Stephen G. Kliegerman
President of Development Marketing
The billion-dollar developer, one of only a few straddling the low-income and market-rate worlds, grows despite uncertain real estate climate
By Candace Taylor
In 1998, L+M Development Partners started its first affordable housing project on West 148th Street, between Adam Clayton Powell and Frederick Douglass boulevards. At the time, the vacant block was inhabited solely by boarded-up, graffiti-scrawled buildings, abandoned by their owners in the '60s and '70s. In the middle of the block sat P.S. 90, a Collegiate Gothic-style structure built in 1907 by architect Charles Snyder. Unused by schoolchildren for 30 years, the building's windowpanes were broken or missing, and its stone gargoyles tarnished. Trees sprouted amid overturned desks.
This spring, a buyer paid $1.13 million for a three-bedroom combination apartment in the P.S. 90 building -- restored and converted to condos by L+M.
Over the past several decades, L+M's stature has grown along with the real estate prices in New York City. Since its inception, the company has built more than 8,000 units -- or some $2 billion worth -- of affordable and market-rate housing in the New York area.
Company founders Ron Moelis and Sandy Loewentheil started out flipping individual apartments during the co-op craze of the 1980s, then moved into small affordable housing projects, and finally into high-profile condo projects like Northside Piers in Williamsburg, the 249-unit Kalahari in Harlem and Brooklyn's Columbia Commons, which completed a rapid sellout this spring.
"Part of the reason I think we've been successful in this business is because we have evolved," L+M CEO Moelis told The Real Deal during an interview last month. "Every five to seven years, I think you have to sort of look at what the world is doing, see where the motion is going."
That strategy has served him well. At a time when most development companies are cutting back, L+M is growing. To accommodate about 40 new employees it's hired since 2008, the company recently moved into a new 8,000-square-foot office at 419 Park Avenue South, Moelis said. L+M is also expanding its operations outside of New York for the first time, Moelis said, with a project in New Orleans and potential deals in San Francisco and New Jersey. The company is also planning to start construction this spring on a new condo in Harlem, one of only a few to rise in the post-Lehman era.
Like all developers, L+M took its share of hard knocks after the financial crisis, with slow sales at Northside Piers and PS90. But L+M has a few key advantages: Unlike most developers, it has its own construction arm, which helps keep costs down and provides an additional revenue stream when times get tough. And, it's one of only a few firms to do both affordable and market-rate development, often in the same project.
"There's only a handful of people who do both," explained Toll Brothers' David Von Spreckelsen, who partnered with L+M at Northside Piers. That ability is increasingly in demand, he noted, now that changes to the city's 421-a tax incentive program require developers to build affordable housing on the site of their market-rate projects, rather than off-site, in order to qualify for tax breaks.
Moelis is "a star in the world of affordable housing," said developer Jonathan Rose, founder of the Jonathan Rose Companies (see "At the desk of: Jonathan Rose"). "He's one of the industry leaders."
The 'messy stuff'
In May 2010, the 42-unit new condominium Columbia Commons hit the market in Brooklyn, along with its accompanying 95-unit, income-restricted rental portion, the Columbia Hicks Apartments.
It was a less-than-promising start. L+M had closed on the financing for the deal in October 2008, just as the Lehman Brothers bankruptcy was wreaking havoc on the real estate market. Neighbors had come out in droves to protest the demolition of the historic Hamberger Christmas Display factory to make way for the project. And as sales started, the project was criticized for having "an unfortunate BQE proximity," as the blog Curbed put it. Being on the "wrong side" of the highway put it not in desirable Cobble Hill, but in the up-and-coming Columbia Street Waterfront District.
So L+M surprised the industry when it announced in May 2011 that the last Columbia Commons unit had gone into contract, making it one of the fastest-selling -- if not the fastest-selling -- new developments since Lehman crashed.
Moelis said he'd initially selected the site because "it was in a desirable school district, and we thought it would hold up."
Still, he was "pleasantly surprised" when the units sold briskly at prices of roughly $700 per square foot -- slightly lower than the $750 he'd hoped for when the project was designed, but higher than expected after the market crash. (By contrast, units at Northside Piers sold for roughly $750 per square foot, compared to the projected $900, Moelis said.)
Columbia Commons "was a very successful project," Moelis said. "We made a nice, good return. Not a home run, but for that market, we made good returns."
This spring, he's hoping for similar success in Harlem. On 116th Street between Malcolm X Boulevard and Fifth Avenue, L+M will soon start construction on a two-building project with 100 affordable rental units and 85 market-rate condos, Moelis said. Because the project is across the street from the Kalahari, it's playfully called "K2" in-house, though it doesn't have an official name or address yet.
The company also recently bought the note on a property in Long Island City and is planning a 180-unit 80-20 rental project there, Moelis said.
Affordable housing isn't an easy niche. It requires knowledge of complicated city, state and federal programs, as well as good relationships with nonprofits and government officials. (As evidence of L+M's close relationship with city government, former Department of Housing Preservation and Development commissioner Rafael Cestero resigned from that post in March to join L+M as a managing director.)
"It's not for the amateur," explained Rose, who also specializes in the field. "You've really got to understand how to put together complicated financing to make affordable housing work."
Moelis said he actually relishes this skill set, which he calls "the messy stuff."
"We find it to be fun," he said. "It's interesting. That's part of what separates us from a lot of the market developers, and also separates us a little from the affordable developers, in that we do a little of both."
From law to land use
Gaining those esoteric skills wasn't an overnight process.
Growing up in Westchester, Moelis dreamed of becoming a Supreme Court justice. After law school at NYU, he clerked for a federal judge. But once he started practicing law, the high-energy Moelis realized he "wasn't cut out for that."
"I can't sit still very long," explained Moelis, who has a basketball hoop in his new office so he can practice shots during downtime. "I was bored."
While in law school, he'd started "playing around" with real estate, and in 1984, a mutual friend introduced him to Loewentheil.
Like Moelis, Loewentheil grew up in New Rochelle. He had a background in construction -- his father and grandfather had built condos and rentals for years in Westchester. But after working with them for a short time after college, Loewentheil wanted to go off on his own.
The two young men clicked immediately. They started out small, buying the rights to apartments from rent-stabilized tenants when their buildings went co-op, then renovating and flipping them.
Their first real development project was 214-216 Avenue A in the East Village, four crumbling rental buildings owned by a friend of Moelis's family. The owner "was not really a real estate person," Moelis said. "We came to him and said, 'Look, we need to gut these buildings.' We basically agreed to do it together."
Of course, that was easier said than done for the fledgling company. "We sent out 30 applications to lenders, and got one lender interested," Moelis said, "because we had no track record and really no money."
But they successfully renovated the buildings, selling the 18 apartments as condos and creating three retail stores, which they still own today. Their next building, a 30-unit condo project on Avenue B with 25 percent affordable housing, was "our first introduction to HPD," Moelis said.
By that time, the housing boom of the '80s had begun to collapse, and affordable housing seemed like a good bet. Moelis and Loewentheil decided to take advantage of the new Low-Income Housing Tax Credit program, which had been introduced by the Department of Housing and Urban Development in 1986.
At the time, the city had started converting unoccupied buildings into affordable housing under then-Mayor Ed Koch's Vacant Building Program.
Affordable housing developers hadn't yet started using the complicated new LIHTC program, which "took a while to understand," Moelis said. (Plus, he noted, there was less competition for these projects than there is now, since many investors shied away from then-crime-ridden New York City.) But Moelis was "good with numbers" and had some tax training from law school, he recalled, so L+M was able to use the new program to successfully bid on a 58-unit project in the Bronx, becoming the first developer to integrate the LIHTC and Vacant Building programs.
It wasn't the last time L+M would be on the forefront of public-private partnerships to finance affordable housing deals.
The Kalahari was one of the city's first mixed-income condos, with half of its for-sale units set aside for households with incomes at or below 185 percent of the area median. Northside Piers was the first market-rate condo in New York to have affordable rental units on site. The Aspen, L+M's 233-unit rental project in East Harlem, in 2004 became the city's first project financed as a 50-30-20 mixed-income rental. Moelis worked with HPD to develop the program, which sets aside 20 percent of the units for low-income tenants, 30 percent for middle-income renters and the rest for market-rate residents.
L+M has been able to be creative in part because it has a full-fledged construction division, L+M Builders Group, headed by Loewentheil until he entered semi-retirement a few years back. The existence of L+M Builders frees up Moelis "to do creative financing that works well in these deals," Loewentheil said.
"It's made [Ron's] life a lot easier knowing that he's got this construction arm that can build these projects," he added. "It allows him to focus on his side of the business."
Writing down investments
In the mid-2000s, L+M started doing more market-rate condos, Moelis said, "because the market was so good." That turned out to be a less-than-ideal scenario when the financial crisis slammed into the city in 2008. At the time, L+M was involved in about five condo deals, and had "about a half a billion dollars of debt," Moelis said, though he noted that he didn't have personal recourse on any of his deals.
It was especially bad timing for two of L+M's deals: Northside Piers and PS90.
Of Northside Piers, Moelis said, "I expected it to be my biggest financial success, but because of where the markets went, it wasn't." Luckily, he'd brought in two partners to share the risk: Toll Brothers for the market-rate units, and Dunn Development on the affordable side.
The first two buildings of Northside Piers contain 450 market-rate condo units, and an adjacent building called Palmers Dock has 113 affordable rentals. After several years on the market, there are still 50 market-rate units left, though Williamsburg has rebounded better than he expected it would right after the crash.
"Two years ago, I wrote my investment down to zero," Moelis said. Instead, "we'll get a lot of our money back."
As for PS90, Moelis has a soft spot for the project because of its location: L+M redeveloped the other buildings on the once-vacant block one by one, starting with an 87-unit, low-income rental project and progressing to middle-income rentals and co-op units.
PS90 -- one of several L+M projects financed through a $100 million dedicated fund with Goldman Sachs Urban Investment Group -- hit the market in 2009, at the height of the downturn. Of the 75 units, four are left.
The high-ceilinged units sold for decent prices -- about $550 per square foot -- but it took "a long time" to sell the units, Moelis said.
He paid off the lender, Wells Fargo, last month, but the slow sales process means L+M won't make a profit on condo sales at the project. "We're paying a big interest rate to Goldman for their mezz," he said, "so if it takes a long time to sell, that means it hurts."
Overall, however, L+M won't lose money on PS90, in part because having a construction division provides an additional source of income.
Because L+M's construction and development divisions are technically separate companies, they each have their own fee structures. And while profits from condo sales vary depending on the market, general contractors get paid the price they negotiated with the lenders, investors and developer. (If they come in under-budget, they can make more profit, Moelis said, whereas if they go over-budget, they make less.)
"As long as we finish the job, we make the construction profit," Moelis explained. "It's not market-dependent."
When condo sales were at a stand-still during the recession, profits L+M made from construction jobs helped keep the company afloat, especially at affordable housing projects that continued despite the economic turmoil.
"We were very busy right after the crash," Moelis said. "Affordable housing ... was still good business."
Rose said he sometimes wishes his company had its own construction division.
"Having a construction division is a big advantage," Rose said. "From the project point of view, it gives the company direct control of the project's quality, budget and schedule. From the profitability point of view, it adds another source of profit on a project. Affordable housing projects are only modestly profitable, so having multiple sources of income is very helpful."
That's a good thing, because many of L+M's projects are not easy.
At Columbia Commons, for example, Moelis acquired the land for a reasonable "$8 to $10 million," including the cost of rezoning, but the deal took six years to come together. After working out an agreement with the feuding factions of the family that owned the land, L+M began the process of rezoning it from manufacturing to residential. In exchange for building affordable housing, the city contributed some land to the project.
Then, when the Hamberger factory was demolished to make way for the project, dozens of concerned neighbors turned out at community board meetings, said Craig Hammerman, the district manager of Brooklyn's Community Board 6. "People felt the size of the L+M project might be overwhelming," he said.
Plus, this rapidly gentrifying section of Brooklyn had been scarred in recent years by run-ins with developers, explained City Council Member Brad Lander.
"The community has been hit by these developers who were not responsive to the neighbors," Lander said. "There have been a lot of bad experiences."
To their surprise, Moelis incorporated the board's suggestions on the color of the brick, and agreed to reduce the height of the project from eight to six stories.
L+M "really went out of their way to engage in an active dialogue with the community about the design," Hammerman said.
Of course, Moelis wasn't cooperating out of sheer altruism. The community's participation in the project eased the construction and sales process, and likely helped it sell out faster.
"Any time that there's a project the community has an opportunity to leave an imprint on, there's usually more buy-in by the community in general," Hammerman said. "The smart developers realize that."
Tuesday, November 01, 2011
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