SL Green’s recent $2.3bn purchase of 11 Madison Avenue reflects its leading role in New York City’s real estate scene, in recent years as a lender as well as an investor, co-chief investment officer David Schonbraun tells Al Barbarino
As Roger Federer battled Richard Gasquet in the US Open quarter finals on 9 September, SL Green co-chief investment officer David Schonbraun watched intently in the stands along with a business associate.
It could have been Schonbraun playing professionally, he says, relaxing on a leather chair in a conference room at SL Green’s Graybar Building in Manhattan. Schonbraun, 38, played tennis through high school and university, until a groin injury ended those dreams. Instead he joined SL Green in 2002.
“In some ways I was lucky because, had I tried to play professionally, I may have started in real estate much later, when the opportunities would have been very different than in 2002,” he says. “Sometimes things put you on a different path and while the injury was unfortunate, I’m very happy with the end result.”
Trips to tennis tournaments as a kid with his father Bruce, who owned a real estate consultancy, inspired David’s interest in real estate. “He would drive me to tournaments and I was amazed listening to him talking through real estate deals on the phone, discussing capitalisations, corporate activities and those types of things.”
Schonbraun interned at Mack-Cali Realty Corp while at Princeton and wrote his senior thesis on REITs. After graduation he got a job in an investment banking division of Credit Suisse, but realised he wanted to be a principal instead of on the advisory side.
Schonbraun says it has been “quite a ride and experience seeing the evolution” of SL Green, having been involved in its rapid growth. When he joined “we were a circa $1.5bn company; now it’s $20bn-plus”.
He now oversees the firm’s debt, special servicing, structured equity and corporate or strategic investments, plus its multi-family residential businesses.
Schonbraun says the company’s New York City focus, which goes back to its founding in 1980, and deep relationships on the equity side of the business, gave rise to the firm’s growing originations business.
As New York City’s largest office landlord, the REIT held interests in 120 Manhattan buildings totalling 44.1m sq ft as of 30 June, including interests in 29m sq ft of commercial buildings plus debt/preferred equity investments secured by 15.1m sq ft of buildings. SL Green also has stakes in 37 suburban buildings totalling 5.9m sq ft in Brooklyn, Long Island, Westchester County, Connecticut and New Jersey.
Recently the company completed one of the largest deals in the city’s history: the $2.28bn acquisition of 11 Madison Avenue in Manhattan, which required the sale of several other assets (see panel below ‘Sony features in towering SL Green deals’).
“Our whole company is in New York City, so everyone from our CEO to our president, our investment and leasing people are always talking; we know everything that’s going on in this city,” Schonbraun says.
“New York is a global city and it’s a better market than the next several in the country. International capital flows into the city continue to show how healthy it is, as others seek a safe haven or higher yields.”
Under Schonbraun and Rob Schiffer, managing director of SL Green’s Investments Group and head of originations, the company wrote $1.4bn in debt last year and holds about $1.7bn in loans on its books, consisting of whole loans on transitional assets, mezzanine loans and preferred equity.
In March 2013, the company originated a jaw-dropping $925m financing on New York City’s renowned Sony Building, putting the company on the map as a lender and proving that it had the wherewithal to finance large, complicated deals, giving borrowers an alternative to bank syndicates.
Joe Chetrit and David Bistricer bought the trophy tower at 550 Madison Avenue in Manhattan for $1.1bn, with plans to turn it into condominiums and a hotel. While the bidding process had pitted New York City developers against other industry heavyweights such as Joseph Sitt and Harry Macklowe, the bidding for the financing was less competitive, Schonbraun says.
“We ironed out the deal with Chetrit and Bistricer and I don’t think they had discussions with anyone else,” he says. “We provide certainty of execution and often can get it done quicker. And when we tell people we are done with a deal, we are done, and in this business your word matters.”
SL Green’s debt business seems to defy the formal structure of other lenders making large loans in New York City, in that every one of the firm’s 18 or so employees dip their hands across business lines.
SL Green seeks to maintain an average 10% yield across its debt portfolio, originating whole loans at about 300-400 basis points over and the mezzanine piece in double digits. Schonbraun says about 10% of the company’s value is held in its structured business, including senior mortgages, mezzanine loans and preferred equity.
“On a lot of our deals we originate the entire stack; in many we hold the entire stack, in others we sell the senior piece and retain the mezzanine,” Schonbraun says. “When you slice and dice that way you get a very good senior execution and above market mezzanine yields.”
For the Sony Building, the company sold a $600m senior loan to the Bank of China, a $175m senior mezzanine loan and retained $75m of a $150m junior mezzanine loan.
The company also lends senior debt via wholly owned subsidiary Belmont Insurance Company. In September, Belmont became a member of the Federal Home Loan Bank of New York (FHLBNY) – the first captive insurer to gain membership of the FHLBNY cooperative, which gives members access to low-cost funding through FHLBNY’s credit products.
Schonbraun says the programme will allow SL Green to originate and retain more senior mortgages that it would otherwise have sold off. “We can get higher returns on the senior loans, with a lower risk profile,” he says.
Eligible collateral to pledge to FHLBNY includes residential, multi-family housing and commercial mortgage loans, mortgage-backed securities and US Treasury and Agency securities. SL Green chief financial officer Matt DiLiberto says: “Access to the FHLBNY’s array of credit products expands our access to liquidity and is an alternative means to efficiently finance the debt and preferred equity platform.”
Much of the company’s lending is derived from its equity and ownership business and SL Green has amassed exhaustive files on every substantial asset in the city, giving the company a major competitive advantage.
“We have targets, but as we have a certain capital allotment, we allocate to the best place and don’t buy a building simply to hit a target,” he says. “A lot of our origination is direct to borrowers who are friends and even competitors in this city. They know we understand real estate, everything happening in this market and on their property.
“If we aren’t the highest bidder, we go and finance the highest bidder,” he adds. “We have a file on pretty much every asset in the city, so it’s very quick for us when someone calls us to finance an asset.”
Deep relationships in New York City have allowed the firm to lend to a range of its best-known real estate developers and owners. This year it financed assets for Larry Silverstein, RFR Realty, Rockpoint, GGP, Jared Kushner, HFZ Capital, Brickman and Thor Equities, among the “premier sponsors in the market”.
Answering silverstein’s call
When Silverstein – known for purchasing the Twin Towers shortly before their destruction and vowing to rebuild the site – acquired a former Mercedes-Benz site in New York City for more than $100m, with plans to build an ultra-tall residential tower, he instructed his staff to call SL Green.
“Another lender had fallen out of bed and we had to close a very complicated deal in a matter of weeks,” Schonbraun says. “Marty Burger [Silverstein Properties’ CEO] reached out to us in mid December; we had agreed to the terms right before Christmas. We put together the $200m-plus capital stack over the Christmas holiday.”
The business associate Schonbraun took to the US Open was a broker SL Green has “done a lot of business with”. Federer made quick work of Gasquet and when asked if he sealed any deals of his own that day, Schonbraun speaks about the value of relationships in real estate.
“The real estate business is such a social business and being out with people is very important. A lot of people you do business with become your friends. As you develop relationships you are working on an almost friendship basis, and people want to do business with people they like and trust. So deals flow as a result of that. But no, it’s not like you’re going out to get a deal.” n
Sony features in towering SL Green deals
In August SL Green sealed its $2.28bn acquisition of the 30-storey 11 Madison Avenue in Manhattan, in one of the city’s largest ever real estate deals.
The building is the US headquarters of Credit Suisse AG. It will also be the new HQ of Sony’s US division, as it is due to move from its 550 Madison Avenue tower next year, the sale of which SL Green also financed, in 2013.
The purchase of 11 Madison Avenue was financed with $1.4bn of securitised, 10-year, interest-only, fixed-rate finance from Deutsche Bank, Morgan Stanley and Wells Fargo, with an interest rate of 3.83%.
“It made sense to lock in long-term financing to go with the building’s long-term leases,” says Schonbraun. “It was key to pull off such a big deal in August, which was a choppy month for CMBS.”
The company agreed to buy the building from CIM Group and the Sapir Organization in May, planning to fund the deal through “property sales, joint ventures, new financing and refinancings, while retaining cash for other investments in the pipeline”.
The sales included the disposal of the 440,000 sq ft Tower 45 office building at 120 West 45th Street and 131-137 Spring Street for $222m.
An additional $300m has been reserved for improvements to 11 Madison Avenue.
“It’s a great asset, with large floorplates, which are rare in Midtown South, where we want to grow,” Schonbraun says. “There is also upside, given that the rents are below market rates and we bought at a cap rate above market rates.”