Burkle’s billions

Business tycoon Ron Burkle ramps up NYC real estate buys

Ronald Burkle is known for many things: the billions he made in the grocery business, his now-sour relationship with former President Bill Clinton, even being the godfather to rapper P. Diddy’s children. But until recently, New York City real estate was not on that list. Indeed, Burkle — head of Los Angeles–based private equity firm Yucaipa — was focused more on investing in companies like Whole Foods and Barnes & Noble than on the Manhattan property market.

But lately, Burkle has made high-profile investments in boutique hotels in New York City and elsewhere. In January, Burkle reportedly paid $550 million for a majority ownership stake in the Soho House company, which operates members-only nightclubs and hotels all over the world, and will soon expand to Moscow and China. A few months later, Burkle and partner Joe Cayre paid $81 million to purchase the Manhattan building occupied by Soho House New York. And last month saw the opening of Manhattan’s NoMad Hotel, where Yucaipa partnered with hotel developer the Sydell Group in a joint-venture investment.

And Burkle’s involvement in New York City real estate extends beyond hospitality.

In February, Burkle retained commercial firm Eastdil Secured to sell 430 West 14th Street, the site of trendy clothing retailer Scoop, which he owns a majority interest in. Burkle is said to be trying to flip the property for $100 million — far more than the $63 million he paid for it just a few months earlier.

Joe Cayre
Together, these real estate investments mark a shift in direction for Burkle, according to his friend and fellow grocery magnate, Gristedes Foods CEO John Catsimatidis. “I’m not sure he’s in love with the food business anymore,” Catsimatidis said.

When it comes to New York City real estate, sources say Burkle is on the hunt for opportunities others may have overlooked.

“He is focusing on a market where he thinks people are not paying a lot, where there is a lack of competitive interest,” said Lloyd Greif, CEO of Los Angeles–based investment bank Greif & Co. and one of Burkle’s longtime partners.

Or, as another source put it, “he’s not looking to buy the Four Seasons, even though he could. He’s looking to buy properties with a huge upside.”

Burkle is known for his quick decisions and bold, opportunistic investment style, and he will likely deploy a similar strategy in real estate, sources say.

But some noted that the billionaire business tycoon is interested in making only a few strategic property investments rather than a wholesale crossover into the real estate industry.

“He’s not in line to purchase a lot of buildings; he isn’t [running in real estate] circles,” said a source familiar with Burkle’s dealings, who asked to remain anonymous. “I don’t think he is a collector of real estate.”

Regardless of his long-term plans, Burkle’s interest in the hospitality industry has generated excitement among industry professionals.

“He is probably one of the first calls that people make in this sector [right now],” said Steven Kamali, a hospitality consultant and broker in New York City and the Hamptons. “His ability to move quickly makes him a prime candidate for prospective sellers and/or operators.”

Groceries and beyond

Born in the Los Angeles suburb of Pomona in 1952, Burkle famously began his career as an entrepreneur at age 30, with an audacious bid to buy the Stater Bros. Markets grocery chain, where he worked as a manager.

He reportedly failed in the endeavor when his bid was too low, and was then fired from the chain — the only employer he and his father had ever worked for. Undaunted, he began buying up small grocery stores and flipping them, with money he made in commodities investments, eventually building an empire of Fred Meyer grocery stores. He sold the company for $13.5 billion in 1998.

Then, instead of riding off into the sunset, Burkle began investing in a diverse array of businesses. The Yucaipa chairman now owns the Pittsburgh Penguins hockey team, as well as interests in numerous national and seminational grocery chains. (He started buying up stock in Wild Oats Market years ago, and became its majority shareholder just before Whole Foods bought the organics purveyor for $565 million in 2007.)

Burkle (left) and P. Diddy
He also has his hand in media properties, such as the magazines BlackBook and Vibe, and reportedly considered a bid for the Tribune Co., parent of the Chicago Tribune and the Los Angeles Times. And, he became a godfather to P. Diddy’s children after investing in the rapper’s clothing line, Sean John. That’s in addition to his investment in high-end clothing retailer Scoop NYC.

Not all of Burkle’s investments have been welcome, though. The board of troubled bookseller Barnes & Noble changed its bylaws to prevent him from buying up any additional shares.

While real estate has never been his primary focus, Burkle has always dabbled in the industry. His Americold cold storage company, for example, is structured as a REIT. And while he spends most of his time in London these days, he made New York headlines with the 2007 purchase of the penthouse at 704 Broadway (previously known as the Sky Studios event space), reportedly for $17 million in cash. But until now, he’s kept many of his investments quiet.

“He owns a lot of real estate, he’s just very private about it,” said one source with knowledge of Burkle’s personal finances.

Lately, however, his real estate deals have become too big to keep under wraps.

In 2008, Burkle partnered with developer Raffaello Follieri, then-boyfriend of actress Anne Hathaway, to buy more than $50 million worth of properties from the Catholic Church. But in a high-profile scandal, Follieri ended up in court on federal fraud and conspiracy charges relating to his dealings with the church (which did not involve Burkle). Follieri pleaded guilty and was sent to prison, and Burkle later sued him for misusing $1.3 million of his funds. The money was returned.

Last year, Burkle launched a venture with Sydell to invest in boutique hotels valued between $600 million and $1 billion, according to published reports. The venture is currently developing five hotels: the NoMad, two in the Saguaro chain in Scottsdale, Ariz., and Palm Springs, Calif., as well as two more yet-to-be-named hotels in Miami and Los Angeles.

In November, Burkle and Sydell announced that they would also spend $250 million to renovate 10 low-cost hostels in major U.S. tourist cities and reposition them by adding amenities like trendy bars and pools — carving out another potentially lucrative niche in the hospitality business.

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“We think the sweetest spots are existing hotels that need capital, don’t have the right branding or could use an upgrade or repositioning,” Sydell Group CEO Andrew Zobler told the Wall Street Journal last year. A representative for Sydell declined comment for this article, as did Burkle.

Buy at a bargain

Burkle’s bid for New York City real estate seems to be following the same philosophy as his other investments: buy low.

Burkle “has an incredible sense of intuition with respect for companies that have the potential to grow rapidly, as to where there is an opportunity for value-creation,” said Kamali.

That seemed to be on display in 2008, when Yucaipa started buying up stock in the organic grocery chain Whole Foods. Burkle bought enough stock to demand that the company adopt his recommendations — like more shelf space for in-house brands and opening fewer stores. Then, as the company’s stock price increased, he cashed out, making a 200 percent return, according to Business Week.

“We always try to buy companies that are doing okay but have some issues,” Burkle told the publication in 2010.

Soho House New York

On its face, the Soho House deal may not have immediately appeared to be opportunistic, but sources say it was.

Because of debt in the deal, Burkle actually paid less than the reported $550 million figure, a source close to the transaction told The Real Deal.

When it comes to New York City real estate, Burkle’s investments so far have spanned the middle-to-upper range, focusing on trendy neighborhoods such as the Meatpacking District and the niche market of boutique, high-end hospitality properties.

“He recognizes value in the middle-market, in the $50 million range,” said David Schechtman, a principal at Eastern Consolidated. “It should signal to us all that tremendous opportunity lies therein.”

And when it comes to real estate, Burkle isn’t putting all his eggs in one basket.

At around the same time Burkle took a stake in the NoMad, he also began buying up shares of a competitor, Morgans Hotel Group, the operator of the Mondrian Soho and other New York City hotels.

The unconventional move raised eyebrows and caused much speculation in the hospitality sector about Burkle’s motives.

Sources told the Journal he might bring on Morgan as the operator at the NoMad.

“There may be an opportunity to create synergies, potential for him to cross-pollinate between his various companies,” Kamali said.

Relationships matter

Burkle may face some challenges infiltrating the tight-knit world of New York real estate, industry insiders said.

Over the years, he’s developed a reputation as someone willing to do whatever is necessary to turn a profit. Early in his career, he received financing from notorious junk bond trader Michael Milken, and has been frequently criticized for leveraging his political liaisons to his advantage.

Burkle (left) and Bill Clinton
Burkle, who began holding political fund-raisers at his estate in Beverly Hills in the 1990s, famously had Clinton’s ear during his presidency. After Clinton left the White House, Burkle hired him as a Yucaipa consultant, though the relationship between the two has reportedly soured since then.

Over the years, Burkle’s legal struggles and dubious business partners have besmirched his public image. Like many of Burkle’s deals, the recent Soho House transaction prompted a lawsuit, when broker Nathaniel Christian, of NCG Real Estate, sued Yucaipa for $22.8 million. Christian alleged that he acted as the broker for the January purchase but was never compensated.

In an industry where relationships are everything, Burkle’s reputation for litigation and quickly cashing out of deals may deter some real estate players from partnering with him.

However, at a time when financing is hard to come by, hooking up with Burkle is still many an investor’s dream.

He’ll always be an attractive business partner, one source said, because of “his ability to act quickly from a financial perspective.”