Jared Kushner with President Trump in the White House. (photo: Pablo
Martinez Monsivais/AP)
Deep in Debt, the Kushners Hunted for Cash Across the Globe
By David Kocieniewski and Caleb Melby, Bloomberg
31 August 17
Jared Kushner, Donald Trump's son-in-law and top adviser, wakes up each
morning to a growing problem that will not go away. His family's real estate
business, Kushner Cos., owes hundreds of millions of dollars on a 41-story
office building on Fifth Avenue. It has failed to secure foreign investors,
despite an extensive search, and its resources are more limited than
generally understood. As a result, the company faces significant challenges.
Over the past two years, executives and family members have sought
substantial overseas investment from previously undisclosed places: South
Korea's sovereign-wealth fund, France's richest man, Israeli banks and
insurance companies, and exploratory talks with a Saudi developer, according
to former and current executives. These were in addition to previously
reported attempts to raise money in China and Qatar.
The family, once one of the largest landlords on the East Coast, sold
thousands of apartments to finance its purchase of the tower in 2007 and has
borrowed extensively for other purchases. They are walking away from a
Brooklyn hotel once considered central to their plans for an office hub.
From other properties, they are extracting cash, including tens of millions
in borrowed funds from the recently acquired former New York Times building.
What's more, their partner in the Fifth Avenue building, Vornado Realty
Trust, headed by Steve Roth, has stood aside, allowing the Kushners to
pursue financing on their own.
Kushner Cos. says it will prevail. Laurent Morali, the president, said the
company has a variety of contingency plans for the building and its broader
portfolio will allow it to sustain any setback. He said he is encouraged by
the interest of several potential investors, but declined to name them.
"Reports that portray it as a distressed situation are just not accurate for
the building or for the company," Morali said in an interview on the 15th
floor of the building, 666 Fifth Avenue.
But there are challenges all around. The mortgage on their tower is due in
18 months. This has led to concerns that Kushner could use-or has perhaps
already used-his official position to prop up the family business despite
having divested to close relatives his ownership in many projects to conform
with government ethics requirements. Federal investigators are examining
Kushner's finances and business dealings, along with those of other Trump
associates, as they probe possible collusion between the Kremlin and the
Trump campaign. Kushner has already testified twice before closed
congressional committees and denies mixing family business with his official
role.
This article, which describes new details of the company's troubled finances
and its overseas fundraising efforts, is based on a review of thousands of
pages of financial documents and interviews with more than two dozen
executives, business partners, real estate agents, deal participants and
analysts. They spoke on condition of anonymity to discuss private deals.
Some feared legal reprisals or other retaliation from one of the country's
most powerful families.
The portrait that emerges is that of a real estate company established by a
pair of penniless Holocaust survivors, its extraordinary expansion by their
children, the rise of a grandson to a top White House role and a big bet
that has complicated its financial future.
It was 2006-the height of the real-estate market boom-when Kushner Cos.
agreed to buy 666 Fifth Avenue for $1.8 billion, then a record for a
Manhattan building. All of it was borrowed except for $50 million. The
company still holds half of a $1.2 billion mortgage, on which it hasn't paid
a cent. The full amount is due in February 2019.
The strain has become increasingly evident across their holdings. One person
familiar with the company's finances describes the tower, with its low
ceilings and outdated floor plan, as the Jenga puzzle piece that could set
the empire teetering.
The family's idea of how to salvage its investment requires razing the
building to the ground and constructing an 80-story tower with greatly
expanded retail areas and high-end condominiums. No short- or medium-term
return can be expected from such an aggressive approach. Even a return over
the long run would be speculative, though Morali describes the plan as
"ambitious and creative." That narrows the pool of investors to those
interested in something other than profit. Real estate experts say this
almost certainly precludes U.S. companies. More likely: a foreign firm
looking to get capital out of its country or seeking a trophy Manhattan
property.
Before Trump began his rise to the presidency and the 36-year-old Kushner
became his senior adviser, 666 Fifth Avenue struggled to attract serious
offers. Meetings the Kushners requested were often rejected. After Trump's
nomination, billions of dollars in Asian and Middle Eastern money came under
discussion. Two potential deals that made it to advanced stages, with
China'sAnbang Insurance Group and a top Qatari sheikh, fell apart.
The new status meant the Kushners' calls were more readily answered-but they
came with additional scrutiny, not only of the Kushners but also of the
investors. Since January, the company has ceased entering into business
relationships with sovereign entities, Morali said. Federal investigators
want to know if the Fifth Avenue building's finances came up in a
post-election meeting Kushner had with the head of Russia's state-controlled
development bank.
The Kushners have reason to look far afield. Even after selling big sections
of 666 Fifth in 2011, they have increased their own vulnerability by
borrowing more money for other deals, people close to the company say. After
a refinancing, the deed to 666 Fifth sits in an escrow account, ready to be
seized by lenders in a default, an action indicating their trust has grown
thin. The mortgage will become even more of a burden after a scheduled jump
in interest rates in December. Under some dire circumstances, guarantees in
the refinancing agreement could even give lenders the ability to go after
the family's other assets-many of which are also underpinned by debt.
Towering Debt
Debt payments have almost always eclipsed net income at 666 Fifth Avenue. A
two-year respite followed a hard-fought loan refinancing deal.
(photo: Bloomberg)
While 666 Fifth Avenue has been a drain, Kushner Cos. has continued to make
big moves across New York City, and company officials say those assets
insulate the business. It has expanded its footprint by $1 billion,
including the Times building and properties formerly owned by the Jehovah's
Witnesses, according to data firm Real Capital Analytics. Morali, sitting in
a conference room below a painting of the company's founders-Jared Kushner's
grandparents-says even a worst-case scenario at 666 Fifth would do minor
damage to the company, because "it's just one small piece of the portfolio."
But after selling 18,000 mid-Atlantic apartments in 2007, the Kushners only
partially own a substantial number of the company's assets. In many cases,
Kushner Cos. has partnered with well-capitalized firms that want to invest
in real estate and seek out experienced locals for deals. These include the
Israeli firm Gaia Investment Corp. as well as Oaktree Capital Management,
the Los Angeles-based asset manager, and Stonehage Fleming, a London firm
that invests money on behalf of 250 wealthy families primarily from Europe,
the Middle East, and Africa.
As a privately held business, Kushners Cos. doesn't generally have to
disclose how ownership breaks down between it and its partners, and Morali
declined to provide details. But there are clues. One Brooklyn development
site purchased in 2014 for about $75 million and heralded by the real estate
press as "Jared Kushner's big Gowanus project"-so-named for the canal it
abuts-is in fact barely owned by the Kushners at all. SL Green Realty Corp.,
their partner in the endeavor, owns 95 percent of it, according to a
regulatory filing. The remaining 5 percent is split between the Kushners,
and LIVWRK, another developer. Elsewhere in Brooklyn, where the Kushners
partnered with RFR Realty to purchase buildings owned by the Jehovah's
Witnesses, they own about half of the project's equity.
It's here where the Kushners have scaled back. Among the six buildings the
partnership purchased for $375 million in 2013 is a 30-story hotel at 90
Sands Street scheduled to be turned over to the Kushner group later this
year. Kushner Cos. is now exiting the partnership and selling its stake to
RFR, Morali said. Leaving the property means narrowing its role in a planned
tech-centric Brooklyn office hub-its most ambitious project since purchasing
666 Fifth.
(photo: Bloomberg)
The Kushners are also extracting cash from properties in which they do own
significant stakes. Six floors of the former New York Times building, which
they purchased for $295 million in 2015, now have $370 million of debt
against them, loan documents show. Of that amount, at least $59 million was
used to return cash to the Kushners.
Across the Hudson River at Trump Bay Street, a luxury residential building
in Jersey City, the family plans to take out $50 million, Bloomberg
previously reported. Efforts over the summer to obtain a $250 million
mortgage for the property struggled in the face of controversy around their
use of an investment-for-visa program. Now the company has found a lender,
Morali says, declining to name the firm.
Central to the fate of 666 Fifth yet noticeably absent from the gyrations
around it, is Steve Roth, Vornado's chairman and chief executive officer,
whose firm owns almost half the building's offices and most of its stores
following a 2011 refinancing. When an analyst asked Roth about 666 Fifth in
an August earnings call, he demurred, saying the issue was being debated.
Two spokesmen for Roth declined to comment for this article.
In 2014, at a meeting in his 57th Street headquarters with Jared Kushner and
his father, Charles Kushner, as well as others wrestling with how to save
the investment, Roth argued against the Kushners' extravagant renovation
plans, saying, "It would be worth a lot more if it was just dirt," according
to two people who were there.
Roth is famous for his unsentimental patience. In an April letter to
investors concerning a recent dip in demand for retail property, he
described an opportunity to "feed on the carnage" for those with ample
capital at their disposal-a chance to profit from the overleveraged and
underprepared.
That's what Roth saw when his firm came to Kushner's rescue in 2011,
according to three people familiar with his thinking at the time. For $80
million and the assumption of half the debt, Vornado put itself in the best
position to become 666 Fifth's sole owner in the event of a restructuring or
worse.
This may help to explain why Vornado has allowed Kushner Cos. to shoulder
the burden of hunting for potential partners and lenders, according to four
people. Another reason: Roth's concern about his own legacy. Now in his
mid-70s, having exited retirement only after his handpicked successor left
Vornado, he has little desire to gamble his career on a family and a
property with uncertain futures, the people said.
Morali said Vornado and Kushner Cos. are equal partners in the tower and
will jointly decide its fate.
Gold on Fifth Avenue
Leasing and selling the building's stores on the world's most valuable
shopping strip helped the Kushners dig themselves out of a deep hole.
(photo: Bloomberg)
The troubles caused by 666 Fifth have their origins in the overheated moment
of its purchase. On Thanksgiving of 2006, Charlie Kushner made clear he
wanted all employees in the office the next day. Tishman Speyer Properties,
a real estate company with a New York pedigree his own company lacked, was
looking to sell an office tower in midtown Manhattan, and Kushner wanted it.
Tishman was demanding that the deal be done fast. The financing had to be
put together by Sunday.
In retrospect, it would be difficult to imagine a worse time for the
Kushners to have entered Manhattan real estate. Pension funds, insurers and
other blue-chip firms wanted in on a market that many believed would climb
forever, and landlords were loath to sell. The combination of new demand and
limited supply created frenzy over each transaction, doubling prices.
Buying High
Shortly after Kushner Cos. bought 666 Fifth, rental rates dropped
precipitously.
(photo: Bloomberg)
The Kushners didn't have much cash on hand, weren't in the habit of taking
out 10-figure mortgages and weren't very well known, so they needed an
aggressive offer. Charlie Kushner's dealmakers couldn't get the numbers to
add up, but he didn't care. "I buy it, you make it work," he told his
accountants, according to a participant in the meeting.
A kingmaker in New Jersey Democratic politics, Kushner had been out of
prison just three months for making illegal campaign contributions and, in a
bizarre episode that the tabloids couldn't get enough of, hiring a
prostitute to entrap his brother-in-law. He wanted a prestige Manhattan
property to mark a fresh start for the family business, which would now be
led, if mostly in appearance, by his eldest child, Jared Kushner, who
frequently consulted his father. Charlie had recently been turned down for
towers including the Seagram Building. He saw securing Tishman's property as
a way to plant his flag.
Over the weekend, the Kushners and their partners worked out a deal in which
they would put down $50 million-a pittance. Barclays Bank Plc and UBS Group
AG funded $1.75 billion of the purchase, $535 million of it in short-term,
high-interest loans. The terms were demanding, bordering on untenable.
Nevertheless, after the deal closed in January 2007, the group celebrated
with a party at one of the most expensive restaurants in New York, Per Se.
Everyone there was given a pair of silver cufflinks fashioned in the
embossed look of the building's exterior.
High-stakes business mixed with politics and unwelcome publicity isn't new
to Jared Kushner. It characterized his initiation into the family firm. He
was 23, just out of Harvard, when he was thrust into its leadership after
his father went to prison.
Charlie and his three siblings had inherited a small real estate company
from their parents, and under Charlie's leadership, Kushner Cos. flourished.
Over two decades, Charlie amassed about 25,000 middle- and working-class
apartments, making him one of New Jersey's largest landlords. Plain but
lucrative, these massive suburban complexes threw off enough cash to fuel
his political ambitions. As a major donor to the national Democratic Party,
Charlie received visits from President Bill Clinton; he was also the single
biggest financial backer of former New Jersey Governor Jim McGreevey, who
appointed him to the board of the Port Authority of New York and New Jersey.
But Charlie used company money for his political donations, and his siblings
didn't care for it, leading to the infamous lawsuit and prosecution.
Then-U.S. Attorney Chris Christie began a grand jury investigation.
The arrest and its coverage made Jared's entry into the company hierarchy a
crucible and strengthened his already fierce attachment to his father.
During Charlie Kushner's 14-month incarceration in an Alabama penitentiary,
Jared flew down every Sunday. For years, he carried a wallet his dad had
made him in the prison workshop. While his father was behind bars, Jared
bought the New York Observer newspaper as a platform to reach the Manhattan
elite and began pushing for the company to leave New Jersey behind. He
ultimately set his sights on 666 Fifth.
At 1.5 million square feet, the 1950s building ranks nowhere near the
largest of New York skyscrapers. Its low ceilings and closely built columns
give it a dark, closed-off feel-anathema in the era of light-filled
open-plan offices.
"If that building was beginning to look obsolete at the time of purchase, it
is totally obsolete now," says Jesse Keenan, a Harvard lecturer on
architecture who wrote a 2013 report on the building for Kushner Cos. He
notes that Manhattan is in the midst of its largest office-construction boom
since the 1980s. The most prestigious occupants-hedge funds, private equity
and law firms-are moving west to new buildings, shifting the center of
gravity away from the Kushners.
As the building's fate became increasingly bleak, the family, rather than
forfeit, decided to go big. Their plan was to raze the structure and replace
it with a glimmering Zaha Hadid-designed tower of massive proportions. The
scale of the plan stirred the imagination, but the costs were astronomical
because they involved repurchasing the property rights they'd sold to keep
the original building afloat. That alone would require more than $1 billion.
The elaborate renderings of the reconfigured building promised a kind of
Time Warner Center on steroids: more than 80 stories with five levels of
retail, a hotel and record-breaking expensive luxury condos on top.
For all its inspiring visuals, investors who reviewed the early version of
the Kushners' pitch book noticed a conspicuous omission: numbers. The
company circulated a revised pitch, complete with financials, and the scale
of the debt and risk involved were jarring. With a $4 billion construction
loan and a business model that assumed the condos would sell at the
aggressive price of $9,000 per square foot, it was similar to the leap of
faith the Kushners had taken by overpaying for the original building a
decade earlier, just before the boom went bust. A simple downturn in
high-end New York real estate and the colossal new building would be in a
hole of titanic proportions.
One early stop on the Kushners' tour: Israel. Familiar with the country from
their involvement in Jewish business ventures and philanthropy, they were
able to partner with companies including Harel Insurance, Bank Leumi and
Bank Hapoalim BM on various New York properties. But none invested in 666
Fifth.
Richard Goettlich, whom Charlie Kushner met in prison and hired, used his
contacts to find others, former company employees say. In 2012, he
approached Gaia, a firm connected to one of Israel's wealthiest families,
the Steinmetzes, whose fortune is derived from African diamonds. Gaia
partnered with Kushner on a number of New York City buildings but not 666
Fifth. Goettlich didn't respond to several requests for comment.
A pitch was made to Bernard Arnault, France's richest man and the CEO of
luxury-goods maker LVMH, to see if he might buy into the project's
multi-floor mall. He passed as well. A spokesman for Arnault declined to
comment.
As 2015 drew to a close, there were no serious offers, and many in the
company figured the plans were all but dead. Then Donald Trump began his
meteoric political rise, and Jared Kushner was right on his coattails.
Discussions heated up. Sheikh Hamad bin Jassim Al Thani, the Qatari
businessman who had once run that nation's sovereign-wealth fund, had
earlier declined to even take a meeting with the Kushner Cos. executives,
according to people familiar with the talks. In 2016, Al Thani agreed to
invest $500 million from the private fund he runs, contingent on investment
from others, which failed to materialize.
Also in 2016, Charlie and Jared met in New York with executives from the
government-controlled South Korean sovereign fund asking for an investment
in 666 Fifth. The Korea Investment Corporation didn't invest, people
familiar with the talks said.
The Kushners opened discussions with Anbang, the Chinese insurance giant
with such close ties to the ruling party that the federal government has
forbidden it from buying near a U.S. military base. During months of
talks-before and after the election-Jared Kushner negotiated a proposal for
Anbang to put billions into the building and allow the family firm to take
away $400 million in cash. After details of that plan were made public in
March, Anbang walked away amid a crackdown on foreign investments by Chinese
regulators.
Representatives of Kushners Cos. also discussed the project with an
executive working for Fawaz Alhokair, a Saudi billionaire whose company has
vast holdings in shopping malls, hotels and real estate overseas. Alhokair
made a splash in the U.S. when he paid $87.7 million for a Park Avenue
penthouse. Alhokair's company considered a possible investment in late 2015,
according to Simon Marshall, who was CEO of Alhokair until this year.
Marshall said he analyzed the retail portion of the proposal. The building's
financial viability relied on a plan to construct five levels of luxury
shopping at the base of a gleaming new tower. Marshall, who had overseen
Alhokair's retail operations around the world, said he found the projections
to be more than the New York luxury-retail market would bear.
"The numbers just didn't work," Marshall said in a telephone interview,
adding that politics played no role in the decision not to invest. The
proposal remained on the table into late 2016, he said, as Trump continued
on his path to the White House. Fawaz Alhokair didn't respond to calls and
emails for comment; Kushner Cos. also declined comment.
Staying in the Red
JAN 2007
The Kushners buy 666 Fifth for $1.8B, mostly with debt. Of that, $535M was
in short-term, high interest loans.
JULY 2008
Kushner Cos. sells 49 percent of the retail spaces to Carlyle Group LP and
Crown Acquisitions for $525M, and refinances the short-term debt.
MARCH 2011
The Kushner group sells one retail unit to Zara-owner Inditex SA for $324M.
2011
Vornado agrees to buy a 49.5 percent stake in the tower's office spaces and
adds $80 million of new equity. Kushner Cos. adds $30M. A portion of the
principal loan-$115M-becomes a "hope note," considered unlikely to be
repaid.
JULY 2012
Vornado agrees to buy remaining retail space from Kushner and Carlyle for
$707M.
Even after all of these deals, the Kushners still haven't touched the $1.1B
principal.
Federal investigators know that Kushner met with then-Russian Ambassador
Sergey Kislyak in Trump Tower last December and later met with Sergey
Gorkov, head of the Kremlin-controlled VEB bank in two meetings that he
didn't, at first, disclose publicly or on his application for his
national-security clearance. After those meetings became public, Kushner and
the White House said the contacts were made in his role as a Trump adviser
and didn't involve discussion of his family business. But VEB and a
spokesman for Russian President Vladimir Putin described the meetings quite
differently, noted Adam Schiff of California, the top Democrat on the House
Intelligence Committee. They said that Kushner was there in his capacity as
head of his family's real estate business. Investigators say they are
studying those accounts with keen interest.
"I think it is part of a pattern of outreach to Russian financial interests,
which are essentially Vladimir Putin and his oligarch circle, by Trump
family members," said Senator Richard Blumenthal of Connecticut, a Democrat
on the Senate Judiciary Committee. "The financial dealings are important
because we know that the Russian playbook is to engage and compromise
foreign leaders." He added, "Whether this meeting and contact are
significant remains to be understood." -With assistance from Billy House and
Steven T. Dennis.
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