Kaufman Organization Grows Its Portfolio and Profile by Recreating the Bs
After 100 years, one might think that a real estate company has maxed out its portfolio and its impact. But the century-old Kaufman Organization, still family-owned three generations in, is growing on multiple fronts.
Founded in the 1910s when Samuel Kaufman purchased 45 East Broadway to house his garment business, Kaufman Organization’s growth helped to create the Garment District in Midtown South. Expanding on that core of buildings, many of which it has owned for decades, Kaufman is now comprised of management, leasing, and new venture divisions that work together to continue to grow. Today, Kaufman locates, acquires, and turns around underperforming Class B properties around New York City, as well as provides third-party services. The result is a seven-million-square-foot portfolio, says Samuel Kaufman’s grandson Steven Kaufman, president of Kaufman Organization.
“Using the expertise of the three-generation family platform, and the efficiencies afforded us by having so much of the required expertise either in-house or available to us on an expedited basis, we are able to renovate and reposition undermanaged buildings, or buildings owned by family businesses that wanted to sell and maximize their returns,” said Grant Greenspan, principal of Kaufman Leasing Company and senior vice president of Kaufman Management Company.
“Hard as it may be to believe in 2018, many industry players really shied away from coming back into the market in the wake of the ’08-’09 recession,” said Fred Leffel, president of the company’s New Ventures division. “But as a 100-year-old company that had survived through numerous economic cycles, we had a different view. And as long-time owners in Midtown South, we believed in the upside potential of these neighborhoods. We saw the downturn as an acquisition opportunity, an opportunity we could exploit with our value-add business strategy. That led us to invest early in neighborhoods like Union Square, Flatiron, and NoMad years before they became trendy.”
For example, at 100 Fifth Avenue, Kaufman acquired out of bankruptcy a 240,000-square-foot building with 190,000 square feet of existing and rolling vacancy, a deteriorating physical plant, and a negative taint among tenants and leasing brokers. After untangling an ownership quagmire, executing a $15 million renovation, and a complete repositioning and rebranding of the property, 100 Fifth has become one of the premier Class A properties in New York’s “Silicon Alley,” with tenants including Apple, Adobe, Net-a-Porter, and Yelp.
With 27 West 24th Street, Kaufman adopted a slightly different value-add approach. The building had always maintained healthy occupancy because of its location. Kaufman acquired the property, significantly modernized its infrastructure, and rebranded it, with the business plan of focusing on smaller tenants, companies that required 2,000 square feet to 3,000 square feet of space. At the time, such companies had few quality choices, Greenspan explained: either tertiary quality buildings or co-working spaces such as WeWork.
“We could give them a B+ to A- building with many more services,” he said. “Companies may come from a WeWork space to us. That’s the secret sauce.”
At 27 West 24th Street, which it acquired in 2012 with Lubert-Adler Real Estate Funds, Kaufman upgraded the property from Class C to near prime after a $5 million capital and leasing program. At that time, few competitors shared Kaufman’s small tenant strategy. But the strategy paid off: Within a year, 25 percent of the rent roll had been upgraded and leased out at rents that represented a significant premium to the competition. Within two years, the building was sold for a premium price.
There still is a role for Class B buildings, even as millions of square feet of Class A space is scheduled to come online from Hudson Yards and other developments, Greenspan added. In fact, those major developments help.
“Tenants at those buildings are major corporations paying hundred-dollar rents,” he said. “That creates a need for smaller businesses to support them. And those smaller support businesses prefer to be nearby their clients and customers.”
Yet another example of the success of this business strategy is Kaufman’s Madison Square Portfolio. Part of the former Frank Ring portfolio, Kaufman created 99-year ground leases on four totally vacant, dilapidated buildings in Midtown South with the plan of creating fully modernized, high quality buildings targeted at New York’s burgeoning tech/media industries. Kaufman’s $30 million improvement program reinvented the buildings with state-of-the-art building infrastructure, including advanced telecommunications, fiber optics and energy management system, and dramatic, innovative lobbies and elevator systems. Today, the portfolio is 95 percent leased, at market-leading rents.
Working with older buildings requires a certain expertise, as well.
“You know what may or may not be approved by landmark commissions, so you don’t waste time with ideas that just aren’t going to be approved,” Greenspan said.
For decades, Kaufman had focused on such turnarounds for other owners.
“We always had third party management, getting key fees along the way,” Greenspan said. Historically, Kaufman had acquired properties with its own capital, and a small group of individual investors.
“In the wake of the ’08, ’09 downturn, we saw that there was an opportunity to grow our business by harnessing the expertise developed over close to a century and adapting it to a proactive, value-add business strategy,” said Leffel. “But to be effective with this strategy going forward, we needed access to more capital and we needed to adapt. We formed Kaufman New Ventures as a distinct business division to develop this new strategy, develop the necessary relationships with institutional capital partners, and to be the vehicle through which we would find and acquire value-add property opportunities, and devise and execute our asset- specific repositioning plans. By rethinking our business in this way, we were able to vertically integrate our value-add business, and the New Ventures model became a great platform through which we could expand our business, increase profitability, and carry the Kaufman name forward. George Kaufman saw this, and Steve Kaufman and Ed Hart, our current leadership, are carrying the vision forward.”
“We’re always looking for well-located properties, in Manhattan or in the boroughs,” said Michael Kazmierski, a Kaufman principal and director of acquisitions. “It comes down to the submarkets. Right now, the market remains tremendously competitive. It takes certain market knowledge or coming up with creative solutions.”
Kaufman has become a leader in ground lease, to date completing seven transactions. The most recent is a 99-year lease at 21-01 51st Avenue (the Cardinal Building) in the Hunter’s Point section of Long Island City, a building it will gut renovate and reposition as an office and retail building. An eighth ground lease deal is pending.
Integration of the firm’s various areas of expertise is critical. Everyone has to be pulling together towards the common goal. Acquisition, underwriting, capital markets, operations, leasing, accounting, and property management must work together
“At that point, the operations staff develops a detailed model of the building renovation costs. The information is then given to the acquisitions team, which feeds it into a proprietary projection model to determine what we can pay. Everyone talks and communicates their expertise into this model. Simultaneously, we’re having discussions with our institutional partners,” he says. “Then we go through the committee process. If we have a go vote, we go forward and try to secure and close the deal”
“It’s a careful, disciplined process, and we’ve had terrific success with it,” added Leffel.
And that process will continue—maybe even for another 100 years.
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