Cover Story

Hard Knocks and Hard Bargains
BY SHANKAR P.

Since tapping his credit card to buy his first building, David Lichtenstein has amassed a real estate empire worth some $2 billion and counting

When Lichtenstein first set eyes on the 100-year-old building that serves as Lightstone's headquaters, he immediately wanted to own it. Inside: fine art and red silk wall coverings.

 David Lichtenstein will need more bookshelves if he keeps buying real estate at his current pace. The wall-to-wall display cases in his Lakewood offices groan with plaques celebrating his many deals. “Our institutional partners are calling daily,” he says.

Hardly a month passes when Lichtenstein, 42, doesn’t add a new plaque to the shelves. The Lightstone Group, the real estate investment firm he heads as chairman, has been among the most active property buyers in the U.S. in the last two years. This year Lightstone has snapped up portfolios of apartments, shopping centers and industrial space worth more than $1 billion.

Just last month Lightstone paid $175 million to acquire a 55-building apartment portfolio in Virginia and North Carolina from F&W Management of Roanoke, Virginia. Lightstone also paid chipmaker Intel $10 million for a six-building high-tech industrial complex in Las Piedras, Puerto Rico.
 There’s much more in the works. Lightstone currently has contracts to acquire nearly $1 billion of property. That includes the acquisition of Prime Retail, a Baltimore real estate investment trust, for $115 million and the assumption of $523 million in debt.

This deal, however, has come under fire. Two major Prime shareholders—Merrill Lynch and Fortress Investment Trust of New York—have objected to the terms of the acquisition. In addition, four Prime shareholders served notice in August that they intended to file a class action lawsuit against the deal. Shareholders are to vote on the acquisition on November 18.

Meanwhile, Lightstone is plowing ahead with plans to pay $50 million for a portfolio of apartment complexes in Washington, D.C., and to acquire a 400,000-sq.-ft. industrial facility in Bridgewater. At any time, Lightstone has access to capital to acquire some $500 million worth of property. “There is not a more aggressive investor in New Jersey in real estate than us,” Lichtenstein says.
Founded in 1988, Lightstone owns and manages a diversified portfolio in 18 states and Puerto Rico. Included are 16,500 apartments and 9.1 million sq. ft. of office, industrial and retail space. Lichtenstein hesitates to put a market value on this portfolio, saying that it fluctuates. He estimates its worth at between $1 billion and $2 billion.

The Brooklyn-born Lichtenstein is a first-generation entrepreneur. His father, Samuel, taught school. Although Lichtenstein took real estate and accounting courses at New York University and the University of Pennsylvania’s Wharton School, he says his real education came in “the school of hard knocks.” When he saw real estate markets booming all around him in the mid-1980s, he decided to make that his career.

His first investment was a two-family residence that he bought for $89,000 in 1986, raising the $12,000 down payment by tapping his savings and credit cards. Two years later his portfolio consisted of three apartment buildings in New Jersey. Next came an 18-unit building, and so on, as Lightstone grew without any overall strategic plan.

Our goal is to create an asset base one step at a time,” Lichtenstein says. “We’re all over the place, from retail to industrial. We are always looking for a difference between the real value of a property and its market price at the time of a deal.”

Lichtenstein enjoys treating colleagues to cruises around Manhattan on his yacht the Argonauta. The Brooklyn-born mogul ofter points out properties he has brought, or sold, or would like to buy.


In its first decade, Lightstone focused mainly on apartment complexes. But about three years ago, Lichtenstein felt the apartment market was becoming too pricey, and he found opportunities in retail space. Lightstone was soon a bidder for virtually every promising mall on the market and currently owns 4.5 million sq. ft. of retail space.

Lichtenstein says the retail market “has gotten tight” and he is shifting his focus to industrial space. Meanwhile, today’s office markets “are a disaster,” he says. “People who bought office space in the last two or three years should start writing their own obituary.”

While Lichtenstein has no overall plan, he does have investment ground rules. “To a man with a hammer, everything looks like a nail, but we have the discipline not to lower our risk standards,” he says. And when it comes to return on investment, he wants nothing less than 20%.

David can break down the economic information in a deal and put it in perspective in terms of tenants, location, the vacancy factor and future earnings with uncanny accuracy,” says P. G. Waxman, a friend of 25 years who owns Waxman Realty, a residential brokerage firm in Lakewood. “Where other s may shy away, David sees hidden potential and pursues it.”

Waxman points to Lightstone’s recent purchase of its 430,000-sq.-ft. Puerto Rican industrial facility from Intel. The California chip giant had carried the property on its books for $31 million but found few ready takers. Lichtenstein paid $10 million for the vacant facility and figures it will be worth $25 million once it is fully leased. “It was a deal no one else wanted, and he saw the real issues and the transparent issues,” Waxman says.
David has a knack for finding the hidden value in deals such as his recent work in Puerto Rico,” concurs William Bendernagel, managing director of the commercial real estate group at Citigroup, who has worked with Lichtenstein for years. Moreover, “As a real point of distinction in the real estate business, David closes when he says he will close—he delivers on promises.”

Lichtenstein doesn’t bite at every deal. When Waxman recently offered him a large tract of land Lichtenstein wasn’t interested. “It was a tremendous opportunity and he passed it up,” Waxman says. That’s because Lightstone has little use for raw land. “We don’t invest in anything which doesn’t have cash flow,” Lichtenstein says.

Jeff Joseph, CEO of Presidential Realty, a real estate investment trust in Westchester, New York, says Lichtenstein is both fleet-footed and dogged enough to pursue an evasive deal. “We are very comfortable with him,” says Joseph, who has done business with Lichtenstein for about five years, ever since they worked through what Joseph calls a “very complicated deal” involving residential property in New York City.

Lichtenstein, who is the father of five children, fell in love with the 100-year-old building that houses Lightstone when Waxman showed it to him three years ago. It had been in the family of Jay Gould, the legendary financial robber baron, before Lightstone acquired it from an architectural firm that occupied the building in later years.

Lichtenstein has a taste for fine art but does not seem particular about what he buys. He shows off a large painting of a garden that he bought “for a large sum” at an auction at the Louvre in Paris, but cannot recall the name of the painter. “Frankly, I liked it because it matched the color of the walls,” which are adorned in dark red silk.

Several times a year, Lichtenstein invites business partners on trips aboard the Argonauta, his 48-foot Hateras motor yacht. As the yacht glides around Manhattan, Lichtenstein points to the buildings he owns or wants to buy. Those who sail with him know there will shortly be more financial plaques on his already crowded walls.
TURNING A DEAL INTO A STEAL

The interior of Lightstone's Lakewood headquarters brings to mind posh hotel.
Nearly two years ago, when The Lightstone Group made a pitch for a retail real estate portfolio owned by Acadia Realty Trust of White Plains, New York, the deal seemed like one to avoid.
It was just after the September 11 attacks, and Lightstone Chairman David Lichtenstein recalls that “people were definitely talking recession.” The unwieldy portfolio had 17 properties spread across seven states in the Northeast, the Mid-Atlantic and the Southeast. Worse, six of the retail properties had anchor stores that were in bankruptcy—Kmart discount emporiums and four Ames department stores. The portfolio had a 20% vacancy rate that seemed headed to 30%. On top of all that, Acadia had borrowed against the properties at well above market interest rates and the loans couldn’t be prepaid.
Lichtenstein says he felt he could unwind the problems and extract a profit. “You could not put a mortgage on it, so it required a lot of capital, and that put off a lot of investors,” he says. Of course, it also reduced bidding competition. Moreover, Lichtenstein felt that three of the properties had strong locations that Lightstone could lease to new tenants.
Lightstone bought the portfolio for less than its appraised value of $78 million and immediately got to work. Last year Lightstone signed Home Depot for a 104,000-sq.-ft. building at a mall in Dothan, Alabama, and soon found other tenants. And while the Ames stores closed because of bankruptcy, the Kmart stores stayed put. Today, the vacancy rate for the Acadia portfolio is down to 10%. If Lichtenstein were to sell the portfolio today, he says he could realize a gain of somewhere north of 25%.