Billy Macklowe no longer the kid

<i>With a year under his belt, Harry Macklowe's son is still putting out fires</i>

In June 2008, William “Billy” Macklowe ousted his legendary father, Harry, as chairman and CEO of Macklowe Properties. A year later, instead of moving the company forward, the younger Macklowe is still putting out the fires that were set during the final tumultuous years of his father’s reign.

For months, Macklowe has fought to stave off the seizure of the former Drake Hotel site at Park Avenue and 56th Street by Deutsche Bank, which filed to foreclose in August 2008 after the company defaulted on a $543 million loan meant to finance the redevelopment of the site into condominiums and retail stores.

Also, in April, Macklowe lost the Financial Times building at 1330 Sixth Avenue, after defaulting on a $130 million mezzanine loan issued by Otera Capital. The Montreal-based firm, a subsidiary of Canada’s largest pension fund, acquired the tower from Macklowe for $100,000 and the assumption of the building’s $240 million mortgage.

Defaults like these have become, in many ways, standard operating procedure for Macklowe Properties.

Indeed, much of Billy’s job this past year has been shepherding the sale of the Equity Office Properties portfolio that his father acquired in a $7 billion transaction from the Blackstone Group in 2007. Macklowe Properties was unable to carry the deal’s high level of leverage, and, after defaulting in February 2008, Macklowe was forced to help his father unwind the portfolio piece by piece. The cleanup included selling off the jewel in the company’s crown, the General Motors Building at 757 Fifth Avenue.

In some ways Billy Macklowe has seen two crashes: The very public unraveling of his company’s commercial real estate portfolio was just a preview of the September 2008 implosion of the global credit markets and subsequent collapse of the banking industry.

“He’s faced insurmountable obstacles,” said Darcy Stacom, a vice chairman at CB Richard Ellis, who led negotiations of the Macklowe asset sales in 2008.

In March, CB Richard Ellis Investors closed a deal to buy 1540 Broadway, one of the last properties in the portfolio, for about $355 million, which values the property at $403 a square foot — around a third of the value that Macklowe Properties paid for the building in 2007.

Macklowe, who has a more conservative reputation than his father, declined to comment for this story. But several of the family’s closest confidants spoke to The Real Deal on his behalf.

“I knew Billy before Billy knew he was Billy,” said Sandy Lindenbaum, the legendary veteran land-use attorney and long-time counsel for Harry Macklowe. “First of all, he’s very smart. He’s a very hands-on guy. And, maybe because I started out with his father, I’ve found him very respectful.”

Nonetheless, the last year, Billy’s first on the job at the helm without his father, has been consumed with the financial inferno and focused entirely on cleaning up a dirty balance sheet rather than growing the company and putting his own mark on the city skyline.

“You can’t help but learn things going through this emotional roller coaster,” said attorney Jonathan Mechanic, chairman of the real estate department at Fried Frank and a longtime attorney for Harry Macklowe. “[Billy has] matured well, well, well beyond his years as a result.”

Real estate in the blood

Born in 1968, Macklowe is the son of Harry and his wife, Linda. For most of his 41 years, Macklowe grew up in the shadow of his iconic father. His only sibling, Elizabeth [Macklowe] Swig, is a former Macklowe Properties employee who is now the wife of developer Kent Swig and director of design at Swig Equities.

In 2004, Macklowe married Julie Lerner, who recently left Manhattan-based hedge fund Sigma Capital Management. (The marriage is actually the second for Macklowe, who was briefly wed to fashion designer Tory [Robinson] Burch when they were both in their 20s.)

There was never much doubt that Billy would go into the family business. After graduating from New York University in 1990, he worked as a real estate finance analyst at Manufacturers Hanover, which was acquired by Chemical Bank and eventually merged into JPMorgan Chase. In 1992, Macklowe joined his father’s company and worked his way up.

Over the next 10 years, he successfully negotiated a number of major deals, including the repositioning of 400 Madison Avenue, a 200,000-square-foot tower at 48th Street, which the company acquired out of bankruptcy in 1998. Among the company’s other commercial holdings is 610 Broadway, a 125,000-square-foot boutique office building in Soho.

Ruth Colp-Haber, president of Wharton Property Advisors, recalls a lease negotiation with Billy Macklowe about 10 years ago that highlighted what she considers his integrity and fair-minded nature.

Colp-Haber represented a tenant for a commercial sublease agreement at 125 West 55th Street, but the tenant walked away from the deal. “Billy took the space back anyway,” said Colp-Haber. “He could have told us, ‘Tough luck, your tenant disappeared.’ I never forget those types of things. I think I’ve had so many experiences to the contrary.”

In fact, depending on whose story you believe, a couple of very high-profile tenants are now desperately trying to back out — or Macklowe is desperately trying to push them out — of 510 Madison, the speculative office tower that Macklowe Properties is developing.

The building, which is on the corner of 53rd Street, was the site of a three-alarm fire earlier this year. However, Billy Macklowe took the unusual step of writing an open letter to the commercial brokerage community to assure them the tower would still be ready this summer.

“510 Madison Avenue stands as a trophy boutique office tower, ready to meet the rigorous demands of today’s office tenants and the challenges of today’s rental market,” he wrote.

The building has been a problem site for him since the economy took a dive last fall. In February, Jay Goldman & Co. filed suit in New York State Supreme Court against Macklowe Management, claiming the landlord tried to illegally terminate its 10-year, $125-per-square-foot lease in December 2007.

Macklowe had declared Goldman, one of the city’s largest hedge funds, in default after it failed to pay a $132,700 deposit for the space. Goldman countered that it was being locked out of the space. Lawyers for Jay Goldman were not immediately available for comment; however, a compliance conference is scheduled on the case for June 26.

Last month, the story nearly repeated itself when Tourneau, the luxury watch and jewelry chain, filed suit to back out of its lease for a 3,300-square-foot flagship store in the building.

A more conservative approach

By 2002, Billy Macklowe was named president of Macklowe Properties, taking responsibility for day-to-day operations, new acquisitions and relationships with lenders.

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The irony is that it was after Macklowe took on his new responsibilities as president of the company that his father, Harry, embarked on some of the company’s riskiest deals.

In 2003, the elder Macklowe got the ball rolling with the now legendary acquisition of the General Motors building for a record $1.4 billion, a move that underscored both his genius as a dealmaker and his recklessness.

Macklowe outbid some of the industry’s biggest players, including Jerry Speyer, Sam Zell and Marvin Davis, paying a record $800 per square foot for the building, and leading some observers to question whether he had gone mad.

However, Macklowe, with considerable help from Billy, turned the GM building into an iconic tower, raising rents to levels never before seen in the Plaza District and striking a deal to put the flagship Apple store in the building’s ground-floor retail space.

Some Macklowe insiders defend Harry against the charge that the EOP deal was a reckless gamble and say his success at repositioning the GM building showed he could have made the purchase work in a more stable market.

“Everyone at that moment in time was very optimistic,” said Lindenbaum. “In retrospect, one can say all the signs were out there. You can Monday-morning quarterback anything.”

Billy Macklowe publicly criticized his father for the EOP debacle in the Wall Street Journal, noting his opposition to the $1.2 billion bridge loan that Harry secured from Fortress Investment Group. And some have speculated on whether the leadership change at the company was prompted by the tension between the two.

But Macklowe insiders say they do not believe that Billy Macklowe’s public criticism of his father’s business decisions has done long-term damage to their relationship. Mechanic said Billy still taps his father’s knowledge of the real estate market and resources within the industry.

“Listen, there’s a lot of knowledge there. I think they have a strong father-son relationship,” he said. “They’ve been through a lot of things together.”

However, there are some questions about who is in Billy’s inner circle.

In May 2008, just a day after the Wall Street Journal reported that Billy would assume his new position, Michael Szollosi, former COO at the firm, left for Cohen Brothers Realty. Other reports noted that during negotiations with investors and lenders in late 2007, Macklowe replaced his father’s top advisers with a team from CB Richard Ellis and Citigroup.

While some sources say the younger Macklowe has pushed many of his father’s key advisers to the side, insiders deny that he has made any wholesale changes to the organization.

“People in the company really worked with the two of them,” said Mechanic. “I don’t think they were Harry’s people or Billy’s people.”

Macklowe officials declined to comment on the number of employees or any cost-cutting measures.

Industry observers do praise Billy for what they consider to be his clear-eyed view of today’s real estate market.

“He’s a sharp guy; he gets it,” said Dan Fasulo, managing director of research at Real Capital Analytics. “He’s very analytical, probably a bit more than the old-timers.”

In fact, some of Billy Macklowe’s best negotiating work came during the talks to dispose of the GM building and other EOP assets.

“We got to work very closely with Billy on the deposition of the GM Building and the three other legacy properties that they sold in order to satisfy the Fortress debt. Billy was very in tune with what was going on in the capital markets,” said Stacom. “We felt he was very creative in his approach.”

After months of negotiations, Mort Zuckerman’s Boston Properties wound up buying the GM Building and three other Macklowe properties for $3.9 billion.

No more going it alone

Once Macklowe manages to find time to pursue his own agenda, Stacom and two other sources said they expect him to launch several new partnerships with outside investment groups, a departure from the go-it-alone strategy pursued by Macklowe Properties in the past.

“I think Billy would like to have more venture partners going forward,” said Stacom.

Lindenbaum said he believes Macklowe, and many of his competitors, will pursue future deals with more deliberation than at the height of the real estate boom.

“I don’t think in 2010-2011, it’s going to go back to the same sort of free thinking that occurred in 2006-2007,” he said.

That doesn’t mean Macklowe is out of the market, of course.

Paul Massey, chief executive of Massey Knakal Realty Services, is currently working with the company on a couple of potential deals. While he declined to discuss any details, he confirmed that Macklowe Properties is actively looking to set up an investment fund.

“I wouldn’t be surprised to have them do something sooner than later,” said Massey. “They’re always in the vanguard.”