CIM’s shock and awe
Out-of-towners take Manhattan, jumping on projects before rivals, sometimes at high prices
The principals of the Los Angeles-based private equity firm the CIM Group know a thing or two about military strategy — two of them served as Israeli paratroopers before immigrating to the United States and teaming with a former Drexel Burnham executive to found CIM.
Perhaps it’s no coincidence, then, that CIM entered Manhattan with a real estate equivalent of “shock and awe.”
Virtually unknown to most local industry players until recently, CIM parachuted into Midtown in late 2009 — with a speed and decisiveness that surprised many of those still cautiously hoarding cash — and targeted distressed assets in prime locations.
Two years later, the firm has multiple beachheads around the city, and has established itself as a major New York City player, likely for the long haul.
“They came from nowhere,” said an industry source involved in one of their deals. “And when they made the decision to do the deal, they came up with the money within a manner of days. They move very, very quickly.”
Over the last two years, CIM has completed at least 11 deals across the city, valued at a total of well over $1 billion (the exact dollar amount of their investment, however, is unclear, because the size of the firm’s stake in some of its properties is unknown). Those include its first buy, the site of the former Drake Hotel, which the firm followed up on by acquiring three neighboring properties that give it the most valuable development site in the city.
Other assets include 209 unsold condos in the William Beaver House, a 47-story luxury tower in the Financial District; a stake in 11 Madison Avenue, a fully occupied Art Deco office tower; 737 Park Avenue, long one of the most coveted potential condo conversion sites in the city; and Trump Soho. And as The Real Deal went to press, it was announced that CIM had teamed up with Jared Kushner, principal of the Kushner Companies (and publisher of the New York Observer) to acquire 200 Lafayette Street, an office building in Soho, for $50 million.
CIM’s blitzkrieg Manhattan buying spree closely mirrors the strategy the firm developed on a smaller scale in its hometown of Los Angeles.
“They tend to pick an area and hit it hard; they don’t do a one-off here or there,” said Carl Muhlstein, a vice president in Cushman & Wakefield’s Los Angeles office who has done three deals with the firm. “Speed to market and really penetrating a market quickly is their hallmark.”
CIM relies on a large in-house staff with expertise in areas ranging from capital markets to construction to leasing and development to transform the undervalued assets it acquires — often urban properties in need of repositioning. The depth of that staff, which is unusual for a private money manager, allows the firm to transform its acquisitions without an outside development partner, industry experts say.
Over 17 years, CIM has built up $9.5 billion in assets by following that template. The firm serves a long list of institutional clients anchored by the gargantuan, $228 billion California Public Employees’ Retirement System (CalPERS). Other clients include pension funds in New York, New Jersey, Virginia, Texas and many other states.
“After they moved from joint ventures to raising institutional money for their own funds, it allowed [acquisitions] to work much faster, with much more credibility,” Muhlstein says. “It allowed them to take it to the next level.”
CIM’S Drake play
According to Real Capital Analytics, some $4.1 billion of CIM’s assets are in real estate. And in recent years, CIM has been one of the most active buyers in the industry nationally, shelling out an estimated $1.7 billion since 2009, according to the Wall Street Journal.
Buys in recent months include Las Vegas condos, commercial properties in Los Angeles, high-rises in Dallas and office space in San Francisco. In addition, last year, Cantor Fitzgerald announced that it was partnering with CIM to originate some $5 billion in commercial loans and securitize them on the CMBS market. (Anthony Orso, CEO of Cantor Commercial Real Estate, told Bloomberg News in 2010 that CIM is putting up most of the capital.)
In New York, most of CIM’s purchases have been targets of opportunity — troubled projects, mired in financial distress.
The firm’s biggest New York play is the Drake Hotel, which once belonged to Harry Macklowe, one of the poster children for the overleveraged excess of the boom.
Macklowe had started with an ambitious vision. He purchased the Drake site on the corner of Park Avenue and 56th Street in 2006 for $440 million, then demolished the hotel, planning to build a mixed-use development that would include luxury condos, a hotel and high-end shopping.
First, however, he had to acquire a series of neighboring properties, driving up the cost of the project to about $724 million, even before construction.
Macklowe put in tens of millions of dollars of his own money, but turned to Deutsche Bank to help finance the bulk of the deal. The bank chopped up a $559 million loan into pieces and sold it to eight different groups. In late 2008, as the credit markets were collapsing, the bank filed a foreclosure suit on behalf of the buyers who had purchased those pieces. Meanwhile, iStar Financial, which owned the largest portion of the loan, $224 million, hired Cushman to sell the note in the fall of 2009, but took it off the market because bids came in well below the $160 million asking price.
It’s unclear whether CIM got involved with the Drake site through Macklowe, who was fighting off foreclosure at the time, or iStar.
However, when CIM arrived in late 2009 it agreed to pay off some 10 creditors, who held a total of $510 million of the debt, some at severely discounted rates.
That property still carries a significant degree of risk. According to news reports, CIM is planning to build a $1 billion condo and retail complex there. The site could include the tallest residential tower in New York. But to develop the site, CIM still needs to obtain a construction loan of as much as $700 million, no easy task in today’s market.
Yet they may be just the owners to do it.
“These are not the kind of people to get deterred,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm headquartered in New York. “They didn’t generate a business of this size running away from challenges.”
CIM has made its name making “lemonade out of lemons,” he said.
“The people who win in the vulture business are the ones who are the most skilled and the most aggressive,” he said. “The guy who gets the deal is the guy who’s got the balls to come in and write the check, and not say, ‘It’s subject to getting a construction loan.'”
Joshua Barbar, an analyst at investment banking firm Stifel Nicolaus who covers iStar, said that though construction lending has come back in recent years, in order to get a loan, he believes CIM will need to obtain at least some commitments from tenants willing to move in once the building is complete.
“I don’t think anybody is going to give a loan on a purely speculative basis,” he said. “They need to get commitments, or find an REIT that is willing to take it on, since they can borrow on a non-project-specific basis.”
This type of project, he added, is only for those who can afford to be financially patient.
“You really have to have a much longer-term horizon with many of those things,” Barbar noted. “The Drake might be the best piece of undeveloped land in Midtown, but if the economy stays stagnant the next few years … having land is going to be costing you money.”
In October, Shemesh told the Wall Street Journal that he was confident CIM would get the loan.
“We have long-standing relationships with lenders,” he noted. “We anticipate our construction financing to be in place well in advance of any sort of deadline.”
Meanwhile, CIM has continued to tap Macklowe’s expertise as it’s bought up the brownstones surrounding the Drake site (including 46 East 57th for $42.5 million and 42 East 57th for $32.4 million). Though Macklowe doesn’t have an equity stake in the project, last August, CIM backed him on an unrelated deal — the purchase of 737 Park Avenue, a 20-story rental building that he’s planning to covert to condos.
CIM eschews publicity — so much so that no one knows for sure the meaning of the company’s initials.
The firm declined a request for an interview with The Real Deal and would not answer written questions.
A number of CIM’s local partners — including Macklowe, Tamir Sapir, Madison Equities and iStar — also declined to comment, noting that CIM liked to control its own publicity.
But the firm is certainly no stranger to the media spotlight, and the broad outlines of its origins are well known.
In the 1970s or 1980s (accounts vary), two former Israeli paratroopers, Avi Shemesh and Shaul Kuba, immigrated to the United States, launched landscaping and design businesses, and began investing their profits in West Hollywood real estate.
The story goes that the duo met their partner in 1987, when they showed up at the home of Richard Ressler to discuss landscaping his property. Ressler was already a well-connected player, with a track record for big deals. Armed with an MBA and a law degree from Columbia University, he had worked as an attorney at Cravath, Swaine and Moore, and as an investment banker at Drexel-Burnham Lambert, home of disgraced junk-bond king Michael Milken. Prior to forming CIM, Ressler had worked as the president of Brooke Overseas Limited, which developed Ducat Place, a mammoth office complex in Moscow, backed with private equity funds, according to CIM’s website.
Ressler’s brother-in-law is Leon Black, another Drexel Burnham alum and head of private equity giant Apollo Global Management LLC, while his brother Tony is the cofounder of Ares Management LLC, another large, L.A.-based private equity firm.
In 1994, Ressler, Shemesh and Kuba launched CIM and set to work acquiring properties in Santa Monica, where, according to the Los Angeles Times, city officials were attempting to inject life into a dormant pedestrian mall near the Pacific Ocean. CIM’s nearby buildings “helped drive the transformation of the pedestrian-oriented district from a series of vacant storefronts into a bustling entertainment strip,” according to the paper.
In the years that followed, the team gained a reputation as turnaround artists, moving into a wide array of other down-and-out areas.
“They were absolute pioneers here in Santa Monica, Hollywood, the Center City and Downtown Los Angeles, and they’ve had one of the best track records in adaptive reuse, bringing retail to where it’s needed, and turning around very difficult situations,” said Cushman’s Muhlstein.
“They were on the Third Street promenade doing projects at the most embryonic stages. … They bought in Hollywood when no one would touch it. Now, [that part of Hollywood] is one of the hottest transit-oriented development areas in the city.”
To finance its projects, CIM has sought and won financial assistance from government officials eager to accelerate revitalization. (In L.A., officials gave the firm a $30 million federal loan to help it recruit Cirque du Soleil to a theater in one of CIM’s redeveloped shopping centers.)
But the firm’s ability to expand to its current size would not have been possible without the backing of large institutional investors.
After establishing a track record working largely on project-by-project joint ventures backed and controlled by big institutional partners, CIM began raising money for larger independent funds that would give it the authority to move with the speed and decisiveness that only an independent entity can (not to mention the potential for greatly increased profits). To raise the money for its funds, CIM sometimes turned to well-connected players known as “placement agents” — a common practice in private equity, but one that would soon become controversial.
In the late 1990s, CIM hired a firm headed by Alfred Villalobos, a former CalPERS board member, eventually paying $9.6 million in commissions.
“CIM paid a portion of those fees in the form of a $1.1 million loan to Villalobos, to build a 9,100-square-foot mansion in Nevada overlooking Lake Tahoe,” according to the L.A. Times. Eventually, Villalobos became embroiled in a major scandal, which brought unwanted scrutiny to CIM in the pages of California newspapers.
In May 2010, the California attorney general sued Villalobos, accusing him of attempting to bribe a former top Cal-PERS official. Villalobos denied the allegations, and the suit was put on hold by bankruptcy litigation. CIM, for its part, was just one of many private equity firms that hired Villalobos (Apollo was another), and was not accused of wrongdoing.
Even so, in October 2010, CIM agreed to cut its fees for CalPERS by $50 million over five years, and promised to avoid the use of placement agents. According to the L.A. Times, the fee reductions were “intended to compensate CalPERS for any costs it may indirectly have paid because of large commissions paid by investment partners to placement agents.”
Local industry insiders say the negative headlines tarnished CIM’s name. And, just this August, revelations of the firm’s connection to the case were trumpeted in headlines in Israel, as it attempted to negotiate a deal to buy distressed properties.
New York arrival
A hedge fund division of CIM arrived in New York in late 2009, moving into 515 Madison at a time when “the world was waking up and getting back in the game,” said Michael Joseph of Colliers International, the broker who helped the firm find space.
Though CIM’s fortunes at the Drake site remain to be written, some of the several other bets it has since placed already appear to be paying off.
“It’s been very hard to acquire distressed assets in Manhattan over the last couple of years, and I would certainly put them there in the most successful groups,” said Dan Fasulo of Real Capital Analytics. “They were willing to pay more than others at that point in time. But you could easily argue that for many of the things they bought, they are well in the black.”
In New York, CIM appears to have forged strategic relationships, which will likely pay dividends as they move ahead with the projects in the months to follow.
Sapir — who was in trouble at the William Beaver House and Trump Soho — had been staving off creditors for months when CIM purchased his debts in December 2010 at the eleventh hour from iStar and others. Just as with Macklowe, instead of turning its back on the fallen titan, CIM reached agreements that allowed him to retain varying levels of involvement in some of his former properties.
CIM took control of Trump Soho, agreeing to pay down about $85 million of the senior loan held by iStar, and to provide a mezzanine loan.
It also bought Sapir’s loan on the unsold condos at William Beaver, while simultaneously negotiating with the mogul to acquire a minority stake in Sapir’s healthy 11 Madison, a 2.25 million-square-foot office tower, anchored by Credit Suisse First Boston.
At William Beaver, CIM bought more than $60 million in mezzanine debt held by a fund controlled by Blackstone, with iStar remaining in the deal as a senior lender.
CIM then turned the high-end condos into rentals, transforming a negative drain into steady cash flow.
“It’s a huge success,” said Robert Scaglion, managing director of Rose Associates, which is handling leasing at the building. “They created a rental portfolio within a stalled condo and now have a fully functioning building.”
After the Macklowe and Sapir deals, CIM also went back to the well with iStar. Among its buys was the debt for $54 million on 49 East 34th, a 110-unit apartment building.
Meanwhile, CIM has also teamed up with Madison Equities to develop a hotel at 140 Sixth Avenue, between Spring and Broome streets, to be run by hotelier Sam Nazarian’s SBE company. The private equity firm provided the bulk of the capital to purchase the $24 million defaulted first mortgage on the 11,470-square-foot building at a 16 percent discount.
That collaboration may just be the start of another fruitful partnership. Sources say CIM has agreed to provide financial backing to Madison on a number of other potential deals, including a project at the old Domino Sugar site in Brooklyn.
But not everyone in New York has greeted CIM as saviors.
Last month, NMP, an investment group controlled by Russian developer Natalia Pirogova, filed suit, accusing CIM of “fraud and breach of trust.” The group claims CIM reneged on commitments it made to its local representative, Edward Mermelstein, before he shared “confidential intelligence” relating to a property at 21 East 33rd Street, including appraisals, feasibility studies and financial projections. Mermelstein, the lawsuit claims, shared the information on the understanding that CIM would pursue negotiations with Garrison Commercial Funding, a real estate investment firm that owned the debt, to purchase, restructure and refinance a $29 million loan on the property, and partner with Pirogova’s group.
Instead, the suit alleges, CIM purchased the loan and continued foreclosure proceedings.
“It’s unfortunate that outside entities entering the New York market are choosing to play by a different set of rules,” Mermelstein said.
CIM spokesman Bill Mendel declined to respond.
“We will be filing our response and, as a matter of corporate policy, do not comment on ongoing litigation,” he said.