Ex-L.A. Dodgers Owner and Boston Real Estate Mogul Frank McCourt Looks to Expand Big Apple Portfolio
The Real Deal | |
In June 2011, the Dodgers filed for bankruptcy, bringing to a head the battle between McCourt and Major League Baseball Commissioner Bud Selig. Selig vetoed a 17-year TV-rights deal between the Dodgers and Rupert Murdoch’s News Corp. worth about $3 billion, leaving McCourt exposed to the team’s mounting debt and struggling to meet his hefty payroll. Meanwhile, news outlets blamed the McCourts allegedly extravagant lifestyle — including their private jet and L.A. compound — for the team’s financial troubles.
“During that apocalyptic time, when everyone seemed to be piling on him … you’d never want to read the paper,” recalled Peter Wilhelm, former Dodgers CFO and a senior managing director at the McCourt Partners, the mogul’s real estate investment and development company. “It was as though this guy was the second coming of the devil.”
Two years later, McCourt is making headlines for different reasons.
In August, his real estate firm acquired a development site on Manhattan’s Far West Side for $167 million. That was more than triple the price paid for the site in 2011 by the previous owners, a partnership between Sherwood Equities and Long Wharf Real Estate Partners.
The deal is McCourt’s first major commercial transaction since the 2012 sale of the Dodgers for $2.15 billion — and his first-ever in New York.
For McCourt, who long ago sold his Boston property, the real estate transaction marks a fresh start and the beginning of what he hopes will be a global expansion for his company centered on real estate, sports and media.
McCourt Partners — a joint-venture between McCourt Global, a company formed in 2007 by McCourt with his sons Drew and Travis, and financial services firm Guggenheim Partners, which now co-owns the Dodgers — is armed with more than $550 million in assets and capital. It’s recruited a team in New York and plans on making more strategic investments in Manhattan in the coming months, McCourt told The Real Deal.
Sherwood CEO Jeffrey Katz said McCourt chose his first New York property wisely, adding that he was smart to get on the industry’s radar.
“You come to New York, you want to have a presence. If you buy a mid-block infill site on the Upper East Side to build a 12-story apartment house, it’s hardly noticeable,” Katz said. “This will be very high-profile and will get him into the deal stream. People want to do business with people who are active.”
Starting with a clean slate is a “great feeling,” McCourt said, speaking from his new 43rd-floor office at 888 Seventh Avenue, which has a sprawling view of Central Park. “Being able to hit that reset button and grow a business in exactly the way you want to grow it [is great.] When I built the business the first time, I didn’t have all the capital in the world, and I loved those times — but I love these more.”
McCourt, 60, grew up in the Boston suburb of Watertown, the place that drew national attention during the manhunt for the Boston Marathon bombers. His family legacy: building and baseball.
His grandfather was an owner of the Boston Braves, while his great grandfather, an immigrant from Northern Ireland, started the John McCourt Company, a road-building business, in 1893. The company eventually became a major public works contractor, building the road that was replaced by the Big Dig, the infamous Boston tunnel and highway project, and working on Logan Airport. McCourt’s brother Richard now heads McCourt Construction, an off-shoot of that company.
“Most of the infrastructure in Boston we have touched more than one time over the course of 120 years,” McCourt said. “I knew from early on that I wanted to build things. I learned that at the knee of my dad. I used to love going to work with him and having him put me on a bulldozer or a front-end loader.”
In the late 1970s, after graduating from Georgetown University, McCourt jumped into the Boston real estate game himself.
In his most high-profile deal, he bought up several lots on an abandoned waterfront rail yard in the 1980s. For years, McCourt hyped the area as a new frontier for Boston development. But he didn’t end up developing it. Instead, he used the 24-acre site as collateral for a $145 million loan from News Corp. to buy the Dodgers — along with their stadium and 260 acres of Los Angeles land — for $421 million in 2004. McCourt would also be granted future media rights to the team as part of the deal, a valuable commodity which would allow him to make a deal with a TV network.
Two years later, McCourt turned the Boston land over to News Corp. to satisfy the loan. News Corp. then sold it to developer John Hynes III and Morgan Stanley for $203.7 million.
The site is now being turned into a $3 billion mixed-use project.
McCourt profited handsomely in the meantime — reportedly pulling in around $86 million from deals made with the state for use of his land as a construction staging area during the Big Dig. He also accumulated an impressive collection of personal homes, including a $16 million Brookline mansion, a Cape Cod estate and a condo in the ski town of Vail, according to published reports.
“Where I think we were most effective with the actual land was cleaning it up and then methodically developing the narrative that this area could be the next great area of Boston, much like the Back Bay was in the late 1800s,” McCourt said.
The Dodgers years
In the early years of his Dodgers ownership, McCourt and his wife, Jamie, were seen as saviors. The team had struggled on and off the field, sitting out the playoffs for most of the prior decade and reportedly losing around $50 million a year.
Under McCourt, the team made it to the postseason four times, and fans were willing to overlook increased ticket prices as a result of $150 million in improvements to Dodger Stadium.
However, McCourt’s reputation in L.A. soon soured as reports emerged that he was struggling to pay the team’s $95 million payroll in the wake of Selig’s TV deal veto. With his divorce, ultimately the costliest in California’s history, playing out on the gossip pages, the press homed in on the lavish lifestyle of McCourt and his wife as the cause of the financial straits.
McCourt maintains that it was the loss of the lucrative TV deal that threw the Dodgers into short-term financial disarray. Selig was quoted as saying the deal “would have the effect of mortgaging the future of the franchise to the long-term detriment of the club and its fans.”
“I made decisions during the course of the eight years that I wouldn’t have made if I knew I was going to be blocked from making a $7 billion [media deal],” McCourt told TRD.
In the end, McCourt sold the team, the stadium and the accompanying land for a record $2.15 billion to principals of Guggenheim, along with retired basketball star Magic Johnson, former Atlanta Braves and Washington Nationals President Stan Kasten and other investors.
The deal laid the groundwork for McCourt’s real estate comeback.
As part of the complex sale, Guggenheim put the 260 acres of land, plus an additional $400 million in equity, into a joint venture with McCourt. That joint venture, which purchased the Far West Side site, is now managed by McCourt, who receives a management fee (reportedly $5.5 million in year one). The profits arising from the use of the 260 acres of land by Dodger Stadium as a parking facility remain with the joint venture until the land is sold, at which point McCourt and Guggenheim will split the distribution evenly.
Meanwhile, McCourt maintains the option of buying back a portion or portions of the 260 acres from the joint venture for sports-related enterprises at any time, and for an agreed upon price.
McCourt’s role in the joint venture is to source and originate transactions, while Guggenheim vets and ultimately approves each deal.
“We’ve got patient capital,” Wilhelm said of the fund. “It can be rescue capital, long-term capital, whatever-we-want-it-to-be capital. It’s almost every color of money.”
Indisputably, McCourt has succeeded in creating a great deal of wealth out of notably few transactions. Some, such as his attorney Robert Ivanhoe, the head of real estate at law firm Greenberg Traurig, said that shows that he “has a measured and sober way of taking on risk.”
But others described him as a poster boy for over-leveraging.
“On the one hand, he’s an absolute genius because he was able to buy the team for just a few hundred million dollars with virtually no cash and then sell it for over $2 billion,” said one person familiar with the situation. “Or, one could argue that he’s everything that’s wrong with the system. He basically played the system really well.”
While the lean, white-haired McCourt has a charming demeanor, he’s also a tough negotiator, sources said — though not the villain portrayed in the papers.
“The whole Dodgers saga is not the Frank McCourt I’ve seen,” Ivanhoe said. “He’s cordial and he’s warm, but he’s tough when he needs to be. When he says no, it’s no.”
The new venture
McCourt decided New York should be the global headquarters for his new fund, inking a deal for his 10,000-square-foot Manhattan office early last year.
“From a business perspective, with one of our focuses being real estate, we feel this is the city to be in,” he said. “This is a great base to be operating from when you’re thinking from a global perspective.”
He also personally relocated to the city, snapping up a trophy apartment. Public records show he acquired a $50 million six-bedroom co-op at 944 Fifth Avenue from David Hamamoto, the CEO of NorthStar Realty Finance. The broker on the deal, John Burger of Brown Harris Stevens, declined to comment.
After months of deliberation on the fund’s direction, McCourt scooped up the vacant site at 356 10th Avenue in August. No brokers were involved in the transaction.
“We were trying to figure out, do we want to become more of a development company or more of a buy-and-hold real estate company?” Wilhelm explained. “Frank kept coming back to sexy development deals and the idea of building important buildings. There were some trophy assets that we were looking to do on a buy-and-hold basis in big cities, which also piqued his fancy, but these mixed-use developments, which had residential up top and office and retail at the bottom became a recurring theme.”
Indeed, the transaction was sexy, especially since the land was valued so much higher than the $42 million that the Sherwood partnership paid British banking giant Barclays for it in 2011. (Barclays wrested control of the site earlier from developer Gary Barnett.)
But according to Sherwood’s Katz, McCourt paid market rate.
“It wasn’t that the price he paid for it was so high. It was that the price we bought it for was so low,” Katz said. “We bought it when the market was in the doldrums.… Hudson Yards hadn’t started yet and, in that environment, people didn’t know if it would ever happen. So we got a heavy double discount.”
McCourt plans to construct a 730,000-square-foot tower that will include residential condominiums on top and retail on bottom. What’s in between is still undecided; the fund is debating between office and hotel use, McCourt said. Once that’s set, McCourt may solicit submissions from potential architects. A construction start date has not yet been determined.
McCourt and his partners have identified development as their best chance at success.
“Returns are going to have to be in projects which have a development aspect to them, whether it’s from the ground up or value-add,” said Henry Silverman, global head of real estate at Guggenheim. “Buying a completed office building net-leased to a credit tenant at a 2- or 3-percent cap rate is, in our opinion, a recipe to lose money, and it’s a view that McCourt shares with us.”
McCourt agreed: “Just competing on price for existing product isn’t going to be where we’ll succeed.”
So far, McCourt has not hired any brokers in New York. But, he said, a number of brokerages have approached him with prospective deals.
Meanwhile, he has assembled a team of about 30 professionals in his New York and L.A. offices to handle all of his interests, including real estate. Ten of those staffers are actively sourcing deals in New York, L.A. and other major urban markets. But those hires are not former brokers or execs from New York development firms — and some are straight out of business school. A limit has not been set on how much of the company’s capital will be deployed in any given market, a spokesperson said.
At press time, negotiations were underway for another New York site, said McCourt, who declined to offer any specifics. The team has already passed up on two significant New York deals, said Greenberg Traurig’s Ivanhoe, pointing to their fussiness as a potential sign of future success.
“This market is so crazy that a lot of investors, particularly non-New Yorkers, want to plow ahead in order to invest here no matter what, and so they don’t always do their homework or they hold their nose through the problems to win competitive bids,” he said. “Frank has a much more thoughtful and sober approach. He passed on two hairier deals before he settled on this one, which was probably the right decision.”
While McCourt is keeping mum about his next deal, he’s bullish on New York.
“If you can’t get excited about New York looking out that window, there’s something seriously wrong with you,” he said as he stared out at Central Park.