Barbarians at the Boarding Gate & Meridian's Risky Business

Barbarians at the Boarding Gate

The Zeckendorf brothers thought they had their legacy-starting deal sewed up. Then came the mid-air phone call.

On the line, from first class en route to Paris, was Ralph Rosenberg, right hand to Dan Neidich, who oversaw Goldman Sachs’ Whitehall real estate fund. Whitehall was bankrolling the Zeckendorfs’ deal to redevelop 515 Park Ave, a project that would usher in New York’s luxury condo era. Whitehall had bought the note from Mitsubishi for 30 on the dollar, and the Zeckendorfs were eager to get started.

But Rosenberg had news: Whitehall wanted to rejig the agreed-upon deal to make it a bit sweeter for themselves. The brothers could think about it, of course, but not for too long: once he was out of US airspace, their time was up.

“It means more to you guys than it does to us,” Rosenberg said, per Arthur Zeckendorf’s account in The New Kings of New York. “We have plenty of deals. And if you guys don’t agree we’re just going to tell the bank we’re out and this goes in the dead-deal pile.” 💀 

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KKR (cont.)

The Zeckendorfs chose extortion over execution. 515 Park ended up being an unqualified success, and more importantly, served as proof of concept for the JV’s 15 Central Park West, the Limestone Jesus, the most successful condo project ever (perhaps 220 CPS has now pipped it). Today, Rosenberg is boss of KKR’s real estate team, which is revving up: the firm is targeting what it calls a $500B hole in the market that it says would appear if banks reduce their CRE exposure to 40% (from 50%) of the market. It’s funding NYC luxury rental deals as well as making its own multifamily and industrial buys and just juiced its REIT w/ fresh capital.

After Whitehall, Rosenberg took a stab at his own shop, R6 – he raised $500M but didn’t have much luck, folding the firm into hedge fund Eton Park the following year. In ‘11, he joined KKR, w/ a long-term mandate to, in the words of KKR vet Todd Fisher, “create one of the great global RE franchises.” Rosenberg raised $1.5B for the firm’s first RE fund in ‘13, and has built it up to $70B (half equity, half debt) in RE AUM, with $15B in the pipeline. His 150-person team is still far behind Blackstone and Brookfield, but the gap is getting smaller.

Because of the way the trade media works, you don’t often get a sense of the personalities behind these powerhouses. When they do deign to sit down for an interview, they have all the leverage, and speak in the neutered language of sensible capital allocation and prudent stewardship. Why I think the Zeckendorf anecdote is so valuable is that it is revealing: Rosenberg, and in general all the guys at his level, are fuckin’ bruisers.   

Meridian’s Risky Business

“If you no longer go for a gap that exists, you are no longer a racing driver,” F1 legend Ayrton Senna 🐐 famously said, when asked about his controversial history of collisions with rivals. “Because we are competing.” There’s similar chatter around Meridian Capital Group nowadays, in the Brian Brooks era: Brooks, a former acting comptroller of the currency, has promised to clean house and end Meridian’s cowboy culture – “we will cut brokers who cut corners” he said in a new interview w/ WSJ. But without that culture, without that trademark ultra-aggressive, 24-6, allegedly rule-bendy approach to making deals happen, will Meridian really be Meridian?

In the middle-market financing world, there was Meridian, and then there was everyone else. The brokerage had developed such tight relationships with lenders (particularly NYCB and Santander) that some of its rivals felt iced out. “We keep closing” became the firm’s official mantra, and it fit: no other shop felt as dynamic, as aggressive, as inevitable. Ralph Herzka’s annual shindig at the Mortgage Bankers Association conference drew the highest concentration of power brokers and lenders in RE finance, and everyone who stood up and spoke made sure to kiss the ring.

That was then. Now, the firm is in an atrophied state, a reflection of both the tepid capital markets and its own specific problems: blackballed by Freddie and Fannie, Meridian has lost a host of rainmakers, done waves of layoffs, and seen its favorite bank take drastic steps to reduce its CRE exposure. Brooks came on board in March and acknowledged the need for a “reset” w/ Freddie, saying that improving the “risk culture” was his top priority.

The firm just hired CoreLogic’s Melissa Martinez to be its first-ever chief risk officer, and she’s tasked w/ building a risk infrastructure from scratch – “if you think about the mortgage broker industry today, there really are no standards,” she told WSJ. Brooks made clear he wants his brokers to still do their thing, but within limits, saying that “we want our brokers to be scrappy and hungry, but we will be checking.” Herzka, very much the architect of the firm’s culture, is floating in the background as senior chairman 😕. Meanwhile, Yoni Goodman, Herzka’s protégé and #2, is still in his seat as president, but there’s heaps of speculation about how he fits into the Brooks regime and whether it’s worth his while: princes expect to someday be king. 👑   

RealPage Rent-Fixing Mess: A Primer

The May 22 FBI raid at Cortland’s Atlanta HQ in connection w/ the criminal rent-fixing probe into RealPage has left a lot of industry folk confused as to what’s going on: was Cortland the only multifamily giant raided? Per one source in the mix, the answer is NO – other major landlords were similarly disturbed by the Feds, but no names have yet leaked. And what’s all this about? Probably a good time for a bullet refresher

• The DOJ is investigating whether RealPage is enabling rental price-fixing among large landlords & property management firms

• Part of a broader attempt by the Biden admin to make RE its piñata on the campaign trail

• Separate civil antitrust action looking at whether RealPage is enabling a landlord cartel 🛢️ : instead of competing w/ each other on rents, landlords are sharing real-time deets on metrics such as occupancy, inventory, unit types through RealPage.

• Giants such as Greystar, Lincoln Property Company, Equity Residential & Cushman-owned Pinnacle also dealing w/ class-action tenant suits

• RealPage is owned by PE giant Thoma Bravo (further fodder for the “PE’s war on the little people” argument made by consumer advocates and echoed by the Biden admin.

• Pols are seeking to ban the practice of algorithmic rent-setting

Quickies

• Arbor’s CLO collapse creates WTF moment for investors (Also check out my colorful interview last week w/ Viceroy boss Fraser Perring, who is shorting the REIT)  

• Want to understand who else is mainlining The Promote? Check out our audience breakdown here (Hint: CRE junkies and “M” money) 🤑 

• Remarkable history in this obit of Florida master builder Tibor Hollo

• BDT & MSD (godawful name) bankrolling Jeff Levine’s UES rental

• Moody’s says it may downgrade 6 banks over CRE exposure 😭

• "If the capital raise was not ready to go specifically that afternoon, the chances of the company surviving would have been at a peril:" NYCB takes heat from investors over Mnuchin rescue deal and loan-loss provisions

Unquotable Quotes