The ties that bind in New York's dynastic real estate market -- and how to maintain business continuity -- were the focus of Friedman LLP's recent forum on transitioning businesses to the next generation.
Members of two prominent real estate families - the Musses and Gurals - as well as developer Larry Silverstein, who built Silverstein Properties with his father Harry in the 1950s, discussed how to sustain a family's legacy of leadership before an audience of industry insiders, hosted by Friedman LLP Real Estate Group co-chairs Fred Berk and Jay Goldstein.
Michael Stoler, Managing Director of Madison Realty Capital and president of New York Real Estate TV, was the panel moderator. Held at Club 101, the theme was "Preserving the Real Estate Family Business."
A succession plan is "something you need to put on your to-do list and revisit all the time," said Friedman LLP partner Kimberly Dula in opening remarks, citing assumptions sometimes made by clients that children will automatically be capable and willing to take the reins of a real estate empire should the unexpected happen. “It is a process that constantly evolves. Our goal as trusted business advisors is to look at the tough questions and get clients to look at their end goal.”
Stoler noted that studies show the further a real estate business passes from its founders, the less likely it is to still be family held: “In the fourth generation, only 4 percent make it. Third, 12 percent make it, and in the second, 30 percent make it.”
As outlined by the panelists, issues that family-owned real estate firms should consider are:
- What are the principal’s goals for succession, and are those goals shared by the next generation?
- Will the succession plan enable the firm to stay in the family, while maintaining the flexibility to respond to dynamic business and market forces?
- Does the succession plan take into account not only the business strategy and financial structure, but the family culture of the firm?
Joshua Muss, president of Muss Development, noted that he “Grew up seeing real estate and hearing it at the table.” His grandfather, Isaac, started the company in 1906. His father, Hyman, and most of his uncles went into development.
Muss told the Friedman audience he spent much of his early years disagreeing with his father, and later years reconciling the lessons learned. “To be in real estate development, you don’t get a degree from college or law school, you get a degree from experience,” he said, noting that while his father was cautious, “I risked the farm every time we did a project.”
Three of Joshua’s children have been involved in the business, including son Jason, who serves as principal in charge of development, acquisitions and marketing and also was a panelist at the forum. Jason said that while he is somewhat more risk averse than his father, he feels the company has struck the right balance between aggressive growth and managing risk.
Jeffrey Gural, chairman of Newmark Holdings, recalled that he initially did not want to follow his father, Aaron, into real estate, despite his father's pleading, as he was content to work in construction. In 1972, he relented with the provision that he could focus on construction projects, but tensions persisted, as his father was the more risk averse. “He grew up in the Depression” said Jeffrey, who took over the reins of Newmark in 1978.
Gural said his credo consisted of three pillars: Live long, never sell and stay clear of excessive debt. He said his analysis of the most successful operators showed that they are those least inclined to sell properties. “That way, it’s kind of hard to make a mistake.”
This business model, he said, allows Newmark to have a large cushion in rent rates, allowing the firm to remain profitable in the event of a downturn, while heavily leveraged new owners have less latitude.
Jeffrey’s son, Eric, is executive managing director of Newmark Holdings, and his nephew, Brian Steinwurtzel, is managing director. The two said they divide their responsibilities based on their particular skills sets, rather than dividing up properties to oversee. But Eric, who joined the company in 1991, said they have not encouraged other family members of their generation to enter the business because success tends to be elusive. “We always ask the question of whether you put family first or the business first. We are a family-first business. Do we want to ask family members to come into a business where the success rate is 4 percent?”
The odds seemed similarly stacked against Larry Silverstein when he counseled his father in the 1950s that they needed to be owners, not brokers, to be successful in real estate, as brokering was a “hand-to-mouth existence.”
Silverstein told the Friedman forum that, inspired by Harry Helmsley’s acquisition of the Empire State Building with the help of partners and investors, he and his father were able to secure a loan of $350,000 to buy a “derelict” property on West 23rd Street for $660,000. They raised the difference from local businesses Larry Silverstein had served as a broker. Fighting their instincts, the Silversteins declined a developer’s offer for a quick $100,000 profit to take over the contract for the new building, instead taking “the long view.” Within a few years the building was profitable enough to repay investors, with banks now offering them credit for new acquisitions. “That was a turning point in our lives,” Silverstein said.
He would face greater adversity in the future. In a wide-ranging and often witty exchange with Stoler, Silverstein recalled that in the beginning of 2001, while finalizing his bid for a 99-year lease of the World Trade Center from the Port Authority of New York and New Jersey, Silverstein was struck by a drunk driver while crossing Madison Avenue and hospitalized for weeks. Depriving himself of pain medication despite his broken bones, Silverstein arranged and submitted an offer of $3.2 billion for the lease, coming in second to Vornado Realty. But as he healed, Silverstein found that the higher offer fell through because of complications faced by Vornado as a publicly traded company.
Just weeks after completing the deal came the devastation of the Sept. 11, 2001 terror attacks. Silverstein credits his wife, Klara for saving his life that day.
He had been holding regular breakfast meetings with tenants at the Windows on the World restaurant atop the North Tower to assess their needs. That morning, Klara insisted he attend a long-postponed dermatologist appointment, rather than cancel again.
“Had she not insisted, I would not be here talking to you this morning.”
While rebuilding 7 World Trade Center and other properties, Silverstein became an advocate for rebuilding and renewing Downtown Manhattan, reasoning that “otherwise it will be lost forever, a wasteland.” Construction on Silverstein’s Four Seasons Downtown hotel in Tribeca, at the former headquarters of Moody’s, began in 2013, with the ribbon-cutting held in October 2016. The hotel construction followed Klara’s advice that he diversify his holdings, he said, noting that “the two most important words of my life are ‘Yes, dear.’ ” The property also includes 157 residence units.
The couple, at 85 and 83 and after 32 years in upper Manhattan, recently decided to relocate downtown because, Silverstein said “let’s do something different. We’re kids. Let’s see what goes on.”
In his remarks, Jay Goldstein of Friedman LLP noted the firm’s long association with Silverstein.
“We have seen a lot of interesting things happen in the past 50, 60 years, and Larry has been a participant in a lot of it,” said Goldstein. “He has always been the staunchest, most optimistic person relative to our city.”
In his remarks, Joshua Muss recalled his family’s long association with Friedman LLP, spanning more than 50 years. “The succession of generations needs very careful accounting,” he said. “There are so many things one must remember and account for. This is what we are here about [today] – the ability of real estate to be able to help for future generations.”