The Real Deal
July 2, 2012
“Drew, you’re tired, huh? You had a rough night?” Miki Naftali, founder of the year-old Naftali Group, is teasing his 26-year-old director of development, Drew Popkin.
Popkin is a good sport. “It was a long night,” he replies from his seat in the windowed conference room of the firm’s new 5,000-square-foot office at 1700 Broadway.
“You’ll tell me after this [interview] what happened last night,” his boss says with a laugh.
Naftali is in good spirits. Best known to New Yorkers as the public face of the controversial Plaza hotel condo conversion, the former CEO of Elad Properties left his post at the company a year ago to start his own development firm. Since its launch in July 2011, the Naftali Group has purchased eight properties in Brooklyn and Manhattan — four multifamily rental buildings and four development sites — and is looking for more. Already, the nine-person firm has plans for four new-construction residential buildings, including a new boutique condo on the Upper West Side and a 30-story tower in the Financial District — neither of which have been made public until now.
“We’ve gotten a great response from the market, from the lenders, from our equity partners, from the brokerage community,” said Naftali, in his first extensive interview since leaving Elad. “So it’s great, we’re doing well.”
Naftali himself acknowledges that the company has been “media-shy,” since its launch. There’s a good reason for that: From the moment Elad purchased the iconic Plaza hotel in 2004, the project was a public relations debacle that spawned lawsuits, protests and unfavorable comparisons to the nearby condominium 15 Central Park West. And as the right-hand man of Elad’s owner, Israeli billionaire Isaac Tshuva, Naftali found much of the ire directed at him; last year, the Observer called Naftali “the man many people blame for the Plaza’s shortcomings.”
Lightning rod though it was, the Plaza conversion was a moneymaker for Tshuva, with its condo units selling out for some $1.4 billion. And Elad is now in the process of selling its stake in the hotel to Sahara India Pariwar for a reported $575 million.
The same cannot be said for the company’s 2007 purchase of the Frontier Hotel in Las Vegas for $1.24 billion. Partnering with Israeli tycoon Nochi Dankner, Elad demolished the hotel with plans for a Plaza-themed resort. But the project never got off the ground, leading to a reported haircut of 45 to 60 percent for Tshuva and Dankner.
But Naftali said he’s been received well by lenders because of his history of completing Elad projects in New York.
Naftali said his track record is what’s enabled the fledgling firm to find three different equity partners and secure over $140 million in construction debt for its 400,000-square-foot New York City portfolio, at an overall portfolio debt rate of around 2.5 percent.
“That rate, for that amount of debt, is very rare,” Popkin said.
Alan Miller, an executive managing director at Eastern Consolidated, agreed that “sub-three construction money is quite low.”
Naftali seems excited — and relieved — to be out on his own, free of the trappings of running a big company.
“For me today, at this stage of my career, I really want to come to the office and enjoy, to feel good,” he said. “It’s not only about compensation, it’s about feeling good about what you do.”
Naftali is fond of saying that he left Elad on June 30 and founded the Naftali Group on July 1.
The newborn firm didn’t even need to move from its offices at 575 Madison Avenue; those who were staying with Elad simply moved from the 23rd to the 22nd floor. (At the time, Naftali owned a 49 percent stake in Elad Properties, a New York subsidiary of Tshuva’s Elad Group. Elad Properties has now been dissolved.) In March, the Naftali Group moved to 1700 Broadway.
Naftali took with him a small team, most of whom had been working with him for years: Victor Sigoura, the Naftali Group’s chief investment officer, had been at Elad for six years. Other Elad veterans include Popkin; Michael Witek, the Naftali Group’s vice president of construction; and Eva Malachi, the firm’s vice president of operations.
The firm started looking for deals immediately, cold-calling building owners in targeted neighborhoods, Sigoura recalled, and spreading the word that they were looking for equity partners.
Within a few months, the company had purchased four small existing apartment buildings, all with “some type of distress or situation [where] we thought we could really create value,” Naftali said.
The first building, 65 Maspeth Avenue in Williamsburg, had been developed as a condo but “during the financial crisis, they had real issues,” Naftali said.
He bought the 21-unit building from the original developer, though Naftali declined to specify how much he paid. Even though the project was nearly completed, “we upgraded, because he didn’t finish it to the standard that we thought was the right standard.”
Then, across the street “we saw a building that was just vacant with plywood on the windows,” Naftali recalled. “I asked Drew who owns the building, and sure enough, we found there was a foreclosure process on the building.”
Originally planned as a 24-unit condo, 64 Maspeth was nearly complete but had sat vacant for three years. Naftali negotiated with the lender to buy the note, took title to the building and secured a bridge loan. Within five months, his firm had completed the project, leased out all of the units and refinanced the deal.
Also in Williamsburg, the firm purchased 484 Humboldt Street, a rehabilitation of a former schoolhouse. And in an off-market deal with the same seller in late 2011, it purchased 200 Franklin Street, a 12-story tower with 19 residential rental units and 10,000 square feet of retail space in Greenpoint.
Naftali hired the brokerage aptsandlofts.com to handle leasing for the properties. All four are now leased out for rents in the “upper $40s” per square foot, according to David Maundrell, head of aptsandlofts.com.
But Naftali wasn’t just looking for existing rental buildings — he was also gunning for development sites.
The team found a stalled development site at 267 Sixth Street, on the corner of Fourth Avenue in Park Slope, and purchased the note for $10.7 million. Together with Chicago-based Pearlmark Real Estate Partners (formerly known as Transwestern Investment Company) they’re in the process of building a $39 million, 104-unit ground-up rental, which is slated for completion in 14 months. The project had already been fully designed by the architect Karl Fischer, but the Naftali Group worked with him to rejigger the layouts to better target the Park Slope market.
They also hired designer Andres Escobar to create “really cool spaces,” including a gym, residents’ lounge and a roof deck with cabanas, Naftali said. Based on comps from nearby Arias Lofts, he said he’s hoping to rent out the units for around $55 per square foot, or more.
Adam Hess, a partner at Brooklyn-based TerraCRG, said for new construction buildings in Park Slope, “we’re in an era where we’re over $50.”
The Naftali Group has also partnered with investment management advisor AEW to buy a 90,000-square-foot development site at 316 Bergen Street on Third Avenue in Boerum Hill. According to public records, the partners paid $6.72 million for the site in a deal that closed in May.
They plan to build an 85-unit rental property there, designed by ODA Architecture. Maundrell said the units are expected to rent in the low $50s per square foot. He also noted that he admires Naftali’s foresight in purchasing development sites at a time when many other developers were shying away from ground-up construction. He said that land values in the area have already risen since the firm snapped up the two development sites.
Naftali “knows what is valuable and what is not,” Maundrell said. “He’s not buying Brooklyn because it’s cool. He understands what’s going on here very, very well.”
According to a May report by the brokerage MNS, average rents in Brooklyn are up 10 percent from the same period of last year and 40 percent in Park Slope. The average one-bedroom in the neighborhood now rents for $2,356 per month.
Naftali said his firm is aiming to take advantage of the current high demand for rentals in the area.
Even if the white-hot rental market slows down a bit, Sigoura said, “we’re in at a good-enough basis that if the market were to turn a bit, we’d still be more than fine.”
Another likely reason for the emphasis on rentals, sources noted, is that it’s currently easier for developers to finance rentals than condos, where lenders want 40 to 50 percent equity, compared to 5 or 10 percent in the past.
Still, the Naftali Group does have at least one upcoming condo project in the works. With equity partner Praedium, the company recently closed on a deal to build a boutique condo at 176 West 82nd Street, at the corner of Amsterdam Avenue. Stribling, the brokerage that marketed the Plaza, has been tapped to handle sales of the building’s 12 to 14 units, said Naftali. The team is “really excited” about the project, Naftali said, because there’s very little new condo product on the Upper West Side. Or, in the words of Stribling founder Elizabeth Stribling, new condos in the neighborhood are “as scarce as hens’ teeth.”
The team is currently determining the appropriate unit mix for the project, she said.
The Naftali Group is also slated to close this month on a deal to build a 150,000-square-foot, 30-story tower in the Financial District, but Naftali said he could not yet disclose details.
The firm is also working on creating a platform to do deals outside New York City, he said, most likely multifamily properties along the East Coast. And it isn’t wedded to doing residential deals.
“If tomorrow we find an opportunity in office space, we have the experience, we know how to do it, we’ll go after it and we’ll do it,” Naftali said.
A native of Tel Aviv, Naftali started working as a property manager to pay his bills while in college at the University of Southern California. He worked with Tshuva for 21 years before launching his own company.
Bespectacled and seemingly mild-mannered, Naftali is “disciplined and energetic and a workaholic,” said Dana Pecorella of the brokerage Cantor-Pecorella, who has worked with Naftali on a number of projects over the years.
While at Elad, Naftali developed many New York condos, including the 215-unit Link at 310 West 52nd Street, the Grand Madison at 225 Fifth Avenue, the O’Neill at 655 Sixth Avenue and the 50-unit 21 Astor Place.
Naftali “was absolutely integral to Elad’s emergence in the U.S. real estate market,” said Thomas Elliott, executive vice president of sales and marketing at Elad US, who worked with Naftali for 10 years. He added that Naftali is “one of the smartest guys out there.” (Elad declined to comment further for this piece.)
But Naftali’s best-known — and most controversial — project was the Plaza.
As The Real Deal and others have reported, problems quickly arose after Elad purchased the beloved century-old hotel and announced plans to convert it to condominiums.
When Elad attempted to fire the Plaza’s 900 hotel workers, it locked horns with the hotel workers’ union, which helped launch a high-profile “Save the Plaza” campaign. Celebrities like Matthew Broderick and Liza Minnelli got involved, and Mayor Michael Bloomberg publicly pledged to help Plaza employees keep their jobs. Eventually, Elad agreed to scale back its plans, limiting the number of condos to 180 and keeping 282 hotel rooms.
Then came the much-chronicled lawsuits, with unhappy buyers — like Russian billionaire Andrey Vavilov — claiming the apartments weren’t up to snuff.
And in 2011, the Plaza’s storied Oak Room bar and restaurant announced that it would close, following a bitter rent dispute with Elad. Naftali left the company shortly thereafter, leading to widespread speculation that troubles with the Oak Room and other retail vacancies at the Plaza had led to his ouster from Elad.
All along, Naftali has firmly denied that version of events.
“This is so ridiculous, about the retail or the Oak Room,” he said. “I don’t know who invented that story. Look, I left.”
He’d long wanted to start his own company, he said, but felt he had to wait until the Plaza and 250 West, the Tribeca condo conversion, were on firm footing.
“I didn’t want to leave and to basically create a situation where they [were] not ready,” he said.
And while he acknowledged the challenges at the Plaza, he emphasized that the development was hugely profitable.
“There is no one opinion, definitely not on something like the Plaza,” he said. “But on the business side, on the development side, on what we achieved there, the fact that we got it done — all that is a great success.”
The numbers don’t lie.
Elad put some $1.1 billion into the Plaza, between buying it for $675 million, converting it to condos and restoring public spaces like the Palm Court. Some 51 hotel-condo units were then sold for around $200 million. When the condos hit the market in 2005, they quickly sold out for what Naftali says was as high as $7,000 per square foot.
If Sahara India Pariwar pays, as expected, $575 million for Elad’s stake in the hotel and retail, that’s a total revenue of some $2 billion, netting Elad around $1 billion.
“Yes, some people might say, ‘Oh, we don’t like the interior design,’ ” Naftali said, careful to note that he himself did not design the interiors. (That duty fell to Tshuva’s 35-year-old daughter Gal Nauer, who worked on the project with the prolific architecture firm Costas Kondylis.) “But financially, it was an amazing deal.”
Still, the Plaza was not the only boom-time Elad Properties project to see lawsuits related to construction complaints. In 2008, a penthouse buyer at the Grand Madison at 225 Fifth Avenue sued Elad for $6.4 million, claiming fraud and breach of contract because the unit was supposed to have “breathtaking” views, but the windows were blocked by a wall. (Elad called the suit baseless.)
And in 2009, the owner of the penthouse at the O’Neill Building sued the building’s condo board, saying the unit was “plagued by leaks” and that “the unit and the building have been overrun by mice and rodents.”
Still, lenders and equity partners seem willing to give Naftali the benefit of the doubt, especially since he has a history of completed projects.
The Plaza “was a fancy deal, but he did other deals where they bought, built, sold, made money and paid back the lenders,” noted Miller. “That’s very important.”
Lenders these days are also very interested in “surety of closing,” he said, which the Naftali Group also seems to have in spades.
Naftali is “lining up the money, he’s got the expertise and they’re getting cheap money,” Miller added.
Back to development
Some in the real estate community say that Naftali — and Elad — have been unfairly blamed for problems at the Plaza.
The Marketing Directors’ Andrew Gerringer noted that the constant comparisons to the Zeckendorfs’ massively successful 15 Central Park West are somewhat flawed: That condo was a new, ground-up project, while the Plaza was a conversion of a historic building, which makes construction notoriously difficult.
“With a conversion, you don’t know what’s lurking behind the walls,” said Gerringer, who added that he’s had similar experiences at projects like 260 Park Avenue South. “So many things can come up in a building. You don’t know what’s going to happen. Before you buy it, you can’t open up every wall.”
Pecorella, who worked as a marketing consultant at the Plaza, said the building was in disrepair when they bought it, and that Elad preserved as many original details as possible.
“I don’t think they got the credit that they deserved,” she said, noting that “everything that was salvageable was salvaged.”
She added that she was “heartbroken” during the controversy.
Naftali, too, seemed heartbroken — and angry — during the hue and cry over the Plaza.
In a 2009 Vanity Fair article, he said of Vavilov: “Personally, I’m really upset with that because not only that he doesn’t close, he also ruined my reputation, our reputation, and frankly he ruined the value of the penthouse.”
Now, however, he seems much more at peace with the situation. His office is adorned with artifacts from the original hotel, images of Eloise, the Plaza’s famous fictional inhabitant, and a black-and-white photo of the building under construction in 1906.
When asked if he felt he was unfairly blamed for problems at the Plaza, Naftali said, “I don’t know if it is unfair. When you are in the position where … everyone sees you as the one who makes each and every decision, you have to be open to be criticized. … The reality is you’re not making all the decisions; you’re not making all the decisions that relate to design, for example. But that’s okay; that’s part of being involved.”
His job at Elad also involved “a lot of things that were not really part of what I like to do.” In 2010, for example, he took Elad Canada public, spending a year on the IPO process.
Now he’s free to focus on his first love: development.
“I’m very passionate about developing things, working with the team, creating a vision and getting it done,” he said. “When you have such a big organization, there are so many other things that you need to deal with that are not necessarily related to the development side. That’s why it’s great here. At the end of the day, what we do is what we really like to do.”
To keep it that way, he wants to keep his current company small and efficient.
“I have no vision right now to have 200 people here,” he said. “It [would be] too big and complicated, and political. Who needs it?”