing the entire building to Goldman Sachs. In 2005, Witkoff ultimately did convert the 23-story building into residential and then, in 2011, sold it for $260.8 million.

“We like to be able to execute on a deal in many different ways. That is the way to buy real estate,” Witkoff said.

At the moment, he’s keeping his options open at one of his splashiest deals: the Helmsley Park Lane Hotel at 36 Central Park South. A Witkoff-led partnership — other investors include Lorber, Macklowe Properties, Highgate Holdings, and Jynwel Capital — closed on the $660 million deal in late November after securing $525 million in acquisition financing from Wells Fargo Bank and Criterion Real Estate Capital. And while rumors abound about how the investors might convert the property into luxury condos, Witkoff has said that for now, the property will remain a hotel. (Highgate specializes in luxury hospitality.)

“Right now, the whole business plan is centered around running it as a hotel,” Witkoff said. “We have the option of keeping it as a hotel and fixing up the rooms. We have the option of converting a portion … to condominiums. We have the option of buying some air rights and filling in around the hotel.”

Meanwhile, the developer has a slew of other recent deals.

Downtown at 22 Thames Street, Witkoff is partnering on a 400-plus-unit Rafael Viñoly-designed condo with Fisher Brothers, which specializes in construction and development. The tower will be one of the tallest residential buildings in Lower Manhattan.

Witkoff and Lorber also partnered with Fisher in the spring to do a deal on Murray Street, buying a 145,000-square-foot building from St. John’s University; they plan to do high-end residential there.

Witkoff Group Principal Scott Alper said, “we know what we know, and we know what we don’t know.” He noted that Schrager is “obviously the father of the boutique hotel,” and brings design and operational savvy. Lorber, of course, also owns Douglas Elliman, which is “very helpful on the residential marketing front,” Alper said.

For his part, Lorber said, “I’m not a developer, so all I can really do is guide them on what the pricing will be for a condo.”

“They believe me because I am putting money in, and that is why it works so well,” he said.

The firm is also not afraid to step away from a development and simply cash out if the circumstances are not right.

For example, last year Witkoff and partner Ruby Schron, who together bought the famed Woolworth Building for $146 million in 1998, sold the upper 30 floors for $68 million to a group led by Alchemy Properties. Originally, the pair and their investors had intended to redevelop the project as residential themselves, said Schron. But the market tanked, and by the time residential came back in vogue, many of the partners involved were no longer available.

“Some passed away and we were dealing with estates, some are not in America anymore,” Schron said. “We did not have a full team … so we thought it was better off to sell it and let someone else try.”

‘Psychology Today’ moment

A native of Baldwin Harbor, Long Island, Witkoff got his start in real estate by chance. It was the late 1970s, and he had just graduated Hofstra Law School. His sister was working for the real estate firm Integrated Resources Inc., and referred her brother to Dreyer & Traub, the law firm representing her employer. Soon Witkoff was hired as an associate and working in the firm’s Park Avenue offices.

It was there that he met an ambitious young lawyer named Laurence Gluck. The two were doing a lot of work for clients who were buying properties with loans backed by the government-sponsored Federal Home Loan Mortgage Corporation, Freddie Mac. They soon began discussing how they might do such deals themselves.

Gary Jacob, executive vice president of Glenwood Management Corporation, worked with Witkoff in those early years, and remembers him being a “very good lawyer, with loftier goals and ambitions.”

“I just knew that wasn’t the life he wanted — looking at documents,” Jacob added. “We spoke about that. He was always very curious about the stuff we were working on, and what we were thinking.”

Soon enough, Witkoff was asking lenders where they were looking to do deals. They responded with the Northwest Bronx and Washington Heights.

Gluck and Witkoff began making forays Uptown to look at property after work and on the weekends.

The two lawyers made their first buy in 1986, when Witkoff was just 29. The building at 164 Sherman Avenue in Washington Heights cost $240,000 and required a $50,000 down payment. To come up with his half, Witkoff approached his father, who worked in the garment industry, for a $15,000 loan. It was an intimidating ask — the loan amounted to at least half of his father’s liquid savings, and Witkoff expected to get turned down.

Instead, his dad said: “If you believe in it, I believe in it,” Witkoff recalled. “It was almost as if my father had read some sort of Psychology Today story about how to have a rapprochement with your son,” he said. “This was a big moment in our lives. It was such a boost for me.”

Within three or four years, Witkoff and Gluck had left behind the law and set up a shingle in a 150-square-foot office on Park Place in Lower Manhattan. The room was so small that the static electricity, which kicked up when the partners walked on the carpet, shorted out their phones. They called their company “Stellar Management,” for “Steve and Larry.”

Entrenched in it

Initially, Gluck and Witkoff considered themselves “deal guys,” who bought and flipped properties. But they were forced to modify their plans when the downturn hit in 1989.

By then, they owned nine or 10 properties. With rents coming in slow and the resale market suddenly gone, the two hunkered down and tried to keep down costs.

“Looking back, we just didn’t have a clue as to how to run property,” Witkoff recalled. “We didn’t understand at first that these properties needed a lot of work, they were maintenance machines.… The toilets and plumbing were breaking down. And all the capital systems needed upgrading.”

Those days, Witkoff said, were “the defining moment in my life.”

“We had very little capital and financial cushion, I was forced to really get out there and learn how to operate real estate,” he said. “We were there every day entrenched in it.”

The pair recruited a crew of Albanian and Czech supers and maintenance men, and carried beepers. Witkoff spent New Year’s Eve 1991 in the basement of a building on 124th Street and Madison Avenue helping his plumber with a sewage backup.

Soldering copper pipes wasn’t the only skill Witkoff acquired. He also learned to use a gun — which he sometimes carried in his gym bag.

“They were very difficult days up there, and I had a lot of scares,” he recalled. “We owned a building on 143th and Broadway and it was a very, very rough neighborhood in those days, tremendous heroin dealing and cocaine dealing, and multiple times we were in situations where we heard gunshots or we were inside a building and we were threatened.”

It was during this time that Witkoff began forging new relationships with some of the real estate figures he would later recruit as partners. Indeed, around 1990, Schron, a former legal client, helped Stellar secure its first $250,000 line of credit.

Armed with their new financing and a growing stable of collaborators, Witkoff and Gluck became active buyers of foreclosed Freddie Mac properties. They also got their first opportunity to buy office buildings. By then they had moved their own office to 135 William Street. And when in 1994, they heard that a 250,000-square-foot, foreclosed office building at 156 William was for sale for $4 million — less than $20 a square foot — they partnered with a fellow tenant at 135 William to buy it.

“Initially, the business plan was ‘we’ll take office space across the street and make an investment out of the deal,’” Witkoff said. “Nobody wanted it. So we bought it and fixed it up and learned the office business.”

More office buildings followed, at 1 Broadway, 33 Maiden Lane and 10 Hanover Square. Many of these properties, Witkoff recalled, were bank owned and still being managed by institutional management firms, which were bloated and inefficient. Given their cost-cutting experience during the recession, Witkoff and Gluck thought they could do it better.

“If we were looking at a 10 percent leverage return, we would know that we could almost instantaneously turn that into a 15 percent return,” he said.

Gluck and Witkoff split in 1997 in part because Witkoff was focusing on office buildings, while Gluck was concentrating on multi-family, Witkoff said.

But looking back, Witkoff said he’s never forgotten his early lessons, and believes those early years “made me a more evolved person.”

“Because I met people from a milieu and a socioeconomic world that I had never met before,” he said, “it gave me context about how lucky my life was. It made me have a tremendous, tremendous appreciation for what other people go through, and how difficult their circumstances can be.”

In 2011, when his own son Andrew died of an Oxycontin overdose, he drew on those lessons.

“When I look at tough circumstances in my life, the loss of a son — I’m not sure I could imagine a tougher circumstance — I think about what other people go through, and that is sort of what gave me the strength on my journey since his death,” Witkoff said.

Optionality: a big word

Witkoff was able to emerge from the most recent recession in relatively good shape in part because of the foundation he created with his early buys, he said.

“We bought the Daily News building [at 220 East 42nd Street] for 80 bucks a foot!” he said, citing the 1997 purchase as an example. “That set me up in a really good fundamental way.”

Witkoff, noted Lorber, “has an unbelievable track record and has never given up a property.”

“He was one of the first guys after the recession to get a financial institution to back him,” Lorber said.

When Witkoff made his first big buy post-recession with Lorber at 1107 Broadway, many in the industry suggested that he had vastly overpaid. But in hindsight, the move looks prescient.

Witkoff and his partners originally expected to sell the converted condos at about $1,750 a square foot, Lorber said. But with almost 90 percent of the building sold, they’ve been getting a “shade under $3,000,” he added.

“At the time, everybody was saying that he ‘overbid’ for the asset,” said RCA’s Fasulo. “But that acquisition for a condo conversion was probably the most timely acquisition I have seen this cycle. It seems like only months after that purchase, the condo market started to explode.”

Witkoff, Fasulo added, has “been doubling down ever since.”

Witkoff is also developing a hotel-condo project with Schrager on Chrystie Street, and is working on a 15-story, 98-unit condo conversion at 150 Charles Street, among other projects. Though the project is sold out, a group of West Village residents have been trying to derail it, citing zoning violations. Last month, they announced plans to file a lawsuit alleging that a connecting parking lot would violate the Clean Air Act.

Still, it’s the project on Central Park South that has industry insiders buzzing most.

Witkoff said he expects the property as a hotel to generate an unlevered cash flow of around 4 percent of the purchase price.

Sources unconnected to the company say the Witkoff partnership has been poking around, attempting to acquire adjacent land.

“The layout is a little bit awkward for condos,” said the source. “But if they can get one or two more sites adjacent to it, it could be one of the best development sites on Earth.”

Witkoff insisted the partnership has not yet decided how to proceed.

“We just like the optionality, and it’s very, very rare, and that’s a big word for us,” Witkoff said. “It doesn’t have a long-term management contract, so there are many different ways we can go.”

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