Moinian’s tap dance

<i>One of New York City's biggest developers wrangles with the credit crunch</i>

When the news broke in March that the investment group Westbrook Partners and its operating partner, the Moinian Group, would return office building 475 Fifth Avenue to its lenders, it was viewed as yet another casualty of the irrationally exuberant real estate market of the boom years.

But for a developer being forced to relinquish one of the many troubled properties in the real estate empire he’s amassed over the past three decades, Joseph Moinian seemed awfully complacent.

“The decision of giving the building back to the lender was made by Westbrook,” Moinian matter-of-factly told The Real Deal in his office on the 18th floor of 530 Fifth Avenue. “They said, ‘Joe, do you mind?’ Because they’re the big brother partner, we agreed with their decision. We were a minority partner.”

He added: “It’s different than giving 530 Fifth to the bank,” gesturing around him at the building that he purchased from Larry Silverstein in 2004 for $210 million, where every doorman in the lobby wears a jacket emblazoned with “M” for Moinian.

“If the decision-making of 475 Fifth was ours, maybe it would have been different. We were not in the driver’s seat.”

Moinian’s life has recently become a complicated tap dance of appeasing the many lenders, tenants and financial partners that make up his portfolio of 20 million square feet of commercial and residential space. But the fact that Moinian has so many financial partners may ultimately be his saving grace.

The Moinian Group has been one of the most active real estate buyers in the past 10 years, amassing some 14 million square feet of property in Manhattan, including luxury rental conversion Dwell95 at 95 Wall Street, the far West Side’s Atelier condo and a raft of properties on lower Fifth Avenue. His empire has also expanded beyond New York City, and even includes a stake in Chicago’s Sears Tower.

But many of the properties Moinian purchased during the boom may now be underwater or are rumored to be in trouble, like his planned W Downtown Hotel & Residences, his Financial District office tower 180 Maiden Lane, and Dwell95, which had the unfortunate timing of holding a red-carpet launch party on Sept. 15, the day of a now-infamous drop in the stock market. Since then, at least $2 million in mechanic’s liens from subcontractors and suppliers have been filed at Dwell95, which has offered generous concessions to lure tenants, including months of free rent and complimentary breakfast for residents.

Other people’s money

Moinian, who was selling $100 million of women’s apparel a year by the time he was 30, insulated himself from much of the exposure by playing mostly with other people’s money. In an environment where lenders were tripping over each other to underwrite projects, he put in little of his own equity and was not asked to personally guarantee his loans.

So while 475 Fifth is likely not the last of Moinian’s projects to go back to the bank, some in the industry say the Iranian-born mogul will ride out the real estate slump with his Midas-touch reputation generally intact.

“We’re in an unprecedented downturn right now,” said Dan Fasulo, managing director at research firm Real Capital Analytics. “Moinian and many other local operators who found themselves in significant trouble are going to get a pass on this down cycle; some of the most experienced investors in the world have gotten hammered.”

Still, it’s clear that the company is being stretched thin with projects like 60 Madison Avenue, the 186,575-square-foot office tower where Moinian was recently late on a loan payment, and 180 Maiden Lane, where he faces a $328 million loan coming due in November.

Meanwhile, 417 Fifth Avenue, which Goldman Sachs’ Whitehall Group purchased with Moinian in 2007 for $250 million, has been pulled off the market after being quietly shopped around in recent weeks amid suspicions it would have to sell at a severe loss.

And, after numerous delays, a city stop-work order and the painfully slow demolition of the Sept. 11-damaged Deutsche Bank building across the street, one of Moinian’s most high-profile projects, the $240 million Downtown W, has delayed its grand opening.

Rumors abound that the project is in serious trouble. Moinian flatly denies this, though he won’t say how many units have been sold.

Several mechanic’s liens have been filed at the site since the summer of 2008, according to city documents, though Moinian said that his company was addressing them.

“Joe himself says he works so much harder today to try to lose less money,” said Ron Cohen, an executive vice president at Cushman & Wakefield who has worked with Moinian numerous times. “We’re all crumbling. What amazes me is that he keeps his temper. It’s a tough situation when you have so many buildings, issues with debt and partners. It’s a nightmare. But he is one of the most brilliant people around.”

Giving Moinian money

It’s easy to see why people feel comfortable lending money to Joe Moinian.

You can hear the animated 55-year-old mogul before you see him, his Farsi-tinged English booming through the halls of his Midtown office building.

The sparse design of the space, all bright white walls and low coffee tables and asymmetrical arrangements of hydrangeas, seems appropriate for the developer of Dwell95, with its interiors by French designer Philippe Starck, and the Costas Kondylis-designed Atelier.

The minimalism provides a fitting backdrop for Moinian, whose good-natured banter (he’s relieved that his daughter Martha’s recent acceptance at Barnard means she’ll stay close) fills the space so completely that too much decoration would be overwhelming.

“He’s got an over-the-top personality,” said a friend who asked to remain anonymous. “It fills the room very quickly. When Joe walks into a room, everybody knows it’s Joe. That’s not something that you’ll find in too many developers.”

Moinian, clad in a crisp white shirt and tie, describes his early days in New York as a 16-year-old fresh off the boat from Tehran.

He arrived in the United States alone in 1971. The only family he had here were his brother-in-law’s two brothers, whom he’d never met.

Moinian enrolled at Forest Hills High School and graduated, then enrolled at City College and co-founded a small apparel manufacturing company, which seemed natural since his family has been in the textile business for generations.

“I knew my fabrics very well because I used to go to work with my father as a kid,” said Moinian, whose entire family had joined him in the United States before the Iranian revolution of 1979.

The company, called Billy Jack for Her, started out making disco-appropriate women’s tube tops.

“We used to get the material in tubes, cut them and just do the hem,” Moinian recalled. “We’d sell them in boutiques for $5 or $10. They cost us no money to make.”

The business thriving, Moinian soon met his now-wife Nazee, who is also Iranian-born, when she was 17 and he was 26. By the time she gave birth to the first of their five children, Matthew (who is now 24 and tasked with heading up Moinian’s W Downtown project), the company was doing $100 million in sales a year. Moinian was spending three weeks a month traveling as far as Korea and China, peddling his wares to the likes of Sears, JCPenney and Casual Corner.

At that point, he’d already been buying real estate for years. “My father always had real estate on the side. Always,” Moinian said. “When I made money, I bought real estate.”

But he claims that it was the travel that convinced him to set aside the fashion business and focus on real estate.

He bought his first “serious office building,” 450-460 Park Avenue South, in March 1982. He also bought nine buildings in the Flatiron district, which at that time was far from the trendy, Shake Shack-imbued neighborhood of today.

“At that time you would not drive from 16th Street to 21st Street because somebody would block your car and hold you up,” Moinian said. “That’s how bad it was. I bought nine buildings in that area; I own all nine still.”

Ever since then, he’s believed in investing in emerging neighborhoods, buying up properties in the Financial District in the mid-1990s and becoming one of the biggest landowners in the area by Sept. 11.

More recently, he’s become associated with the far West Side with his residential condo the Atelier on 42nd Street between 11th and 12th avenues, where Moinian was rumored to give free condos to young celebrities Lindsay Lohan and Nick Lachey to help build hype. (The exact details of the arrangement are unclear, but Moinian told The Real Deal he offered them “special incentives.”)

Moinian had a keen eye for opportunity from early on, said Cohen, who recalled selling him 90 John Street in the early 90s. The crumbling office building was one-third occupied and facing foreclosure when Moinian picked it up for $6 a square foot. Several years later, he refinanced it for roughly $40 million after converting the top half to residential.

“That had never been done before,” Cohen said. “It was a very ballsy move … he sees all these nuances that make the real estate so much more valuable. He takes risks.”

Sign Up for the undefined Newsletter

Inflated projections

As the real estate market of the early 2000s started to heat up and Moinian’s buying spree accelerated with ever-more mind-boggling prices, that deep-seated belief in New York real estate and its emerging markets may have been what got him in trouble.

Experts speculated that he overpaid for properties like 180 Maiden Lane, which he bought for $355 million, and even 530 Fifth Avenue.

But at the time, banks were competing with each other to fund real estate deals, then repackage the loans as commercial mortgage-backed securities. As an experienced New York City real estate investor, Moinian was gold to institutional investors like Westbrook, Goldman Sachs and Lehman.

“There were only a finite number of local players that had the experience,” Fasulo said. “He had a lot of smart money behind him.”

The strategy was to buy run-down office buildings with near-term lease expirations, then refurbish them.

“The whole game plan was to buy some of these assets that had lease renewals coming up, renovate them quickly, then get top-dollar rents when the tenants vacated,” Fasulo explained. “Obviously, that plan has turned upside down.”

Instead, commercial rents have plummeted and properties have lost tenants.

For example, when Moinian refinanced 60 Madison Avenue with longtime lender Wachovia for $66.5 million in April 2007, it was around 86.5 percent occupied, according to Trepp, a commercial mortgage research firm. But the loan was underwritten for 95.1 percent occupancy, and cash flow was projected at $4.85 million, though at the time the loan was originated, cash flow was only $1.9 million. By the fall of 2008, it had fallen to $1.24 million, while the occupancy rate dropped to 64 percent.

“They were expecting cash flow to double, which has definitely not been the case,” Chris Stanley, a research associate at research company Reis, said. “Because the property was aggressively underwritten, they’re not making enough cash to cover the debt payments, and they’ve gone through most of their reserve.”

Moinian insists that despite the hype of news reports, the mortgage payment he missed in October for $319,000 was only one day late.

He also said that the company is “working on two major lease transactions which will fully occupy the entire building,” though he declined to reveal the names of the potential tenants.

Returning the keys

In March, Crain’s reported that 475 Fifth Avenue would be returned to its lender, Barclays Capital, after the owners defaulted on loans backed by the property.

Moinian and Westbrook purchased the 23-story office building (nicknamed the “Wedding Cake Tower” for its layered brick architecture) for $162 million in 2007. They planned to refurbish it, then find higher-paying tenants. But after the team put in some $30 million, most of it from Westbrook, the building struggled to find new occupants.

With loan reserves dwindling, Barclays reportedly asked Westbrook for more equity, but the fund refused.

“Four seventy-five Fifth Avenue was not a material investment for Westbrook,” said a spokesman for Westbrook. “The decision on 475 Fifth was something that was in the best interest of Westbrook’s investors.”

The spokesman declined to comment when asked if Moinian’s involvement played a role in the decision.

Meanwhile, 417 Fifth Avenue, which Moinian purchased in 2007 for $250 million, was pulled off the market, said Cohen, who performed a sell-hold analysis on the property. According to published reports, it would probably only have sold for somewhere between $175 million and $200 million.

“We’re taking it off the market,” Moinian said. “There is no market right now for buying and selling. It’s not exclusive to me. If you owned 417 Fifth, you wouldn’t be able to sell it either.”

The property’s complicated debt structure is one reason it would be difficult to sell, Cohen said. When they purchased it, the partners put up $95 million in cash and took out a $125 million mortgage maturing in September 2010. A buyer would have to clear the $30 million due in a mezzanine loan from Credit Suisse and restructure the first debt, Cohen said, which would be nearly impossible in the face of the credit crunch. Only properties with long-term, stable debt already in place are sellable, he said.

“We were trying to restructure the whole deal by finding a buyer, but this is the wrong time,’ Cohen added. “It’s impossible to get financing today for anything.’

Moinian may lose more properties as more of these situations arise, since it likely won’t make financial sense for him to throw good money after bad, experts said.

“If I were Joe, why would I put money into a project that can’t cover itself for the next four to five years?’ said a source familiar with the negotiations. “It’s financial suicide.’

However, because of the favorable terms offered to Moinian during the heyday, he will likely walk away from some of his properties with little personal cost.

Moinian is “in a lot less personal trouble than you’d think,’ said Fasulo. “Some of these local operators were able to get very attractive terms — they had to put up very little of their own equity to make these deals happen.’

Caught in the mania?

Still, while it’s unlikely that Moinian has exposure on the majority of his projects, the scope of his empire makes it nearly impossible to avoid any damage, sources said.

“He has so many properties, I’m sure there’s one or two he’s on the hook for,’ said one source familiar with the situation but who asked to remain anonymous. “I can’t imagine with all these deals that he’s totally immune.’

Moinian denies getting carried away in the mid-2000s real estate mania, pointing out that he never bought buildings at $1,000 per square foot, and did the bulk of his purchasing before the market peaked in 2007.

“There are buildings that one might say I overpaid [for],’ he said. “But I never bought anything that doesn’t carry itself cash-flow wise. Never. Yes, I bought a piece of land to build or [a building] to convert. But a building that came in already built, I never bought anything that doesn’t carry itself.’

Still, one of the projects clearly closest to Moinian’s heart — the W New York Downtown — has been besieged with problems from the start. After several accidents at the site and a stop-work order from the Department of Buildings, the 46th floor of the 57-story building was poured in late April, Moinian said.

“We are hoping that in a couple of months we will top out on the building,’ he said. While his PR team still insists that the building is on target for a “soft-opening’ in June, Moinian said he expects the hotel to open “by the end of the year.’ The W Hotel chain’s Web site lists the project’s opening date as 2010.

The slower-than-expected demolition of the Deutsche Bank building has impacted sales in the development. Moinian would not say how many units have been sold, revealing only that it’s “a sizeable amount’ of the 159 residential condos.

“The better side of my building is overlooking Memorial Park,’ he said. “Sad to say, this has been the weakest part of my selling. Now as the building is moving down I want to do the selling of that view.’

Even without the Deutsche Bank situation, the market for new condos is severely suffering. “Are people lining up to buy condos?’ Moinian said. “No. We all hope for the best.’

Moinian keeps a relatively positive outlook and says he is proud of the fact that some units at the W have broken the record for the highest price per square foot Downtown at $2,000.

The hotel portion of the W doesn’t seem likely to offset any losses. “We have a situation where the hotel market has changed completely. We’ve never seen room rates fall so quickly,’ Fasulo said.

When asked if his lenders have been flexible about his financing for the project, Moinian said he has an advantage over the many small-time developers that emerged in recent years.

“They’re flexible as much as they can be,’ he said. “I have no complaints from any lending institution that I’ve worked with because none of them are new to us. They all understand, they know the company inside out, they know what we are capable of doing and they all know one thing: that we are in this for the long run.’