Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market


By now, Michael Shah’s origin story is well known in real estate circles. Twelve years ago, at the age of 28, the Harvard Law School graduate quit his gig at Midtown-based business law firm Wachtell, Lipton, Rosen & Katz after growing fed up with the demands of the job.

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“I worked horrible hours, as all lawyers do,” Shah recalled. “I did not find it to be very fulfilling. You don’t get the chance to spend any of the money you’re making.” He spent the following six months “just partying in New York, going out every day and figuring out what I wanted to do.”

The Long Island native’s parents, both of whom were doctors, had invested in affordable housing properties in the city with their savings, providing Shah with some exposure to the nature of the real estate business. That, coupled with his own nous in the fields of business and law, meant that real estate proved an attractive opportunity for a smart young guy looking to reboot his professional life.

His first purchase was 1314 Seneca Avenue, a six-story affordable housing building in the Hunts Point section of the Bronx, which he bought for $6 million. “It was a true crack den, in every sense of the word—if you’ve seen New Jack City, it was the Carter building,” Shah said. Those kinds of outer-borough multifamily acquisitions represented Shah’s initial foray into the business, but in time, he began venturing into more ambitious segments of the market.

Today, the 40-year-old bachelor, who lives on Union Square West, oversees a diverse portfolio of New York City real estate assets approaching $1 billion in value, he said. His company, East Village-based Delshah Capital, owns everything from Meatpacking District retail properties, to Lower East Side apartment buildings, to a 1,100-unit federally subsidized housing complex in Staten Island.

Additionally, Delshah has established itself as a ground-up residential developer. Shah’s boutique Chelsea condo project at 221 West 17th Street, known as the Dorian, recently topped out after suffering a 2015 fire that set construction back a few years, and he’s also pursuing new high-end rental developments at 22 Chapel Street in Dumbo, Brooklyn, and 30 Morningside Drive in Morningside Heights (the latter being a conversion of five former medical buildings that Delshah acquired from Mount Sinai St. Luke’s hospital in 2016).

Shah recently spoke with Commercial Observer about those projects and more—including his firm’s venture into the Israeli bond market, his feud with troubled real estate investor Raphael Toledano and why he’s actually bullish on the retail market.

Commercial Observer: Looking at Delshah’s portfolio, you have a notably diverse array of investments in different types of properties. Do you feel that gives the firm an advantage, rather than just focusing on one asset class?

Michael Shah: It’s definitely an advantage, and there is a method to the madness. Some people just focus on certain submarkets. My personal investment philosophy is you’ve always got to remember real estate is cyclical, and depending on where the cycle is, there are different asset classes you want to be in.

At the top of the market, you want to be in debt, because people are paying more for assets than what they’re worth—so you want to be putting money out. At the bottom of the market, retail rents accelerate way more than residential rents—so if you feel like you’ve hit the bottom, you want to be heavier in retail, and office too. That’s how we pick what we’re in.

We also look at gentrifying submarkets: where people are moving, where we think they’re going to be moving, and where we think rents are going to grow.

You’ve recently increased your exposure on the Lower East Side, where you bought a walkup building at 138 Ludlow Street earlier this year for $19 million. Do you think that neighborhood still has a lot of embedded upside?

The Lower East Side is 100 percent gentrifying. I started investing there in 2007, and I’ve ridden the wave up. You have so many things happening there: Essex Crossing is coming online, and that Ludlow and Rivington corridor, where we bought 138 Ludlow, is maturing right now. I think there is additional upside.

I think the East Village still has upside. Greenwich Village and the West Village are two of the most desirable neighborhoods in Manhattan, so why wouldn’t the East Village a couple blocks over be? That’s where my friends hang out, that’s where some of the cooler bars are, that’s where people want to live.

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Rendering of Delshah’s Dorian condo project at 221 West 17th Street in Chelsea. Image: Delshah Capital

Let’s talk about some of the new projects you’re currently working on, like 30 Morningside Drive, 22 Chapel Street and the Dorian. Where do those projects stand, and what’s your investment thesis on those properties?

Thirty Morningside Drive will be a market-rate, five-building rental complex; the first two buildings are going to be delivered this time next year, and they’ll all be online by the end of 2019. The thesis is, you’ve seen SL Green do 1080 Amsterdam Avenue, Brodsky Organization [did 400 West 113th Street], and we think there’s demand for luxury product in that neighborhood that’s underserved.

Twenty-two Chapel is my first Brooklyn ground-up project. We’re supposed to close construction financing this month. It’s a very cool building; there will be a pool on the roof, which I think will be a very nice amenity, and a fitness center and lounge. Everyone’s seen what’s happened in Brooklyn over the last five years. It’s no longer a lower-cost alternative to Manhattan; it’s where people want to be instead of Manhattan. That building is also rentals, and 25 percent of the units will be affordable. We’re doing that under the new Affordable New York Housing Program.

We just topped out the Dorian and are going to start closings this September. That building is 45 percent [in contract]; one more unit would take it to 50 percent. Right now, between Chapel Street and Morningside, we have close to 450,000 square feet under development. I think we want to finish out these projects before we look at more development.

What are your thoughts on the Affordable New York program, and how does it compare to the previous 421a tax abatement that it was designed to replace?

Honestly, as a developer, the previous plan was more favorable for developers, but what the city is trying to do is smart. I think the city solves the affordable housing problem by giving people FAR [floor area ratio] bonuses to build affordable housing. Right now the law is that you get the tax incentive if you do a partially affordable building, which I think is great and it works. But I think what would be really good would be if you get an FAR bump—that way you keep all your market-rate FAR, can build the affordable and get the tax incentive.

Delshah has a good deal of exposure to the Manhattan retail market. I don’t have to tell you that it isn’t the easiest time for that market; what are your thoughts on the current state of retail real estate, and have you felt the downturn across your own portfolio?

I love it. We’re one of the few actively investing in retail right now. It’s a market that rose crazy fast from 2012 to 2015, and people always forget that rents don’t go up forever. With that asset class, market timing is very important. People are shying away from it, but we just picked up two notes on Manhattan retail assets from Signature Bank and may pick up a third. People bought vacant retail hoping to lease it up at huge rents, and they’re not because their whole investment was based on rents in 2015.

There’s a market for retail. The thesis is, stock markets are up, people feel wealthy, tax cuts are in place, there’s more disposable income, and retail’s been beaten to shit over the last few years. A lot of the pain was built into the pricing, but [companies] were reporting earnings and this was the best holiday shopping season we’ve seen in five years. When [rents adjust], you’ll see people signing new leases. If you’re a landlord with vacancy, it’s a hot retail market—as long as you don’t need 2015 rents.

But all my shit is leased. No bankruptcies; Restoration Hardware [at 55 Gansevoort Street in the Meatpacking District] is still crushing it, and Urban Outfitters [at 58-60 Ninth Avenue in the Meatpacking District] has very little debt anyway. We have good tenants.

You mentioned Delshah’s purchase of those retail notes; the firm has been particularly active in recent years in scooping up commercial mortgages and particularly debt that is nonperforming or on properties that have slipped into bankruptcy. How did you come to enter that market?

It’s a very active part of our business plan. I think a lot of people understand that buying nonperforming debt is a good strategy. What’s unique about us is that we’re not a purely financial purchaser; some people just buy the paper, but we’re very happy to own and reposition the asset because we’re effectively a real estate operating company. We’ve had tremendous success on all of them.

But those deals have also earned you enemies like landlord Raphael Toledano, who allegedly said he would “bury you” after you bought the note on his building at 97 Second Avenue. What did you make of that? [In November 2017, a federal bankruptcy court judge dismissed a lawsuit filed by Toledano seeking to block Shah’s acquisition of the property.]

The dude was imploding, and it was pretty clear vultures were going to pick his carcass dry, and I wanted to be one of them. From the time Madison Realty Capital made the loan [a $124 million mortgage on Toledano’s acquisition of a 16-building East Village portfolio], it wasn’t a question of if he was going to default—it was when. I think [Madison co-Founder and Managing Principal Josh] Zegen is going to do really well on that [portfolio].

I don’t really know how anybody in their right mind believed [Toledano] was going to out-litigate us; he’s not very litigation-savvy. I think it was a lot of noise and press—he’s a colorful guy. Before we did the deal, we had analyzed the litigation risk and knew how a bankruptcy would end, and it played out exactly how we planned. [Note: Toledano and his firm, Brookhill Properties, could not be reached for comment.]

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Michael Shah at Delshah Capital’s offices in the East Village. Photo: Yvonne Albinowski/For Commercial Observer

Delshah is among a select group of U.S. real estate firms to have tapped the Israeli bond market via a publicly traded bond offering on the Tel Aviv Stock Exchange [the company has raised roughly $180 million to date in Israel, including a $50-plus million issuance last August with the expressed goal of financing 30 Morningside Drive]. What’s that experience been like thus far?

When I look back, that—along with Charlie [Oshman, founder of proptech startup Reonomy] coming on to be COO—have been two of the transformative things that have led to the company’s success. To become a publicly traded entity in Israel, you have to do a lot with organizational infrastructure, and I was a good real estate investor, but organizational design wasn’t something I spent a lot of time on. Charlie came over here, and now the company operates like a company and not just a deal shop.

It’s been very important to our trajectory; having access to that market allows us to do larger deals. We did our Series C offering for 30 Morningside, and here that money would have cost a lot more. It’s a great capital market. There’s a premium you pay when you’re a first-time issuer because the market doesn’t really know you, but this company was the perfect size for that market.

Related, Extell, those companies had larger issuances, but they didn’t pay attention to the market as much. Both Moinian and we looked at it not as a one-off but as a recurring thing for future growth. We have active investor relations programs; we go back to Israel when we’re not looking to raise money, we do a quarterly call after our earnings releases. That has gotten the market more comfortable with us.

How else do you finance your projects? With the growth of the alternative, non-bank lending sector in recent years, is that a segment of the financing market you’ve taken advantage of as banks have retreated from the realm of development lending?

Thirty Morningside was [financed] with Square Mile—we have a great relationship with them and CapitalSource. Bank of the Ozarks is doing the senior loan on 22 Chapel, and they were the acquisition financier for 30 Morningside. We’re still getting our deals financed; it’s just about how much leverage.

I think the real estate capital markets have matured a lot since 2009; since the credit crunch, alternative capital has stepped in to fill that void. It’s good for us because we tend to do complicated things. Historically, this company has used its own balance sheet [to finance operations], and this year one of the big initiatives for this company is to launch our own credit fund. We’ll be starting to lend on any asset class that’s based in New York.

You’re very much New York City-focused. Do you plan on increasing your exposure in any real estate markets outside of the city?

I think for the immediate future, we’ll be in New York [mostly]. I did buy a building in Miami recently—a corner building just outside of the Design District. We’re turning that into a 12,000-square-foot retail building.

And outside of real estate, you’ve also established yourself as a restaurateur.

I’ve got three operating restaurants and bars: Sons of Essex [on the Lower East Side], Petaluma [on the Upper East Side] and Leave Rochelle Out of It [on the Lower East Side]. They’re all in buildings that I’ve owned. I tried to do one at 200 Allen Street, but the Lower East Side community board feels they have a saturation issue [with bars and restaurants].

What was your motivation for entering the restaurant business? I feel a lot of people get into it so they can have a place where they can bring their friends and hang out.

That was never my motivation—though my dad did do that. It’s a tough business, and you have to manage expenses. I started doing it because I had vacant retail in 2009 and 2010; the thought process was, if we can put our own operating businesses in here, it’ll help pay rent. I definitely think we’ll end up with at least one more [restaurant] opening this year.

Lastly, do you still work out with Hamid Castro? [Castro, a personal trainer, was the subject of a 2016 New York Post article headlined “I Train Fat Rich Guys and Then Get Them Laid.” Shah featured prominently in the article, noting that he began training with Castro after hitting “a low point in my life.”]

Hamid and I are still good friends, though he’s not my trainer anymore.

Is exercise still a big part of your life?

Yeah, it’s basically my hour to myself every day to get into the mindset for what I’m trying to do at work. It’s a good way to start the day. And not being fat anymore is also a huge perk.