MHP’s Norman Sturner on 850 Third Avenue and Why He Only Believes in Manhattan
In early 2015, MHP, along with Clarion Partners, had just spent $470 million to pick up 180 Maiden Lane, a 41-story glass tower that they poured another $32 million into renovating, and spent the last year leasing.
But Mr. Sturner must have a tapeworm: Earlier this year, MHP with the Chinese airline Hainan (HNA) gobbled up the 21-story Midtown office building, 850 Third Avenue between East 51st and East 52nd Streets, for another $463 million from Shorenstein Properties.
And if that wasn’t enough to satisfy his appetite for real estate, Mr. Sturner could always stroll past 1180 Avenue of the Americas, at the corner of West 46th Street, and check out the recently installed and wildly popular Chick-Fil-A, one of his leases (MHP owns 10 percent of the building).
So this time when we sat down with Mr. Sturner at MHP’s Midtown offices, we were curious about his next big investment. He was just back from South Florida where he had spoken at an Opal Group conference on real estate investment.
Commercial Observer: What were you talking about at Opal?
Mr. Sturner: Manhattan. We’re really a one-trick pony. We’ve done it for 45 years. It’s the one thing we know and love; it’s the one thing we have passion for; it’s the one thing that we have been successful at—it’s the one [investment] that is profitable 99 percent of the time. The gentlemen who introduced everybody [at the conference] was a macroeconomics professor. He was a little bit more depressed about what is going on macroeconomically in the world, and I said that’s exactly why New York is [a good bet]. Because the rest of the world is going to hell in a hand basket. [A downswing] gets very wealthy folks, including governments, to export their currency to the United States, and a large portion of the real estate part falls into New York City.
Talking about all this capital coming in, you guys have two big things recently, 850 Third Avenue and 180 Maiden Lane.
Well there’s a third big thing, which is what led to 850 [Third Avenue]. [MHP bought 850 Third Avenue with HNA]—they are the third largest airline in China. They have 700 aircraft and billions of dollars of assets. They spent $6 billion about two months ago buying [Ingram Micro] a tech company on the West Coast, but the first foray [into New York] was 1180 Avenue of the Americas. They came in when we recapped the Carlyle Group out [of the building] and became our investment banking partner…We came to them after we put Chick-Fil-A in. Do you know what Chick-Fil-A is?
The chicken sandwich store?
Yeah—we just did that. There was a hairdresser in that wonderful corner.
I used to go to get my haircut there.
Well, now you can get chicken. Half a million people eat it six days a week—the seventh day is closed because [the late founder Truett Cathy was] religious. We have a security guard for crowd control and a very large wood-crafted cow that sits on the front, saying, “Please eat chicken.” They are now going to take that to five locations around the city, like Rockefeller Center, with this big cow saying, “Please eat chicken.”
That’s pretty cool.
It is cool. They had a soft opening [earlier this year], but what their tenancy allowed us to do is to get an offer of a profit on the property of $100 million. We went to our partners and said, “OK, guys we’ve filled the building, and now we’ve hit the ball out of the park with the retail: Do you want to sell the [building at a] $100 million profit?” And they said, “Please, don’t do that.”
They said, “It’s taken us four years to get to know you. You’ve done a terrific job, you’re a terrific partner—we don’t want to send the money back home. We need to push the money out the door and not have it repatriated”—because maybe they don’t get it back when they want it. So I said, “What do you want to do?” They said, “Let’s refinance the property and then you go find another building.” We refinanced, [taking out $60 million in equity this time], and found another off-market building at 850 Third Avenue.
Tell us about the deal with 850’s previous owners.
We had done two deals with Shorenstein, at 450 Lexington Avenue and at 1180 [Avenue of the Americas.] The building, 850, came on the market about a year ago and was taken off the market, and nobody knew how ill Douglas [Shorenstein who died of cancer last November] was. So we got a call and they said, “Would you come and look at the property? Two things you can’t do: You can’t flip it, and you can’t negotiate. Yes or no?”
We went up there with our engineering staff, went up the spine of the property, went up the front of the property, literally walked every single foot of that building. At the time of the [letter of intent] it was 90 percent rented. By the time we got to the title on contract, it was 100 percent rented, at probably 10 or 15 percent above the existing then-rents. We went back to the Blackstone Group, which we have been having a love affair with—
They’re having a love affair with a lot of people, so I just hope you use protection.
In less than 18 months, we’re up to $800 million in borrowings [with Blackstone].
Wow is right. They promised me a toaster when I reach a billion.
What’s MHP focused on right now?
If you look at the focus of MHP, three things will emerge: It has to be an office building, it has to be on the island of Manhattan, and it has to be off-market. Not an easy focus, which is why we only do two or three buildings a year. We’re fortunate enough to have a reputation of never screwing anybody. In 45 years, I have never been a defendant in a courtroom. In this city, that is unique. As I said, the focus is laser-like, so that if you called me and said, “I’ve got this great apartment house in Queens,” I wouldn’t do it. “I’ve got a great office building in the Bronx.” Wouldn’t do it. I tell my Denver story to everybody as a lesson learned.
What’s your Denver story?
Donald Trump, pre-emptive Republican nominee, his publisher called one day, and they were putting together a book called The Best Deal I Ever Did. They said, “Would you write a chapter?” So I thought about it, and I called her back, and I said, “How about the best deal I never did?” And she said, “Why don’t you write it, and we’ll ask Mr. Trump.” It goes back 25 years. Neil [Siderow]—my then-partner who has since passed away—and I went to Denver to buy a hotel. I really can’t remember the numbers anymore, but if hotels around here were selling for $1,000 a foot, that was selling for $100 a foot. So we flew out to Denver, and we hired local architects, engineers and hotel people who knew what they were doing—because we didn’t—and we went through it, from Wednesday to Friday. It was perfect. There was nothing wrong with it. So we were sitting at the bar on Perimeter Road off of the airport, waiting for our plane to come in. The bartender came over. He said, “Are you guys buying this?” I said, “Yeah, we’re very close.” He said, “What are you going to do when they move the airport next year?” I said, “What do you mean?” and he said, “We’re building another airport a couple of miles away.” I turned around to Neil, I said, “Neil, give this man a large tip and let’s get out of here.” We took a blood oath—he and I—that unless we could walk, take a cab or ride a bike, we wouldn’t buy it, outside of New York, and we haven’t. By the way, they printed it. If you look in Donald’s book [published as The Best Real Estate Advice I Ever Received] the best deal I never did is a chapter.
In terms of some of these people who are investing, like the Chinese and Japanese, how exactly do you wrangle these investors? Do they come to you? Do you go to them? How does that work?
We network a lot. I’m going to some Chinese networking event. We did it for their Chinese New Year. We have a Korean broker, so I go to Korean events. The people that are coming in now have learned from the mistakes of the past. When the Japanese came in [in the 1980s they said], “We don’t need your help. We’re smarter than you, we have more money than you,” and they went home without their underwear. They bought Rockefeller Center and got killed. Murdered, economically. The Arabs are the same. They came in and said, “We have more money, and we don’t need [you]”…The Chinese learned from that. They said, “You know what we need? We need feet on the ground. We need local partners. We need expertise.” We network a great deal, yes, we try to keep our face in front of the whole world if you will, but some of it is kismet. When 1180 got into difficulty because the mortgage bank Eurohypo went out of business and the mortgage went up for grabs and it got into the paper, a young woman broker in Flushing, [contacted me]; she said, “I have your partner.”
I really need a partner. I said, “I can’t replace that mortgage overnight.” In walked a Chinese attorney, here on Third Avenue, he may even be American-born Chinese, I don’t know, 45 days later, there were our partners that bought out Carlyle. Bought out Carlyle, paid off the mortgage. We filled up the building. It had 10 percent vacancy.
When was this?
It’s five years ago, so 2011. Right after the crash…I walk around like a tourist with my head up. I trip a lot on the sidewalks, looking up. When I see an address, I go right back to our people who have every address of every street of every building, and I say, “Get me whatever you have on the property.” That will tell me who owns it and where they are and you look for…They asked me, on one of the panels, “How do you get somebody to sell?” Well, you look for a soft spot. I once had a client [who shall remain nameless] who actually owned [a big parcel in Manhattan] and had one tenant left: a dentist. Couldn’t get him out. Their treasurer said to me, “If you can get him out, not only will I pay you X”—which was a lot of money—“I’ll let you try and help us in the development.” Fine, so on a particular morning, I went up there, and I knocked on the door. and I said, “Dr. Jones, I’m here representing [the nearby property owner.]” He said, “Goodbye”—slam! Physically slammed the door in my face. Okay, I went back there three days later, and I said, “Doctor, don’t slam the door! I’m here to offer you $1 million.” Slam. It’s not working. I did this for months, literally months, to the point, at the end of the second or third month, I was carrying coffee and donuts and saying, “Bill, at least let me talk to you!” He had one chair. The lights went out three times a day because they cut the electric. He was suing [the landlord because he had] a patient in the chair when the lights went out or the water went off or whatever. And then, I walked in one day, and he said to me, “This is the worst day of my life.” We’re having coffee and donuts. “My wife is divorcing me.” And a fucking light bulb went off in my head. I said, “That’s terrible, Bill.” He said, “It really hasn’t been good, but this is really the worst day. I’m not taking any patients.” I said, “What if I paid you the million dollars after the divorce was final?” He said, “Bring the papers.”