The sit-down: Extell’s Gary Barnett on One Manhattan Square, financing megaprojects and “pedestrian” BK towers
“This is New York City – you sue somebody, you sue the whole world.”
Imagine scoring more than $1 billion in financing but still being miles from the finish line. That’s where Gary Barnett finds himself today, but the chief of Extell Development [TRDataCustom] has fought this fight before and prevailed.
The Real Deal caught up with Barnett at his Midtown office last week for an in-depth interview. The developer, casually clad in a black turtleneck, discussed the state of play at One Manhattan Square and Central Park Tower, two major condominium projects for which he’s looking to score funds. He also talked about his plans for other major projects, such as the City Point megadevelopment in Downtown Brooklyn, where he’s mulling going co-op, an unusual move in Brooklyn’s new development market. And he shared his thoughts on everything from the Israeli bond market to President Trump.
(This interview has been edited for length and clarity.)
The first 100 condo units at One Manhattan Square are now in contract. Are you giving big concessions when needed?
We’ve been giving very small concessions. Discounts are between 0 and 3 percent on average. Some units might be at 4 or 5 percent. It really what the demand is for particular units. One of the most important things about that building is that we do have a 20-year tax abatement. That’s very helpful in terms of carrying costs. If people wanted to buy it as an investment or rent it out, they could actually get a 3 or 4 percent return, which is not so bad today.
But you’re also raising prices. Is that contradictory? You’ve also tried to appeal to brokers.
We’re not raising prices a lot. We’re more tweaking prices by a couple percent to put it in line with where we see the demand. That’s what we do. You have to adjust prices whenever you’re doing a new building. It’s rare you get it perfectly right. In terms of paying 50 percent of the commissions at signing, we are doing that in all our new development projects now because we want to be competitive with existing product. We just want to make sure there’s a reasonable incentive for brokers to do a deal in our buildings. Once they bring their clients to our buildings, we’re confident that the properties will prove themselves. We’re putting out the money obviously a couple years in advance, but we’re ready to do that. We’re not giving them the whole commission because we want them to be there throughout the process.
Where are the buyers at One Manhattan Square coming from?
We’re seeing a decent amount of Asian buyers. A lot of domestic Asian, not foreign so much. Either they live in Flushing or Downtown Manhattan, and they want to make an investment in real estate. Some of them are going to move in, or their kids will. And some are going to rent it out. What I’ve seen is once the buildings are completed and sold out, invariably the prices go up. Because then you’re only seeing one or two on sales at a time. When the sponsor still has units left, you’re competing and there’s a cap on it.
What kind of sales do you have to hit to pay off the project’s loans?
We’re up to $650 million [in financing] probably now. We think we’ll get up to $750 million. If we close the whole first mortgage construction loan, I think we’ll need to sell another 350 to 400 units, less than half the building.
You were hoping to score a construction loan for Central Park Tower to replace the $235 million Blackstone land loan, but you ended up refinancing. What went wrong?
We were not ready for it. This is a significant loan. We have to be far down the road in terms of buying out the job. We did an interim bridge loan till the end of the year. Blackstone stayed on for a small piece of the deal, and JPMorgan came in as the lead. Now we are ready for a construction loan in the neighborhood of $900 million and we expect to get one in the next few months. That only represents $1,800 a foot. It would be a very conservative construction loan.
How did you link up with SMI, your Chinese equity partner on Central Park Tower?
SMI was brought in to us by a broker. It took us a long time to negotiate a deal. They were very tough negotiators, but at the end of the day, we got a deal done that worked for everybody.
Was the deal for the Carnegie Deli site a defensive acquisition?
Actually not. We have all the air rights from that building, and all the rights on the block. It was just a good buy, if you look at the price we paid. That was a particular opportunity – there had been trouble. It was shut down for a while and you had the gas stuff going on there. For whatever reason, we were able to get it at an attractive price. We do that; we own little buildings. Sometimes it’s worthwhile to trade them.
Why do it when you have so many enormous projects?
It’s a little thing – it’s no big deal.
How about your City Point project on Willoughby Street in Downtown Brooklyn?
That’s an example of the change in the market. When we bought it, we thought it was a good buy. Today, it’s a big project, harder to finance and costly to build. The rental market is down. We think we’re going to build the nicest building in Brooklyn. Unfortunately for us, we only know how to build one way, so it’s going to cost more than your typical Brooklyn building. The plan is to do smaller units, mostly studios, ones and twos, some smaller threes. Most likely, we’ll have to go co-op or condo. If it’s co-op, it’s purely a function of the structure of the whole Acadia Realty Trust deal.
You mentioned “the typical Brooklyn building.” Could you elaborate?
A lot of the recent crop of buildings to date is pretty pedestrian. We’re subject to the architectural standards board, which had to rule on our building. They wanted to see a nice building too. Even if we didn’t want to build a beautiful building, we really had to.
You’ve raised a significant sum on the Tel Aviv Stock Exchange. But that comes with headaches. How do you feel about having to constantly disclose information to Israeli investors?
It’s a pain. But that’s the business. You have the disclosure requirements of a public company. We should’ve known what we were getting into. There’s some inconvenience to it, nothing terrible. We don’t have any big secrets. Everything’s got to be audited. It’s okay. You can’t issue a bond offering and then do whatever the hell you want.
Last year, there was a scare when Extell took longer than expected to secure financing for One Manhattan Square and the yields on your bonds soared.
I’m upset and I feel bad that some of the original investors who bought in at par then for whatever reason decided to sell at a loss. I’m very unhappy that they sold at a loss. I don’t like people to buy bonds that are based on our doing a good job and people losing faith and selling at a loss. That’s what happened with a bunch of the investors. I feel bad about that, but we did do everything we were supposed to do. There were projects that people didn’t think we’d get everything done at, but we did get everything done. Not a one of them failed. I feel bad, but you shouldn’t have sold. The analysis that you bought with was that the company has tremendous net asset value and low leverage, and so you felt comfortable buying the bonds. Nothing changed.
Do you get a call from the Ring brothers every time you sell a property?
Both Ring brothers are very happy with us. One of them is still a minority partner in the portfolio. The other is doing very well – he took some of the money he got from us. We sold him a building on West End Avenue [in the 60s] so he could do a tax-free exchange, and that building has worked out exceptionally well for him.
(In 2014, TRD did an in-depth interview with Barnett on how he won the Ring portfolio. Read it here.)
How are you and Joe Chetrit in the wake of the $400 million lawsuit he filed over the Ring portfolio deal?
The lawsuit is complete nonsense. We have nothing to do with it. That’s a fight between him and a partner, Joseph Tabak, and we’re a collateral lawsuit. They’ve been partners for many, many years. It’s not understandable to me why people get into fights over something like that. They’re both super wealthy. Let them fight it out. I don’t know why we need to be involved. This is New York City – you sue somebody, you sue the whole world. Donald Trump sued us too – same story. He was upset with his Chinese partners so he sued us. It wasn’t a big deal, but just a waste of money. I’ve had only good relations with Donald. It’s who he is. Nobody took that personally.
How do you see the Trump administration affecting the market?
I think Donald is a great developer. He’s truly a visionary developer in New York City, from Riverside – which we took and continued onward with – to Trump Tower. People don’t realize he was a real assembler and developer. Time will tell what kind of president he turns out to be. God willing he’ll turn out good for the country, though I have to say you’re not getting the right vibes out of Washington right now. Too many problems.
Given where we are in the cycle, do you wish you had fewer projects? How does this compare to where you were in the last cycle?
We survived that downturn and we’re in much better shape than we were then.
What was the most harrowing thing about that period for you?
The capital markets just died overnight. That was a nerve-wracking time for sure. But we got through it with God’s help. I don’t see anything comparable to that right now. We’ve got oversupply in some areas of the market, and that’s pretty much it. The banking industry is as healthy as it can be. They are looking to do loans. We’ve got a record stock market. There definitely has to be an adjustment in the amount of supply coming in – there is going to be. We’re already seeing a cutback in supply. God willing everything stays stable in the overall economy. We’ll get through it, with maybe a minor correction.
Stuart Elliott contributed reporting.