Trending

Mort Zuckerman gets last laugh

<i>After sitting out the recent boom, Mort Zuckerman gets out his wallet<br></i>

Summary

AI generated summary.

Subscribe to unlock the AI generated summary.

In the ego-driven world of New York City real estate, there was something almost superhuman about the restraint Mort Zuckerman, and his firm Boston Properties, exhibited throughout the liquidity-juiced buying boom of recent years.

The perma-tanned media tycoon, his low-key partner Ed Linde and the other green eyeshades at Boston Properties watched placidly from the sidelines as moguls like Harry Macklowe and the folks over at Broadway Partners spent money like overindulged housewives with platinum cards.

Now, with some of the boom’s biggest buyers in dire financial straits, Zuckerman and his crew are on the offensive.

Flush with capital and backed by new partnerships with the sovereign wealth funds of Kuwait and Qatar, Zuckerman snagged the iconic 50-story General Motors Building in May for $2.8 billion, a record price for an office building. He also captured three other office towers from Macklowe’s shattered empire.

Boston Properties owns only a 60 percent interest in the GM Building, while its two partners on the deal, the first a consortium that includes the investment authorities of Kuwait and Qatar along with Goldman Sachs, and the second a group connected to the ruling family of Dubai, each own a 20 percent stake.

With a media empire that includes the New York Daily News and U.S. News & World Report, and with his international connections, Zuckerman pulled off something perhaps few other figures in the real estate industry could have managed. He tapped into a spigot for international funds linked to Middle Eastern governments.

What’s more, Zuckerman has already stated he intends to return to those sources to help finance the purchase of other distressed trophy properties forced on the market by the credit crunch. And he has not ruled out partnering with other Middle Eastern capital sources as well: “Frankly, we had much more demand … for participation in this particular venture than we wanted to make available. We had at least two others who wished to invest with us. We just didn’t have the space in this particular transaction,” he said in a recent conference call with investors.

Origins of a mogul

The purchase of the GM Building was a coup to which Zuckerman, who declined to be interviewed for this article, had been building his whole career.

At 70, Zuckerman is the 188th-wealthiest American, and he stands astride an empire that spans two industries — media and real estate. And at the heart of Zuckerman’s real estate success are a series of business strategies that he and his longtime partner Linde developed over more than 40 years in the business. Those strategies drive the narrative of Zuckerman’s story. And they’re likely to continue to drive it as he and his partners sweep the wreckage of the credit crunch into their already bulging portfolio.

Zuckerman grew up in Montreal, Canada, grandson of a rabbi, son of a tobacco-and-candy wholesaler. As a child, he was small in stature and endured anti-Semitic name-calling and rock peltings on the way to school.

“This is how I became one of the fastest two-block runners in Montreal,” he told the New Yorker magazine last year.

The future mogul got his first glimpse of New York City at the age of 12, when his parents left him home alone for a few days. He hopped a train south unsupervised and spent three nights alone at a hotel, “walked around town, and went to the movies.”

At 16, he enrolled at McGill University in Canada. Then, for a time, he collected degrees like he would later collect buildings. Adding to a law degree from McGill, he attended Harvard Law School, got an MBA at Wharton and briefly pursued a PhD in business.

Learning his trade

In 1962, Zuckerman signed on at the age of 24 to work at the venerable Boston real estate development firm Cabot, Cabot & Forbes, for a starting salary of $8,750.

The company, which built much of Boston’s skyline, operated with a kind of clubby, corporate professionalism much different from the gritty, sharp-elbowed urban training grounds where many New York City developers cut their teeth.

Gerald Blakely, CEO of Cabot, Cabot & Forbes at the time, liked to draw from the pool of Ivy League talent, a practice Zuckerman himself has continued at Boston Properties. The longtime investment whiz remembers being impressed with Zuckerman’s quick mind and sharp wit. “He had a lot of training in finance, had pursued a doctorate in business. And in the real estate business, legal is always a wonderful background,” Blakely said.

Soon, the precocious trainee was demonstrating his deal-making abilities. And it was that capacity that left the strongest impression on Blakeley.

“We quite often tried to get major tenants before we started construction on projects,” Blakely said. “Then, if we had found a lease with a good tenant, he would go to a bank or insurance agency and they would loan against that — with much better deals than if we did not have the tenant.”

That capacity to bring in other parties was reflected decades later in the GM deal. Zuckerman stated that Boston Properties had the capital to go ahead without any partners at all. But “it was an opportunity to find a way to develop additional equity capital and magnify the opportunities” the company expects in the coming years.

“What he’s really been doing,” said Robert Freedman, vice chairman of GVA Williams, “is putting his balance sheet on steroids.” He added, “partnering on the GM project not only diversifies the ownership and diversifies the risk, it also increases his opportunities to develop additional equity capital. They will be one of only a few players who will be uniquely qualified to buy.”

Launching his firm

After just two years, Blakeley made Zuckerman a partner and chief financial officer, giving him a 3 percent stake in Cabot, Cabot & Forbes. By the time he was 30, Zuckerman would be worth $5 million.

But more importantly for Zuckerman, Blakeley also recruited another promising prospect named Edward Linde.

An engineering graduate at MIT, Linde was also a numbers whiz who won Harvard Business School’s highest honor, the Baker Scholar designation.

In 1972, after eight years at the firm, Zuckerman, then 32, decided to strike out on his own, and he convinced Linde to join him. They called the new firm Boston Properties. To fund it, Zuckerman cashed out a stake in 18 properties, including 12 California industrial and business parks, settling for property swaps and cash. He also won a lawsuit against Cabot, Cabot & Forbes and recouped a $4 million share of a Boston building, plus $400,000 in interest.

By most accounts, Zuckerman and Linde were cut from two different kinds of cloth, and perhaps that is why the partnership has endured for almost four decades.

Linde married straight out of college, wore conservative business suits and was known for his courtesy and attention to detail. Zuckerman, on the other hand, lived for the deal and in the years that followed would develop a reputation as a jet-setting renaissance man, dating the likes of Gloria Steinem and Bianca Jagger.

“They’re an ideal team because they complement each other,” Blakeley said. “Ed is one of the world’s great diplomats — he can negotiate and bring people together and understand their viewpoints. Mort was brilliant and very absorbed in everything he did. The deal was important. People weren’t.”

John Powers, chairman of the tri-state region at CB Richard Ellis, who first worked with Boston Properties in the early 1980s, noted that “they were the first developers I worked with who were very corporate but at the same time very real estate entrepreneurial.” He added, “They were a new breed.”

Early on the pair hit upon another strategy that would set them apart from many of their competitors at the time: They decided to focus on 24-hour central business district sites they could develop in cities.

“At the time, everybody was saying, ‘It’s all about the suburbs,'” recalled Powers. Yet Zuckerman and Linde targeted four constrained destinations: New York, an island with limited land to build on; San Francisco, with its politically correct populace resistant to change; Washington, D.C., with its height limits; and Boston, which has a relatively bounded downtown.

Difficult civic atmospheres, Zuckerman would later explain to another reporter, create “constraints in supply,” causing any demand surge to result in “a big movement in prices.”

Focus and obstacles

It’s a strategy that still guides Boston Properties today.

“We repeat it over and over again, but as they say in the Middle East, repetition does not diminish the prayer,” Zuckerman said recently. “This is the guiding philosophy of everything we have done to date … We are not looking to get into 15 markets. We are not looking to get into anything other than the top end of the office markets that we are in. We think it is still a winning strategy.”

It’s also a strategy that works best mixed with patience. For the GM Building, negotiations dragged on for four months, but Zuckerman claims it was worth every grueling, transatlantic phone marathon. (According to one media account, he spent four hours jawboning with New York from Israel during that nation’s 60th anniversary celebrations back in May.)

“It is the most remarkable acquisition that I have been involved with in the number of years I have been in this business,” Zuckerman told investors on a June 12 conference call. “But I have to tell you we spent just an unbelievable amount of time to do this transaction.”

Of course difficult civic atmospheres can also make for some unpleasant business experiences — something Zuckerman and Linde would learn more than once. One project near Walden Pond outside of Boston drew scathing public attacks and reams of bad publicity from a coalition of local preservationists that included rocker Don Henley.

In 1985, Boston Properties bid $455 million for the site of the old New York Coliseum at Columbus Circle. It was a major coup for the out-of-towners, but led to another politically charged battle.

Community groups, this time allied with celebrities that included Jackie Onassis and Henry Kissinger, complained that the 58- and 68-story towers Boston Property wanted to build were overly ambitious and would cast shadows over the park.

It took nine years for Zuckerman to walk away from that fight, but eventually he did, amid finger-pointing and recriminations.

The media empire

Sign Up for the undefined Newsletter

As he was growing his firm, buildings, of course, weren’t the only assets Zuckerman was acquiring.

In 1980, the longtime New York Times subscriber made his first media purchase, snapping up the venerable Atlantic Monthly and promptly firing its editor. (He sold the magazine in 1999.)

In 1984, Zuckerman purchased U.S. News & World Report and became editor-in-chief. In 1993, he bought the New York Daily News, the fifth-most-widely-circulated daily newspaper in the United States.

In addition, the impeccably tailored mogul frequently appears on “The McLaughlin Group,” chiming in on weighty domestic and global issues.

Zuckerman’s foray into the media made him the subject of sometimes-unfavorable press scrutiny, which derided him as a wealthy dilettante seeking attention. Local reporting legend Pete Hamill called him a “hysterical amateur.” Pulitzer Prize-winning journalist David Halberstam famously called Zuckerman “a sad little man … who likes to think of himself as a journalist but doesn’t have any earthly idea what a journalist really is.”

However, there’s no question his stature has had some very real benefits in the world of real estate.

“Zuckerman is much more than a property developer — he’s a pundit, a statesman and a media mogul,” said GVA’s Freedman. “This is a guy who is as separate and distinct from traditional property developers as anyone I know. He’s a financial statesman, and that gives him more than a competitive advantage in the real estate sector.

“In an industry historically [full] of promoters and spin doctors, he has a lot of stature, and ultimately it translates into competitive advantage,” Freedman added.

An associate professor at New York University’s Real Estate Institute, Barry Hersh, put it this way: “It gives him clout in terms of political approvals, and dealings. Do you really want to get in a pissing match with him?”

Going public

Zuckerman acknowledges that his high profile has come in handy — especially in the more public aspects of his business. And that’s something that became a lot more important with a decision he and Linde made that transformed Boston Properties.

For some time, the company had been privately successful. By the end of 1985, Zuckerman and Linde had largely accomplished what they set out to do: They owned and managed 53 buildings with more than 9 million square feet, valued at $1.3 billion.

But in 1997, they decided to take the company public. During the first road show with potential investors, Zuckerman would later tell a Washington Post reporter, “a number of leading institutional investors came in, not to talk about the offering but to talk about my editorials.”

“They bought stock,” the Post article noted, “which was the whole point.”

Boston Properties’ IPO raised $903 million, a record at the time. A secondary offering the following January raised an additional $702.5 million. The money allowed the company to supersize, and it wasted little time doing so.

Zuckerman and Linde shelled out $321 million for 280 Park Avenue, a complex of two office towers between East 48th and 49th streets purchased from the Bankers Trust Co. In the spring of 1998, they acquired Boston’s 2.2 million-square-foot Prudential Center, which includes an iconic tower, for a price of $519 million. They also bought a six-building, 3.76 million-square-foot portfolio in San Francisco known as Embarcadero Center for $1.22 billion.

Almost simultaneous with those monster purchases, Zuckerman partnered with developer George Klein and the Blackstone Group, and beat out 12 other bidders — including Jerry Speyer and Steven Witkoff — to develop two prime parcels in Times Square.

This time there would be no public obstacles to the completion of Times Square Tower, a 49-story, 1.2 million-square-foot building, and 5 Times Square, a 1 million-square-foot, 40-story tower next door.

And in 2002, the firm acquired Citigroup’s 39-story Park Avenue headquarters at 399 Park Avenue for $1.06 billion.

It was quite a jump from the first project that Boston Properties launched in New York City in 1983, when it took over a 47-story office building project from a financially troubled Canadian developer for $84 million — and completed the $300 million speculative venture on 599 Lexington Avenue within three years.

Selling strategically

Boston Properties has a philosophy of holding its buildings long-term. Yet back when everybody else was buying near the peak of the market in the summer of 2006, they became sellers: They flipped 5 Times Square and 280 Park Avenue for a cool $2.5 billion.

The markets became so “heated” that the company just couldn’t resist, Zuckerman explained on a recent conference call with investors. Or, as Zuckerman explained to one reporter recently, “We went in expecting we would get a price that would make us very, very, very, very, very, very, very happy — very, very happy.”

In total, Boston Properties unloaded some $4.5 billion worth of assets over two to three years before it was done, Zuckerman said — far more than it has expended on the GM deal. The company also refinanced a number of buildings on better terms, including 599 Lexington Avenue.

The advantage of Boston Properties’ capital is already manifesting itself in ways that go beyond the GM buy. While a number of competitors are juggling crippling loans, Boston Properties is spending some $20 million to improve the lobby and entrance of the Citigroup Center, the 1.6 million-square-foot, 59-story skyscraper on 53rd Street that it acquired for $725 million in 2001.

Meanwhile, the company is involved in the development of two 1 million-square-foot office towers in Manhattan.

Zuckerman has been assembling lots and now controls the entire east block front of Eighth Avenue between 54th and 55th streets, where he is constructing a $1.7 billion, 1 million-square-foot office tower to be located at 250 West 55th Street.

Zuckerman’s architects have been consulting with law firms from the beginning and designed the building based on their specifications. The developers even dug below street level to create storage rooms for files and installed central air conditioning that can be turned on and off floor by floor, for law firms looking to control costs on weekends.

CBRE’S Powers, who has been involved with the project from the start, declined to release names of prospective tenants. But Gibson, Dunn & Crutcher has reportedly signed a lease for 220,000 square feet of space. And another law firm, Proskauer Rose, has also been reported as a possible tenant for another 500,000 to 600,000 square feet in the tower.

The project has not been without roadblocks. The Buildings Department posted a stop-work order on the final 10-story building being demolished for the project after Boston Properties’ construction workers accidentally punched a hole through the wall of a neighboring building at 241 West 54th Street. That building is owned by fellow real estate mogul Joseph Moinian, who reportedly refused to give Zuckerman access to his building to reinforce it.

This past spring, the dispute ended up in court with Zuckerman accusing Moinian of attempting to coerce him into buying the building, along with another one nearby. According to the New York Post, Moinian reportedly demanded $20 million to $30 million for the two buildings, both of which are four stories. “This is how the game is played,” Moinian allegedly told Zuckerman, according to the paper.

But the dispute appears resolved now. In June, a state Supreme Court judge finally gave Boston Properties the go-ahead to begin the process of reinforcing Moinian’s building, which allowed it to take down the rest of the neighboring building. And Zuckerman’s 250 West 55th Street appears to be on track to meet its January 2010 completion date.

Meanwhile, in recent months, Boston Properties, along with the Related Companies, has been razing buildings on Eighth Avenue and 46th Street in preparation for yet another 1 million-square-foot office tower on the east side of the street.

Defending the deal

Of course there are doubters. In a turnabout from those who criticized Boston Properties for staying on the sidelines a few years ago, today’s naysayers are from the ranks of the more conservative.

The Wall Street Journal described the GM buy as “uncharacteristically flashy for the Boston-based company” and noted the danger of shelling out a record price and taking on Macklowe’s debt when prime office tenants in the financial sector are shedding employees.

But Zuckerman has insisted the deal is a good one. The GM Building promises a cash-flow yield in its first year of 5 percent, with rents that are likely to escalate dramatically with tenant turnover, Zuckerman said.

By comparison, at the peak of the market, there were so many bidders for buildings that buyers were seeing negligible — even negative — first-year cash flows relative to their investments, said NYU’s Hersh.

And then there are those who see a parallel between Zuckerman and Macklowe. They wonder whether the recent explosive growth of Boston Properties is just another example of an aging mogul grasping for glory as he enters the twilight of his career.

Regardless, the company appears poised to grow even larger.

Lately, Zuckerman has been lamenting the sad state of the economy and industry. Publicly, he has repeatedly declared the current environment “the worst we have had in 70 years.”

But that’s not the tone his investors have been hearing. To them, Zuckerman has sounded almost ebullient.

“We see a continued downward pressure, particularly as mortgages come due in various buildings,” Zuckerman said on a recent conference call with them, “particularly large mortgages [that] cannot be refinanced on attractive terms.

“There will continue to be the opportunities to purchase buildings,” he said. “We are in very, very good financial shape, and have very good credit lines that we can grow to make additional acquisitions. We are going to be out on the lookout.”

Recommended For You