Cartier! Versace! Vuitton! Financing Next Gen at Crown’s Ritzy Retail Focus
Carl Gaines May 29, 2013, 4:02 p.m.
One day in the late 1980s, three Brooklyn brothers in their teens—Isaac, Haim and Richard Chera—followed their grandfather, Isaac, and their father, Stanley, on a trip to Manhattan. While not in school, the brothers would spend much of their spare time in the Fulton Street children’s clothing store that their grandfather had opened in 1948, in a space formerly occupied by a hat store, Suzette Millinery Shop. At the time, lacking the money to replace the previous banner, Isaac Chera simply tweaked it, naming his business Suzette Kiddie Store. Only later, after having expanded to several other stores, did the family change the name to Young World. Soon, the elder Isaac Chera started to invest in real estate. The best advice he gave to his family, according to his grandson, Haim, was to always buy the building where they had a store.
“And when we bought the building of the store where we were in, he told us that if it was good, buy the building next door, and if that was good buy the all block,” Haim Chera remembered. “And if the block was good, buy the neighborhood.”
The Chera brothers grew up learning the art of retail in the family’s stores and real estate by regularly attending to closings. That day in 1980s Manhattan was particularly exciting, though. Three generation of Cheras were present for the closing on the Louis Vuitton building, at 1 East 57th Street. Done in partnership with real estate investor Sol Goldman, it was their first acquisition on Fifth Avenue.
In a series of interviews, Isaac, Haim and Richard Chera gave The Mortgage Observer insight as to how they run their family business, Crown Acquisitions, which currently owns several million square feet of real estate for approximately 100 properties in the city’s main shopping streets.
When asked about their roles and their titles within the company, they answered, “brothers.” From a professional standpoint, they described themselves as “independent” and “inter dependent.” They are a family with development capabilities, they said—the ability to target the right acquisitions and relationships with tenants and capital partners.
Recently, Crown Acquisitions was selected as one of the final bidders—along with Vornado and Ashkenazy Acquisition Corp.—for the purchase of the Carlyle Group’s 650 Madison Avenue, which is expected to fetch up to $1.3 billion.
Between 2011 and 2012, Crown Acquisitions, with partners the Carlyle Group and Kushner Companies—whose owner also owns the Observer Media Group—sold the retail condo at 666 Fifth Avenue for a total of $1 billion. Last year, in a joint venture with Oxford Property Group, Crown Acquisitions purchased a 49.9 percent stake in the Olympic Tower at 641 Fifth Avenue and the adjacent Versace and Cartier mansions from an affiliate of the Alexander S. Onassis Public Benefit Foundation.
The brothers said that the financing was the easiest piece of the puzzle. Their retail experience was a convincing factor in Wells Fargo taking on a $250 million senior mortgage for the property, according to Robert Rosenberg, a managing director at Wells Fargo Real Estate Capital Markets. That loan amounted to a 30 percent loan to cost and valued the property at about $840 million.
The Cheras said that they are looking to refinance the property for both a longer term and higher proceeds, taking advantage of the low interest rate environment for 10-year loans in the 3 percent range.
“In the year since buying [the Olympic Tower] our NOI has jumped up significantly,” Haim Chera said. “When we signed the contract, the income of the property was about $27 million. We expect to double that in our first year of ownership. We worked with our existing tenant first. The most prominent example, Cartier, chose to renew with us. Their lease was coming to the end of a very long-term lease and they chose to renew and to stay for a very long time.”
At the time of the acquisition, it was reported that tenants paid rents in the $1,000 per square foot range, in an area where median asking rents are $3,000 per square foot, according to the Real Estate Board of New York’s retail report for spring 2013. When asked if they are currently achieving rents in that range, Haim Chera said that they clearly were.
“Everything that we do is built on the concept that we have learned as a retailer: rent is a function of sales and profitability,” Haim Chera added. “We don’t say that because some statistics books say that Fifth Avenue is $3,000 per square foot that’s the reason why this new tenant should pay $3,000 per square foot. They should pay $3,000 per square foot if they can project a sales volume that would allow them to be profitable.”
“They really know what they know,” said Mark Schoenfeld, a managing director in the Washington, D.C. office of the Carlyle Group. “They know street retail in New York and they focus on it.”
In January 2012, Crown Acquisitions partnered with Murray Hill Properties, Jamestown Properties and Rockwood Capital for the $390 million purchase of the 537,800-square-foot 530 Fifth Avenue, located between 44th and 45th Streets. At the time, they had seen a disconnect between the upper Fifth Avenue market, between 49th and 59th Streets and lower Fifth Avenue, between 42nd and 49th Streets. According to REBNY data, between the fall of 2009 and the fall of 2011, the median asking price on upper Fifth Avenue increased by 19 percent, from $2,100 to $2,500 per square foot. However, the median asking price on lower Fifth Avenue increased by only 16.6 percent, from $450 to $525 per square foot. Most importantly, the Cheras realized, the asking prices in the part of the avenue under the Rockefeller Center were a fraction—about 20 percent—of those above it. The brothers found out that H&M and Zara stores at 42nd Street and Fifth Avenue did approximately half of the volume of the sales that their stores did at 52nd Street and Fifth Avenue. They became convinced that a correction in the rents had to take place soon. After their purchase of 530 Fifth Avenue, the median asking price on lower Fifth Avenue jumped to $873 per square foot in the spring of 2012, according to REBNY. In the spring 2013 the median asking rent was $1,127 per square foot, which amounted to 37 percent of the median asking price on upper Fifth Avenue where it was $3,000 per square foot. Crown Acquisitions and its partners assumed an existing $200 million loan on 530 Fifth Avenue, which is due to mature in 2016. At maturity “there could be an opportunity,” to refinance the property, Haim Chera said, “but we still have our work to do.” He referenced leasing as part of that work.
While talking to The Mortgage Observer, 44-year-old Haim Chera often took the lead. But he and his brothers, 46-year-old Isaac and 39-year-old Richard, said that they have very similar personalities.
“They are all smart, all hard-working, all trust in each other and listen to each other, and work together very well,” their father Stanley said about them. The three brothers followed the same path. “We all started in the warehouse, doing stock work, truck work, receiving the merchandise,” Isaac said. “We unloaded the trucks and then filled the forms—everything was done manually back then.” Isaac and Richard Chera attended New York University and Haim Chera attended Hofstra University and The Wharton School of the University of Pennsylvania. Their spring and summer breaks were spent working with the family. The Cheras adopted their commercial real estate strategy even in residential real estate. Stanley Chera slowly bought several houses on the street where his children grew up in the Gravesend neighborhood of Brooklyn. The brothers still live door-to-door and their children—14 in all—grew up more as siblings than as cousins, they said.
At work, the three brothers are always involved in each deal, they said. As an example they pointed to a relatively small deal, the purchase of a former bingo hall, at 329 Wyckoff Avenue in Queens. An acquaintance pitched the investment to Haim Chera, who called his brothers. “It’s a great location for a pharmacy because it sits right at the foot of the train stop,” Richard Chera said at the time. Isaac Chera joined them and agreed.
The Cheras bought the property for $2.8 million, after two years they financed the construction with a $6 million loan from Sovereign Bank. “They didn’t sit behind their desk, they literally came out to the site no less than half a dozen of times,” Richard Chera said about the lenders. Ben Flanders, a vice president at Sovereign Bank who worked on the deal, went to the properties with the Cheras. “They had a vision,” he said. “They were very able to get it fully leased.” Currently, 329 Wyckoff is leased to CVS—a pharmacy, as Richard Chera foresaw—and T-Mobile and Planet Fitness. At the beginning of May 2013, Crown Acquisition refinanced it with a 10-year $9 million loan with a 3.75 percent rate provided by Morgan Stanley. The loan will be securitized, in a sign of the expansion of CMBS market in the financing of retail.
“CMBS has claimed a much greater share of loan origination for retail properties than for other property types,” according to a Real Capital Analytics’ report on the first quarter of 2013. “With $30 billion of CMBS so far in 2013 compared to $48 billion in all of 2012, as well as a stable interest rate outlook, financing conditions should continue to foster retail investment in 2013.” The report indicates that in 2012 CMBS had the largest share of loan origination than any other lending sources even in the major metro areas. “You usually get better interest rates with CMBS and usually a little bit more in the proceeds and that helps your returns,” said Isaac Chera.
“We are low leverage borrowers so we don’t really look to maximize proceeds,” said Haim Chera. “We have always looked to keep a conservative capital structure.” He added that they generally keep their financing in the 30 to 50 percent range of loan to value.
Other investments brought this family of retailers from Brooklyn to the heart of the financial district. The Cheras have a passive investment in 2, 3 and 4 World Trade Center. In September 2011, Crown Acquisitions partnered with Highgate Holdings to buy the 165,000-square-foot 170 Broadway for $55 million, with a $35 million loan from M&T Bank. The property is just a block away from the Fulton Street transit hub. “We believe that when the Fulton Center is fully open and operational it will be like Grand Central opening in a new area,” said Haim Chera. “It will be a place where every retailer will need to have a store.”
“We never forget where we come from,” said Isaac Chera. Among approximately 20 properties in Fulton Street, the Cheras still own the first store where their grandfather opened Suzette Kiddie Store, now at the center of the transformation of Downtown Brooklyn.
“Downtown Brooklyn has built 5,000 new residential units in the last five years and another 5,000 are coming in the next 24 months. They’ve got 1,400 hotel rooms that were developed in the last several years going to 2,000 in the next year or two,” Isaac Chera pointed out. In the last 18 months Century 21, T.J. Maxx, Armani Exchange, Swarovski, and Banana Republic all opened stores on Fulton Street.
Despite having delegated much of the company’s responsibilities to his children, Stanley Chera remains active in the business. “Historically, retail had been looked at as almost a step-child of a commercial asset,” he said. “It just wasn’t considered very much when financing an office building. But today it is a major part of the financing of every building.”
A new generation of Cheras is already pushing and ready to make its mark. Haim Chera’s 20-year old son is graduating from NYU and is expected to join the family’s business. And the tradition of training young Cheras on every aspect of the real estate business persists. “I took my 5-year-old son to a closing already,” said Isaac Chera. “He asked a lot of questions.”
Buildings in this story
Organizations in this story
- The Carlyle Group
- 329 Wyckoff Avenue
- Olympic Tower
- 650 Madison Avenue
- 1 East 57th Street
- Haim Chera
- 4 World Trade Center
- Carlyle Group
- Isaac Chera
- 666 Fifth Avenue
- Ben Flanders
- Oxford Property Group
- Alexander S. Onassis Public Benefit Foundation
- Sovereign Bank
- Stanley Chera
- 2 World Trade Center
- Real Estate Board of New York
- Morgan Stanley
- Jamestown Properties
- Richard Chera
- Louis Vuitton
- Kushner Companies
- murray hill properties
- Robert Rosenberg
- Rockwood Capital
- Highgate Holdings
- 3 World Trade Center
- Ashkenazy Acquisition Corp
- 530 Fifth Avenue
- Sol Goldman
- Mark Schoenfeld
- Wells Fargo
- Crown Acquisitions
- 641 Fifth Avenue
- Vornado Realty Trust