FBI Comes at Arbor & Ross' HoF Dealmaking

Goat Exits Stage South

“Fuck you. I don’t have any confidence in you,” is how Steve Ross’ career on Wall Street ended, and one of the most storied careers in real estate began. A higher-up at Bear Stearns had expressed a lack of confidence in young Steve, and the brash, big-eared Detroit native fired back w/ that riposte, instantly rendering himself unemployed and unemployable. It was time to go figure some stuff out.

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Ross (cont.)

Armed w/ a $10K loan from his mother 🤶 , Ross set up the Related Companies in 1972. He used his tax attorney chops to begin bidding on affordable-housing contracts, and parlayed those holdings into a diversified behemoth of office buildings, affordable housing, luxury condos and market-rate multifamily. Having stared down extinction in the early 1990s, by 2007 Ross had created a financial cushion for his firm, in the form of equity and convertible debt investments from Goldman Sachs, MSD, Abu Dhabi’s Mubadala and Saudi conglomerate Olayan.

“Everything was priced to perfection and we took out over a billion dollars tax-free,” Ross later recalled in The New Kings of New York 🥰 . “It was probably the best deal I ever did.”

This is what stands out to me when taking stock of the career of Steve Ross: As consequential a developer as he is – and he’s an auto pantheon pick by virtue of Time Warner Center and Hudson Yards alone – it’s this uncanny ability to take chips off the table that makes him the 🐐 . No Big Bill Zeckendorf-type flameouts for him, because by the time the market turns, Related has long cashed out, through JVs w/ foreign investors, commercial condo sales, and such. Consider how things have already played out at the $25B Hudson Yards:

• $550M for Neiman Marcus space at 20HY to Wells Fargo

• KKR, Wells, Time Warner all own their offices at 30HY

• Coach paid $750M for its spot at 10HY, later bought by Allianz

• Mitsui Fudosan took a 90% stake in 50HY during development

• KKR bought HY observation deck for $500M

As Related, now a $60B RE empire, prepares to embark on the 2nd phase of Hudson Yards (plus a possible play for Pacific Park), Ross has decided that New York will now be a Jeff Blau production: Ross is stepping down as chairman of Related Cos., per WSJ, and throwing all his juice (and even at 84, the man has plenty of juice 🧃 ) into South Florida, where his city-shaping aspirations are manifesting most clearly in Palm Beach County: he has 3M sf of CRE in the region (nearly half of West Palm Beach’s downtown office stock, some of it being bought from Related), has lured in blue-chip tenants Hudson Yards would be proud of, and is developing 3 luxury resi projects. He also owns the Dolphins 🏈 , has a piece of Miami’s F1 race, and is a driving force behind global soccer’s U.S. flirtations ⚽️ The amateur psychologist in me also sees this as a quest to become Florida’s alpha citizen – even though Ross is worth $14B and has his name splashed all over a lot of stuff, it’s hard to compete in NYC with the likes of a Michael Bloomberg. 🛋️ 

“Doing something impactful. That’s what I’ve always loved,” Ross told WSJ of the decision to step down and form his new shop, Related Ross 👏. Ross will retain a stake in Related Cos., and said the 2 shops could work together in the future.

“We will still talk,” he said.

FBI Comes at Arbor

"I am an FBI Agent!" - Johnny Utah, Point Break 

Oh boy. The FBI and federal prosecutors are looking into goings-on at Ivan Kaufman’s Arbor Realty Trust, one of the biggest lenders of the multifamily boom. Investigators are asking Qs about lending practices and how Arbor has represented the health of its loan book, per Bloomberg, after a relentless (16 reports) campaign by short seller Viceroy Research. Arbor’s stock was down 16% on the news.

As soon as I saw the article, I rang Viceroy founder Fraser Perring, and I could basically hear his grin: “It’s a validation of our work which was ignored by the market,” he said, noting that Viceroy had alleged Arbor was engaging in practices such as “round-tripping loans by undisclosed related parties” and refused to take write-downs on clearly underwater loans.

“Arbor is legit the subprime of multifamily,” he added. “We ain’t finished.”

In a statement after the news hit, Arbor said it’s “very confident that we conduct ourselves properly. We look forward to our second-quarter earnings call.”

The DoJ Arbor probe comes amid heightened scrutiny from prosecutors on CRE’s mortgage practices, which has put a lot of former high-fliers on blast. Get The Promote’s primer on that whole scene here.

American Hustle

Dry powder is wet for N. American RE deals: Of the $400B that PE has earmarked for property investments, over $250B of it is targeted at the region, according to Preqin, the highest share (64%) in 2 decades.

“Few asset classes are as unloved as commercial real estate and thus we believe there are few better places [than the US] to find exceptional bargains,” Oaktree’s head of RE John Brady wrote in a recent memo, per Bloomberg. Meanwhile, his boss, Howard Marks, is on-air philosophizing about the true meaning of a bargain in today’s market: “Let's say you are getting 70% off,” Marks said. “Is that enough?”

One path into the action could be the regional banking crisis: Oaktree estimates that the no. of US banks at risk would exceed levels seen in the GFC if CRE values fell just 20% from their peak – values fell 23% last year 👀 

We’ve already seen Fortress buy a quarter of First Foundation, a Texas bank w/ outsized exposure to California multifamily, and a Mnuchin-led syndicate pump $1B into NYCB. Per PGIM, there’s a $150B void between the volume of loans coming due and new credit availability this year.  
 
Fun nugget: Rebel Cole, the finance prof who gained notoriety for his analysis of banks most overexposed to CRE, is an adviser to Oaktree.

SF Rentopoly Continues

RBC 🇨🇦 is readying for a takeover of a 1,200-unit SF multifamily portfolio whose $688M debt a Ballast/Goldman Sachs JV defaulted on last year. Goldman had stopped funding the deal, and since June there’ve been discussions of a deed-in-lieu. At the end of June, RBC transferred 2/3 of the loans to special-purpose entities, per the SF Business Times. The bank has been angling to bring on local operator Hamilton Zanze to operate the portfolio on its behalf, suggesting it’s not looking to cut and run.

The apartments are part of a larger 2,100-unit portfolio Ballast and Goldman had dropped $1.1B on between ‘17 and ‘20 to amass – unclear what the state of play is at the rest. SF has somehow become the setting for the most dramatic game of Rentopoly in the country, with a murderers’ row of investors, equity partners and lenders all buying, selling and defaulting to each other. (Catch up on the Veritas-Ballast-Brookfield saga here if unfamiliar, and the Veritas-Prado one here.)

Quickies

• 🎥 The 🐐 heads south: 90s on Steve Ross’ development legacy

• FHFA announces new tenant protections in Fannie/Freddie loan agreements

• Vlad Doronin’s $135M buyer at Crown Building is 🥁 Vlad Doronin 

•  Namdar buys Chicago office tower debt for $40/foot 🐡   

• How the American elevator worsens the housing crisis 🛗 

• South Florida, land of megaprojects: 2,200 units coming to N. Miami

• Mortgage fraud szn: DoJ seeks to indict Lakewood lad Eli Puretz 

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