#357 - Dov Hertz - Founder @ DH Property Holdings, LLC - The Greatest Land Assembler New York City Has Ever Seen

Chris Powers: All right, Dov, thanks for joining me today on the show. 

Dov Hertz: My pleasure, Chris. I look forward to our conversation. 

Chris Powers: So, let's start. You were at a conference, orP maybe it had been a series of meetings with Gary Barnett, and he asked you to work at XTEL. How did that whole relationship start, and what did it look like when you got to XTEL early in your career?

Dov Hertz: I knew Gary, but not well; we had briefly been at the same college. So I knew him from there, at the time that I fast forward now; however, many years later, 20, probably a few more years later, I was working as an investment sales broker in New York City. I had a deal that I presented to Gary.

I knew him, so I called him up on the phone. I said, Gary, I got this deal. The deal happened to have been in Toronto. I liked the deal as an investment and would have loved to have done it on my own, and I said, listen, Gary, I got this deal in Toronto; let's, this is it. I explained it to him, but I wanted something other than a fee.

I want a piece of the action. I want a piece of the deal. So he said, all right, let's take a look. So we went out and took a look at the deal. He liked it, but we ended up not buying the deal. Okay, but it began a conversation, and that conversation led to Gary saying, make me an offer; look, I like the way you think I have no, no one on the acquisition side, Gary, at that point.

In New York City, he had, I don't know, three people working for him. That was it. He had bought a portfolio of suburban office buildings and based, and he had a, I guess, a management office based in Louisville, Kentucky, but he had done one development deal in New York City, and that was it. At the time this was in 2003. He had done one development deal and bought and owned the Belnard, a large, square block on the Upper West Side, a rental.

And that was it; that's what he had. And we were working out of an apartment in the apartment building he bought. But to give you an idea, my office was in what used to be the kitchen, and that's how it started. And I said, well, what's my job? Tell me about my job. He says, your job is to find me deals. I said, okay, what are you looking for? It says nothing about how we can make money. You convince me it can make money. I'll buy it. 

Chris Powers: Okay. Set the stage; I'm going to spoiler alert when we meet, and your reputation is to be; I'm going to go ahead and say that the greatest land assembler that New York has ever witnessed, and now I want to go back to the XTEL, give me just a description.

What would it be like if you had to describe the New York market and assembling land? Like, what did you know? Did you even know how to assemble land when you got there? Or is this a learned skill that you learned working for Gary? 

Dov Hertz: I knew nothing. I was a real estate broker when I started with Gary. I was working on investment sales, which had nothing to do with land assemblage.

Absolutely nothing when I started there and realized that. Although Gary never articulated it, he wanted to focus on the development business. I started climbing in and understanding how the zoning in New York City works, which is the critical piece to assemble land. You've got to know where you can get the maximum FAR, what districts give you, what zone you can use for residential, what zone you can use for commercial, etc.

It was a learning experience to understand how New York City development works and identify underdeveloped blocks. It is pretty simple. You drive up and down the streets. And if you're in a 10 FAR zone and you see a four-story walk-up, a block full of four-story walk-ups, it's underdeveloped.

And then it's a question: Is it all pre-Internet? I started with Gary in 2003, and everything was done on paper. There was a big book with plot plans, and you interviewed Bob Knuckle. He showed you his map room. So his map room has all of those plot plans, right?

And shows every plot in Manhattan. And you had to look at the plot. Was it an irregularly shaped plot? Was it a regular-shaped plot? Which lots would you have to develop? Would you have to buy it? To have the best and most effective development site, the typical block in Manhattan is 200 feet.

You only need a residential building to build on a hundred by a hundred, which allows you to buy your typical building as a 20- or 25-footer, right? So you'd buy four buildings for 25-footers, and that's your development site. And then you'd buy the air rights from the other four 25-footers because transferring air rights has to be contiguous to the development site.

So I can't buy air rights for Block A across the street. 

Chris Powers: So wait, if you bought four, so you have 100 feet, you bought four 25s? 

Dov Hertz: They were 25 by 100s. That was the lot.

Chris Powers: So if you buy four of them, you get a hundred by a hundred. Why would you buy four more? Why would you buy the air rights next door so that you could build twice as tall of a building?

Dov Hertz: That is correct. So, again, this is pre-internet. So, if the people on the block found out that I was trying to assemble a residential development site, somebody would realize that this guy wasn't buying my building for my building. He's buying my building to knock it down and build a high-rise building.

Therefore, I can ask for more than the market would bear. Or the market be willing to pay. So, I had business cards. I had a Dove Hertz business card. I had a John Smith business card. I had a Peter Schwartz business card, and I would go to the different people on the block as different people, 

Chris Powers: how many identities did you take on over 14 years?

Everybody around town's like, what's up, Jack? Next guy, what's up, Sam? 

Dov Hertz: I said I was just a little guy. Looking to buy four-story walk-ups. That's all I was interested in.

Chris Powers: Is the zoning set in New York, or can you tell me if any zoning has been changed in the last 10 years? There are variances, but how long has the current zoning been in place? Can you change it, or is it what it is?

Dov Hertz: You can apply for a zoning change. It's extremely difficult in today's political environment. Forget it. You're not getting it at all. You could apply back then, but we only did something where you needed a zoning change. It's the easiest and simplest way to the finish line: to stay within the box, and the box allows whatever the zoning is. And we stayed; we just stayed in the box.

Chris Powers: And you bought 20 million deals over 14 years working at XTEL box by box. 

Dov Hertz: Put a B at the end of that, and yes, that's correct. So, it's a national audience. New York is an anomaly because it is the only city in the United States with the right zoning.

So, you don't have to go before a zoning board. You don't have to get entitlements. It's all laid out in a code. It is a big fat book. That's a zoning, and it has the zoning code. And that book tells you exactly every plot. What can you do on that plot of land? 

Chris Powers: Were air rights baked into it from the beginning?

When that one was first laid out, there weren't huge towers going up e. People probably hadn't imagined that air rights would be so important. Or was it baked in from the beginning? 

Dov Hertz: I think it was baked in from the beginning. The zoning was formalized.

I'm doing this by memory; it was in the seventies. UntilUntil then, it wasn't in the formal standardized context that it is today. That happened in the seventies, but air rights were baked in once it happened.

Chris Powers: Your job essentially became putting together the greatest sites in New York piece by piece.

Dov Hertz: Yeah. Find well-located underdeveloped blocks and assemble the buildings and the air rights. You're not done after you assemble buildings and air rights; you have tenants and buildings you want to knock down. New York City is blessed with rent-regulated tenants. We have both rent-stabilized and rent-controlled tenants.

And those tenants have rights. Their leases cannot be terminated, and you must buy them out to vacate them. So you're looking at your average assemblage, where you're building on a hundred by a hundred lot with the air rights, and you're probably building, I don't know, 200 000 square feet.

There are buildings, if not more, and you could be talking about 100 transactions to get to a developable property:

Buying the buildings

Buying out the tenants

Buying the air rights

Doing the whole thing

Getting it vacant 

Chris Powers: Regarding the tenant risk, do you bake that upfront? Are you like, look, let's get it bought, and we'll figure out tenant risks and asks, or is it all part of the same equation from the day you start looking at the site, or is it step by step?

 You'll get there if you spend enough time on it. 

Dov Hertz: Listen, I can't tell you that every single time I was a hundred percent successful in buying out every tenant, but so you're, there is tenant, there is risk. Today, that risk is even greater because of regulations that the city has put into place to make it more difficult to buy out tenants.

When I started, it was a lot easier. Some tenants made fortunes, millions of dollars because they were the holdouts. They were the last tenant to be bought out, holding up a multimillion-dollar development, and a very sharp attorney or attorneys represented them.

They made millions of dollars in rent for a studio rent-stabilized apartment. I had one guy to give you a story to illustrate this. I had one guy; we were assembling a site on Lexington and 86th Street. And the last tenant, the last holdout, and this guy lived in a studio apartment.

The first time I walked in there, I couldn't hardly open the door. He was a hoarder. I assume you're familiar with what a hoarder is. It literally. There was an aisle on either side; newspapers piled from floor to ceiling. And you could, that's how you got to the back of the apartment, down this aisle.

Right. It took me months to gain the guy's trust that he would even entertain a negotiation. We bought a four-story walk-up next door with a vacant studio apartment and moved him. We moved all his stuff into that studio apartment and paid him a few million dollars. He died six months later, six months after we moved him, and with no will and no heirs. The money went to New York State. 

Chris Powers: So what you're telling me is if any kids are listening to this, you can either have a brilliant career and get an education, or you can find the right building to live in, be a holdout, and get and secure the bag. There are two career paths in this world.

One of them is being a holdout in New York City. All right. We went through eight stories that we would tell people today about what it's like, some of these legendary stories of assembling some of the most iconic sites that have created some of the most iconic buildings in New York.

And I freaking loved it. So I can't wait to hear them again, but we will start at the tallest building. Central Park Tower is all over New York City. And you put together the site to do that, and it's an incredible story, so let's start on that story. What was it like to assemble the Central Park Tower site?

Dov Hertz: So most of it is your standard assemblage work. When I started at XTEL, Gary had already owned a piece, and the objective was to grow it. But there is one fascinating story that happened on that site. So, the site is on 50; it went from 57th Street to 58th Street. And on the 58th Street side, you have head-on views of Central Park, where the money is.

Those are the money views, the money views. The problem was that a competitor of ours bought a building on 58th Street that was a low-rise apartment building and had the same plan we did: knock the building down and build a high-rise. Now, had they built the high rise as originally planned we would, our views would have been blocked.

But there was a solution. Each of our lots was large enough that if we pulled a little to the left and he pulled a little to the right, everybody would be happy, and we could all have views. When we first approached that developer, he was unwilling to play. He said, no, I got my sight, and I'm going to do what I want, and too bad on you.

He had a tenant in his building who had a parking garage with a lease with some terms on it. And I approached the parking garage tenant and told him, listen, I will offer you Christmas in July. He says, what are you talking about? I said it's very simple.

You have a lease, correct? Yes. It goes for whatever, five or 10 years. Yes. Said you're running your business here. You do well here. Great location for the parking garage. So I'm doing great. I said, I'll tell you what I'm going to pay you X amount of dollars, and you don't have to do anything. You keep running your business.

You keep making money. You have to do one thing. And one thing only says, what do I have to do? I said, when anyone approaches you to negotiate a lease termination, you have to tell them, no, it's all you have to do. You have to call me, and you can only talk to a few people about a lease termination.

I am the only one who can talk on your behalf; that's it. And for that, here's a check. It says that's all I have to do. I said that's all you have to do. The guy says, deal. We waited a little bit of time. Of course, we knew that the developer needed him to knock the building down and build this building.

The developer approaches him. He says, listen, I'd like to sit down and talk to you about your lease. He says no. He says, well, you didn't even hear what I had to say. No, he says, but at least wait for my offer. No, calls me up, and he tells me that so and so approached him; what does he do? I said you keep saying no for a while.

I'll let you know when we change the tune. So this went on a couple of times. Finally, the guy said, listen, what must I do to get your attention? He says you don't have to do anything. You have to call this guy because I'm not talking to you. Once they realized that it was us, they realized we had him, but they first went to court and tried to terminate his lease.

For whatever reason, they claimed that he was in the vault under his lease. He wasn't using it per the use clause, which wasn't true. So we fought that for a fight. Ultimately, they realized that they weren't getting them out without us. And they ended up; we ended up negotiating the placement of the buildings so that it was mutually beneficial to everybody, plus a very nice payday. 

Chris Powers: How long did they negotiate him out of that lease take them? Was that over a year? Or months? Were those years? How long did they fight with the parking lot guy? 

Dov Hertz: It was at least a year. They took him to court. They took him to court to try and terminate his lease.

Chris Powers: And they called you. What'd you say? You said, Hey, it's Dove. What's up, guys? 

Dov Hertz: Okay, now it's time to play. 

Chris Powers: Were they ready? Were they ready to play, or did they still want to fight at that point? I would have been upset to call you if that was what it led to. I'm imagining the first call wasn't like all roses and butterflies.

Dov Hertz: Listen, I got to tell you something. New York City developers are extremely pragmatic, and ultimately, there's a goal. That goal is to develop the building. Time is money. And they fight until they realize that. There's no fighting anymore. I got to make a deal. And the president was for NATO. The president of NATO sat down with Gary and said, let's go; we got to cut a deal here.

Chris Powers: For context, how many pieces of land did you have to put together over how many years? 

Dov Hertz: That deal took about 10 years. 

Chris Powers: How big was that site?

Dov Hertz: Over a million square feet. 

Chris Powers: I know, but was it a hundred by a hundred or a 200 by 200? 

Dov Hertz: Oh, no, no. I am trying to remember the exact size. It was huge in New York, 

Chris Powers: Okay. And over 10 years, did you have holdouts along the way there? I'm assuming that somebody caught on along the way, so okay, we will hold. 

Dov Hertz: Yes, you had property owners who were holding out, you had tenants who were holding out, and it just, it, you got to keep at it, keep at it, this is a long, this is a long game, you're playing a long game here.

Chris Powers: And the capital that gets behind this, I'm assuming it's, maybe it's institutional, but do you go to a capital source and you're like, look, we're just going to keep buying property, and we're just going to keep holding it, we'll rent it, it's a covered land play. What kind of money would you like to get into a 10-year land assemblage?

Dov Hertz: Interestingly, you asked that question. In most instances, it is not institutional equity. They don't have the stomach for this. 

Chris Powers: Yeah, it's private. 

Dov Hertz: In most instances, it's private. It's high net-worth individuals who are willing to take the risk. It's friends and family money.

The developer himself puts up a significant portion of the equity. The payoff is huge because the difference between owning one building and owning a development site is phenomenal. Once you have completed the development and the assemblage, there's a tremendous markup to market, and you have a development site wrapped in a book.

There are developers in New York who still need to develop. They assemble sites, wrap them in a bow with approved plans, and then sell them to someone who builds them. When it comes to actual development, institutional equity will step in.

Chris Powers: And again, it's a map. You go to the map room, the Knuckles map room, and you can see the whole city. I'm assuming there are no more secrets, as everybody knows where all the potential sites are. Do people still fight to break up people's assemblages? Or is there a gentleman's agreement that you'll stay out of my hair once I start assembling the site?

Dov Hertz: We've had cases where somebody, let me do it this way. The guys playing in the upper echelon of the New York City development game usually don't step on each other's toes. Because we're all, they're all in the business for the long run, and karma is, is, the end of that sentence, I'm not going to say it, and, whatever you do comes back around at you, so, you're going to do that to me, I'm going to do that to you, there's no reason to do that, but you have it.

You have the lower-tier players who will follow developers. Somebody will follow a Gary Barnett and say, Gary's trying to assemble here. I will buy one of the other sites, one of the other properties in the assemblage, so I can use that as a holdout, hold them up, and get paid a lot of money.

I'll tell you this: There was an attorney. He's older now, and I'm curious if he's still practicing, but there was an attorney who would underdevelop blocks in rent-regulated buildings. And he'd knock at the door and find one tenant—just one in one potential development site.

And he'd say, this is the deal. At some point, you're going to sign an agreement with me. He signed them up now, and it has lasted for years. The disagreement lasted for years. And he said, at some point, someone's come knocking at your door and want to buy you out. You can't talk to him. He has to talk to me. And I promise you, he says, I'll take a third of what he gives you.

I will get you the most money of anyone in this entire assembled site. And he made he, this guy became a very wealthy man doing exactly that.

Chris Powers: I repeat, kids, you can go to Harvard and get an MBA. Or you can find that magic tenant and have that beach house you've always wanted. All right.

One Manhattan square assemblage, the path, mark fee, and lease. What happened there? 

Dov Hertz: That's an interesting story. So you had a piece of property on the edge of downtown Manhattan. A Pathmark supermarket, a one-story building with a parking lot, occupied it. Okay? The city rezoned it under a master plan, and you could now build a very tall building on that site.

It was a big site. The site had a fee owner and a leasehold. Pathmark had a long-term lease—I don't know, 49 years, something like that. And there was a fee owner. The fee owner could not monetize his rezoning because he had Pathmark.

Right. So, we identified this. And we realized that the path here was to buy the lease. If we control the lease, we would ultimately control the site instead of going the other way. We can; if we own the fee, we are subject to a path marks lease. But if we could buy Path Marks's lease, we could ultimately buy the fee position and develop the site.

So we went to Pathmark and negotiated the contract with them, and then the market tanked. Pathmark had already stated in their annual report that they would receive a lot of money on the buyout of their lease. So, the market tanked in 2008, and it made no sense for us to close on the lease purchase.

So, we kept trying to extend the lease. At one point, they said, okay, we had enough. And they terminated the contract, which was their right. The CEO, he left, he wasn't very happy with us, as you can imagine, it made him look a little foolish because he had announced that he, they were getting his windfall, a new CEO came in, the market picked up, we were now in 2009, the market picked up a little, we went back, renegotiated a purchase price for less than we had originally negotiated with, and bought the Pathmark, we bought the Pathmark lease, now we have to buy the fee, The fee was owned by two partners who didn't get along.

One wanted to sell, and one didn't. We ended up buying the position of one of the partners and negotiating a deal with the other partner, with the second partner, who didn't want to sell because we were now in the partnership. We could make life miserable for each other, or you could get enough money to make you very happy and call it a day.

That was the Pathmark, the Pathmark lease. Okay. 

Chris Powers: So real quick, Pathmark's got 49 years. I am curious to know what they're paying a month. Well, I'm just making up a number, a hundred thousand a month, whatever it is, and you're like, Hey, we're going to pay you a couple million bucks. We're going to start making the rent payments on your behalf, but we control the lease, and if at any point we want to terminate Pathway, you will have to move. That's what buying a lease means. Is that right? 

Dov Hertz: Correct. Or you could buy the lease and say, get out now, but we had no reason. 

Chris Powers: But you would still have to keep paying rent because you have a lease with the fee owner. 

Dov Hertz: I have to be paying rent. 

Chris Powers: Got it. 

Dov Hertz: That's correct. If you didn't pay the rent, your lease defaulted, and the fee owner could cancel it.

Chris Powers: At that point, he was probably hoping you default on the lease so that, or they wouldn't have hated it. Okay. I get it. How, like, how long did that deal take? Is that a couple of years? Is that a couple or a couple of months? I know you said you dropped the 08 09, but in the context of. 

Dov Hertz: That took three to four years.

Chris Powers: Okay. None of these things happen overnight. 

Dov Hertz: No. Development in New York City is a long game. And if you're unwilling to play the long game, you can play. Like any development, there's a risk; in certain markets, you have entitlement risk, and certainly, in New York City, you have assemblage, holdout, and tenant risk.

Chris Powers: The ring portfolio fungus and hazing for brokers. 

Dov Hertz: All right. So, let's talk about the ring portfolio. So there was a guy. Who comes over from Europe? It was probably after World War II. Leo Ring came to New York City with two cents to his name. Real New York City success story.

Two cents to his name. I don't know how he got into real estate, but Leo Ring ultimately got into real estate. He buys a portfolio of 10 buildings; they're all office buildings,  except for one in the Midtown South market, right? And he buys them; he leases them up; he buys one building, takes it, gets a mortgage on the building, takes the money from the mortgage, buys a second building, and keeps doing this till he buys himself a nice portfolio.

He has two sons. Frank and Michael pass away, and the sons take over the portfolio. When he passed away, the portfolio was probably 95 percent. All right. By the time I show up on the scene, I show up there for the following reason, which I'll tell you in a minute: the buildings are probably 10 percent less.

And bleeding money, there was very little in the way of mortgage on the property but the vacant buildings. Now, the reason the buildings were vacant was because they were extremely, extremely difficult to make a deal with. When I met you, I mentioned that I started as a leasing broker when I started in the real estate business. In many of the leasing brokerage firms, the hazing ritual was for people, they Say; here's a lead: call up this guy, Frank Ring, and see if you can cut a deal for either the leasing or the sale of the building.

Frank is a charming person who loves to talk. He's very charming and can talk to you for hours. When you hang up the phone, it sounds like this is a guy who's interested in cutting a deal. And we're going to. I'm going to. It's going to be my first deal, and this is going to be great.

I'm going to cut a deal with this guy. Well, nobody ever cut a deal with Frank Ring. He has never sold a building, and signing a lease with him is challenging. So you would do this, and he would talk to you and talk to you until you got so frustrated. You realized this was going nowhere, and you hung up and never called him again.

So, in any event, what had happened was Michael, they, as I told you, the buildings were significantly vacant and bleeding money. They kept having to put money into the buildings, pay the real estate taxes, pay the operating expenses, etc. Michael was getting very frustrated with the situation and the sides.

He's going to sell his portion of the ownership. I don't know—tell me if I need to explain this—but they own this in a TIC structure, which stands for Tenancy in Common. So it's as if each one owned 50 percent of the building. Okay, so Michael decides he will sell 50 percent of 100 percent of his tick but 50 percent of the ownership in the buildings.

He cuts a deal with a guy who is an extremely bright New York City real estate. Okay. Michael also had an allergy to paying taxes. So, the guy structures the deal by lending Michael the money. You don't pay taxes on the loan, except that Michael didn't realize he was using Michael's buildings as collateral for the loan.

Now, Michael didn't need him to do that. Michael could have gone to the bank and borrowed the money alone. So the guy went, this was the contract. It never closed, but the contract said he had a right to go to the bank and borrow X amount of dollars. For that, Michael would sell and give Michael that money.

And for that, Michael would sell him 50 percent of Michael's ownership. So they'd be partners, and all Michael got was money he could borrow from the bank alone. Okay. Great deal. Right? So somebody picked up on this, and Michael switches attorneys, Michael switches attorneys, and the attorney takes a look at this and says, Michael, this guy is screwing you.

Royally, you need to figure out a way out of this contract. Okay. So they go to court to see if they can get out of the contract. It was a contract, but it wasn't a real contract. It was a term sheet, but it was a binding term sheet. They couldn't get out. They couldn't get out of this.

They realized that if they continued this, it would be a disaster for Michael. So, I knew the lawyer and the lawyer called me up. And he says, Dove, you need to help me here. You need to figure this out. So we went to the contract Venn D., who had cut the deal with Michael.

And we said, look, we want to buy you out of your contract. This guy put up 10 million to give you an idea of what happened. He put up 10 million basically as a down payment to Michael. And we bought him out for 60 million. And we now controlled Michael's 50%. And besides, we gave, this was just what it took to buy him out.

We also gave Michael money, so we own 50%. Now, with a tick, I have a right to force a sale or a dissolution of the partners, but I can do it with a tick. So I called up Frank Ring, whom I knew from another deal we had. To back up, Frank was in another deal where we also bought his partner's interests and ended up buying Frank out of one of his buildings.

So we had done this once before. I call up Frank. I said I wanted to come up to your office. We had that first deal where we bought his partners out and negotiated with Frank to get him out. And that happened about six months before I called up Frank. I said, Frank, I want to come up to your office.

I want to talk to you. Just show up, come up to the office. I come up to the office. I said, Frank, listen, hi, I'm your new partner. What are you talking about? I said I bought Michael's tick interest in the entire portfolio. I thought the guy's head was going to blow up, blow up. He says to me, you guys are like a freaking fungus.

I asked if I wanted to negotiate a deal. No, I'm not negotiating with you. You're going to have to force me out. I said, okay, see you in court. I left the office, went to a local drugstore, and bought fungal cream to cure fungus. Wrote him a note, I hope this helps, put it in a Federal Express package, and sent it over to him.

Anyway, we go to court, and Frank presents an idea! He says, listen, it's a tick. We can split the buildings. So, we'll split each building in half. You'll own the left half. We'll own the right half. Perfect. And we can continue along with everything as is. The judge, of course, is like Solomon splitting the baby.

We'll split the baby in half. The judge threw the whole thing out. The judge set a date for the portfolio to be sold on the steps of the courthouse. If that would have happened, had happened, Frank would have had to pay the taxes on the sale because he wouldn't have been able to structure a 1031 sale, which I assume I don't have to explain.

I called Frank and said, Frank, do the arithmetic. You can negotiate with us; we're going to buy this. We are going to outbid you. We're going to buy it. The difference is what's going to land in your pocket. You're going to, you're going to end up with a hundred percent of the money, or you're going to end up with 50 percent of the money.

That's the whole difference. You're not going to end up with the portfolio. And we ended up sitting down and being able to negotiate a deal that never got to the. To the auction at the courthouse, we negotiated a deal, and we bought him out. I will tell you one funny piece that's in the contract. He wanted to know how much I bought his brother out for.

I said I can't tell you. I signed the confidentiality agreement. He said, okay, I can respect that. He says, but I want you to put in the contract that whatever you're paying me is more than you paid my brother. We had to put that in the contract, and it was included. 

Chris Powers: Okay. Real quick. I want to pick that apart for a second.

So, if you had to go to an auction, why wouldn't he have been able to 1031? He would have gotten the money and could have gotten 60 days. You're just saying it would have forced him to do it quickly. He probably wouldn't have found something, but with you all, you gave him the time. 

Dov Hertz: No, no. What I'm saying is as follows.

When you do a 1031 exchange, you have to; you can never touch any portion of the money if you touch the money. Then you, that's it.

Chris Powers: Okay. But even in an auction, why wouldn't the money go to an exchange? 

Dov Hertz: We, he would have needed our cooperation to do that. And we would not have cooperated. That was our leverage. 

Chris Powers: And New York is just going to court. Just part of the game. It's just like sport up there. It's like, Hey, this is just part of the deal, so we do this. 

Dov Hertz: Something I have to tell you, some people have a computer; you have a lawyer, a litigator.

It would help if you had a lawyer to transact, but there are people in this business who litigation is no different a tool than an Excel spreadsheet. To do business, you need an Excel spreadsheet to underwrite the deal. To do business, you need a litigator on retainer, and you're constantly litigating.

But I won't tell you that that's everybody. It isn't everybody. Many people do business in the normal course of business, negotiate deals, and honor their commitments. And do things normally and avoid ending up in litigation.

Chris Powers: Until they do business with somebody that's a litigator, litigious.

What happened to the ring portfolio? Once you got it, did those turn into big, high-rise developments? What was so great about those buildings, to begin with? 

Dov Hertz: What is fascinating about that deal is some of it was in a commercially zoned district, so you could never build residential there. The commercially zoned district and the buildings in the commercially zoned district were net leased out on a 99-year lease and used by a landowner, a long-term landowner as a 1031 exchange.

A very large parking lot on the Upper West Side was sold by the owner, who had bought it decades earlier as a parking lot. However, it was worth multiple more as a development site. Finally, he decided to sell it for what is still the largest.

Dollars per square foot are the number of development sites in New York. It was either 1 200 or 1 300 a square foot. It's huge. And he wanted an exchange. He wanted to; he didn't want to pay taxes. He wanted to do a 1031 exchange. So, he did a 99-year leasehold as an ex and used that as an exchange property.

That was a part of it. The rest, except for one building, Gary flipped out one at a time to either converters or developers. He didn't want to pay taxes, so he never built or developed anything. 

Chris Powers: I have to ask: Have you ever done business with or against Trump in New York City?

Is he a good assembler? I read his book, The Art of the Deal, one of the first business books I ever read. You listened to how he assembled the Trump Plaza site. Did you ever run into him? 

Dov Hert: He was a minority partner with a group out of Hong Kong called Television City. It was a bunch of land on the Upper West Side.

XTEL bought from his majority partners, but he was a minority partner, so they didn't deal with him directly. They bought that development site. He sued his partners, claiming they undersold it and lost. But that was my only interaction with Trump, and when I was at XTEL, the only interaction.

Chris Powers: Okay, there are many ways to assemble a site. The one that I have never heard of is hiring Japanese actors to help. 

Dov Hertz: So different story, it wasn't a development, but a different story, but a funny one. So I bought a building with a partner, an office building in Philadelphia, and two floors; I didn't know it was a 250 000 300 000 square foot office building.

The previous owner, the guy we bought it from, had divvied up the first and second floors into a clothing mart. Okay. So you had salesmen who represented different brands. They had little booths and would use that as their base. And once a month, the representatives from the various department stores would come down to see them show their wares and purchase them for the coming seasons.

The problem is that each had two floors: a children's wear floor and an adult floor. Each one had an association. The landlord negotiated a deal with the association as if the association was going to pay one check for the entire floor, which gave them a better deal because they were leasing a large amount of space.

But that's not what he did. He then negotiated with the association, agreed to a price per square foot, and signed. A lease with each salesperson. So each guy had a tiny booth, and he had, and there was a lease for this tiny little booth. So, any vacancy was the landlord's problem.

So he negotiated a wholesale deal and then signed retail leases, which makes no sense in my world. When we bought the building, we knew the opportunity was to vacate these two floors because they were usually undermarket, especially when you factor in the vacancy.

Now, they had a 10-year lease. Now, how was I getting them out? In doing the due diligence, we found that their lease did not have an SNDA as it related to a lender. Normally, the lease is superior to the mortgage, and if the bank forecloses, they have to leave the lease in place, except these leases did not have that clause in them.

So, if a bank foreclosed on the building, they could legally throw out all the tenants. Once we realized that, I realized that was my leverage. So we closed on the building. We got a loan from the Bank of Tokyo. I waited six months. I knew I had to do this. I waited six months. I went to the head of each of the associations and told them we had a problem.

What's the problem? We made a mistake when we bought the building and didn't realize we couldn't afford the loan. We over-leveraged. And so I said, okay, so why is that my problem? I said it's your problem because if you look at your leases, you'll note that you don't have an SNDA, and therefore, if the bank forecloses and takes the building back.

They can throw you out, and you will have no lease. Well, they said, you're full of it and threw me out of their office. And I said, Listen, I'm telling you, have a lawyer look at your leases. They didn't. Who buys a building and, six months later, is going to give the building back to the bank? It didn't make any sense.

So I said I had to make the point. I had to drive the point home. I went, and I hired two Japanese actors, an older and a younger guy. All right. And now, I wonder if either of these two guys speak a word of Japanese. They were, they were, they looked Japanese. I don't even know if they were Japanese, but I met them anyway and said, okay, this is the deal.

As I told you, once a month, everybody was there because all the department store buyers were there, and everybody was there to sell to the department store buyers. I said that when everybody is there on the day of this, I want you to come down to the building. You don't speak English because I don't want anybody talking to you.

Okay. You have to make your presence known. It is, well, how do we do that? I said, very simple. I said. Young guy, here's a pad. You walk around in a pad and just scratch notes. Make it look like Japanese, and I don't care. You're just scratching notes on the pad. I said, old guy, you're just screaming and yelling, pointing and making a lot of noise.

That's your job. You walk into every booth, scream in what sounds like Japanese, and walk out. That's what you do. That's the job. All right? And that's what they did. They showed up on that day. They spent a couple of hours running around, screaming and yelling in something that approximated Japanese or sounded like to someone who doesn't know Japanese like Japanese.

The next day, I got a phone call. They say, what the hell's going on? I said, what do you want? I gave you a warning. It's the Bank of Tokyo. They sent representatives from Tokyo. They're taking the building back and want to see what they're taking back. So he says to me, well, what will we do? I said, well, you have two choices.

I can help you. I'd be happy to help you. We will find your new space, negotiate a lease, and you move; they will. I'll negotiate with the Bank of Tokyo to help them defray some costs. So it's a win-win, or you do nothing, and they'll throw you out. No, no, no. Please help us. I said okay. Okay. I find them a space, and I negotiate a deal.

It needs to be ratified by the entire membership of these two groups. And they call me up and say, listen, nobody knows the deal better than you. Can you come down to a meeting on Monday night in Philadelphia in the space where we're going to have a vote ratifying this, signing this, and these new leases?

I said, sure. I called my partner and said, you got to come with me. Cause I'm worried, these guys are going to kill me. I mean, right? So we go down, and I present the lease. These are the terms of the lease. That is why you have to do the lease. It is the whole story. Soup to nuts. All right. They ratify the lease.

They vote, and they approve the lease. The head of the association gets up and says, we could never have done this without Dove Hertz. We owe him a round of applause. They stand up, and I get a round of applause and appreciation for helping them move out. 

Chris Powers: If I ever see you approach me with two Japanese guys, I must do more due diligence.

Dov Hertz: Speak to them in English because they don't speak Japanese.

Chris Powers: Alright, what are you doing today? Why did you leave XTEL?

Dov Hertz: So, that's a great story, alright? So, I'm a little nuts. In 2016, I was 59 years old, and I could have stayed at XTEL for the rest of my life, very happily, doing the same thing. The truth is, I just had enough.

I was bored. I had always wanted to open my shop and realized the opportunity was closing. I mean, I was 59 years old. When was I going to stop? At 75? So, I realized it's now or never. And I went to Gary Barnett, the owner of XTEL. And I said, listen, Gary, I want to leave. I want to stop my shop.

He said, what are you crazy? You're 59 years old. Nobody does that at 59 years old. What do you want? I said I want nothing. I want to open up my shop. He says, no, no, no. You want something. I said, no, I don't want anything. I want to open up my shop. It took him a couple of months to wrap his head around it.

And I said I don't want to leave you high and dry. I want to make an orderly transition, so I've been here for almost 14 years. I don't want to hurt you in doing this. I want to open my shop. Took him a couple of months to wrap his head around it. He finally did.

We worked out a transition plan, and in November 2016, I turned 60 in December. In November of 2016, I hung out my shingle and opened up DH property holdings, to be honest. When I opened up shop, I started with Aaron Malitsky as a number two, and we sat down and said, okay, what, okay, now we opened up.

What are we going to do? Do you still need to get a business plan? No, I had no business plan. I just knew: I know New York. I know real estate. I'll figure it out. I need a plan. We did one deal. I bought Gary Barnett's father-in-law's portfolio and ended up. We bought 10 buildings, flipped six or seven, and flipped three. Our partner kept them and put some gas in the tank.

That's our first deal, but it wasn't a business plan. It just happened: God sent me a present. It took a little time, but we decided to look around the different property types. I wouldn't say I liked hotels and wanted to avoid getting involved in rent-regulated apartments in New York.

Retail was on the way down. The office didn't speak to me. I started running out of choices, but e-commerce was starting at that point—taking off, I should say. We realized that logistics distribution would need to come to New York City. Until then, New Jersey was New York's warehouse; only business-to-business used those warehouses.

There were no consumers involved. Only when e-commerce was a warehouse for consumers, it was a warehouse for business. But we realized that it would be easier to be a developer who understands New York City because New York City is its beast than to be an industrial guy and learn about New York City's development.

So, I decided we're going to focus on industrial development. A new spec industrial building hadn't been developed in New York City in 50 years, so we decided, all right, we've got to go out and learn industrial. For six months, we didn't do a deal. We spoke to anyone who had talked to us, who was in the industrial space and had walked over 2 million square feet of industrial land.

We decided, all right, we know enough, let's find a deal. So we found a deal: 640 Columbia, which ended up being the first multi-story logistics distribution center built on the East Coast. Prologis had built one on the West Coast, and this was the first that ended up being built on the East Coast. We built it, leased it to Amazon, and sold it.

Okay. That's the short of the story, but that has an interesting story to it. I don't know. It follows. All right. So, Goldman Sachs was our partner. I still need the contract. And I get a phone call from the business guy at Goldman Sachs. He says, listen, this is on a Thursday morning.

I am going to the investment committee for approval tomorrow. In talking to the investment committee, they realize nobody—only one other person—has built a building like this, no one has built it on the East Coast, and certainly nobody has built it in New York. They're concerned about the hard cost numbers we're underwriting; they want it proven.

Please get a G. M. P. signed before Friday morning. That is a guaranteed maximum price for those in the development business, which means they develop the GC Guarantees that they can deliver for these hard cost numbers. It's Thursday. I need it by Friday morning. Okay, I called the GC with whom we've been working.

And I said, let's, and we have no plans. We have a floor plan. I don't have anything. I need a structural plan. I don't have an engineering degree; I have nothing. I have floor plans. I said I need you to sign a GMP before nine o'clock tomorrow morning. Otherwise, this deal is not happening. He says you're out of your mind.

I said, yeah, but you're going to do this. We're going to figure this out. He asks how I do this without plans. I said you have a floor plan. You've built a hundred buildings. Modern. I have yet to build a lot of buildings. Go figure it out. We spend the day and the night up the whole night.

Negotiating a GMP. All right. We negotiate a GMP and deliver it to the Goldman Sachs investment committee for approval. Okay. Fast forward. It takes us a year. We get all of the permits, excuse me. We hire all the subs, the GC hires all the subs, and everything's ready to go. We go out, and we get a construction loan.

Now, this is my first deal. A developer must sign a completion guarantee with the bank when building a building. The bank doesn't want a half-built building, and they take it back, so you need to sign a completion guarantee. I didn't have a large enough balance sheet to sign a completion guarantee, so I brought in a credit enhancer.

A guy that I had met. His father was a very wealthy man who owned many residential real estates. The father, at this point, is in his late eighties. And I said I'll make a deal with you. You signed the completion guarantee with me, and I'll give you a piece of the deal.

No problem. So we negotiated to present his financials to the bank, and the bank approved the financials. We negotiate the whole thing. It is five, ten minutes to five. The deal's all done. The title company will press the send on the wire, right? And the deal's closed. I get a phone call from the son.

My father just died. Now, what that means legally, other than the fact that I feel sorry for the guy that his father died, what that means legally is everything that he signed is worthless. Everything the father signed is worthless because it moves from him into his estate. The lawyers' legal opinions to sign for this to close were all invalid.

I just got a phone call from the title company. I have an email. Should I hit send? Is everybody approved? Are we approved? And then I get the phone call—the guy's dead. And I'm sitting there; it's my first deal. What do I do? Do I ignore the fact that it came first and tell him to go ahead and wire, or do I stop it?

And call Goldman and say, listen, the guy's dead, we can't do this.

And I'm sitting there debating, what do I do? And I said, I am starting; this is the first deal. How do I want to build my business? Do I want to build my business on a foundation of complete and total honesty or not? And I said I'm not doing it. I called up Goldman. I said, the guy died. Can't wire the money.

Chris Powers: I thought you were about to tell me you went and did CPR, brought him back to life for a couple of minutes, and hit send.

Dov Hertz: No, wait. The story gets better fast-forward. Okay. The company that gave us the GMP went bankrupt and had nothing to do with us. We had yet to start construction, and it went bankrupt because of a deal that had nothing to do with us.

Goldman Sachs was the lender on the deal, but it had nothing to do with Goldman Sachs. Had I let that deal happen and we got the construction loan, they would have started construction. I would have been stuck mid-construction with a lender who, I'm sorry, is a bankrupt general contractor.

And my completion guarantee would have been called.

Honesty is the best policy. 

Chris Powers: When you started, did you know you were building for Amazon, or was it a spec project? 

Dov Hertz: No, it was a spec project. We were lucky that Amazon showed up before we'd gone vertical. We were putting in the foundations because they wanted certain changes we could make.

Chris Powers: How did you source capital from Goldman Sachs? Did you just put the deal together and hire a capital markets broker, and they brought in Goldman, or did you already have a relationship? That's a big partner for a first deal. 

Dov Hertz: Yeah, we hired an equity broker to find Goldman. Goldman had just lost another industrial development deal.

So, they were one of the few institutional equity groups with the vision to see where e-commerce was going and that logistics distribution would be an underserved need. And they had just climbed in on another deal they had just lost.

They said they jumped all over it when this was presented and moved quickly. 

Chris Powers: Did you do more of those, or was that just a one-and-done? Are you trying to do more vertical industrial, or how do you begin? You started with no plan, and then you just did this amazing industrial deal.

What became the plan after that? Just being opportunistic, or what? 

Dov Hertz: We stayed in the industrial sector. Did it come back? About 2 million square feet. We bought about 2 million buildable square feet between 2017 and 2019. And then started branching out into other urban infill markets. So we're in today in Boston, in Philly.

They have developed, or are in the pipeline, about 6 million square feet. 

Chris Powers: Okay, so I'm shocked, and maybe you'll get there. Why are you not about to build the next Central Park Tower? Will you assemble yourself an iconic site, or will you just let other people play that game?

Dov Hertz: I'm going to let other people play that game. First of all, as I said, it's a long game. To develop another iconic building, it's a 10-year game. If you're going to do it right and not buy it from somebody else, high rise, look, everything has its risks. High-rise construction has a particular set of unnecessary risks.

Also, the condo market in New York has softened. So, right now, the top of the real estate food group is in the industrial sector. 

Chris Powers: What does 2024 look like for you guys? Are you seeing lots of deals, or how are you thinking about the market? Now, what's interesting?

Dov Hertz: So, in July of 2021, we started assembling. When we started, we were only doing development in July of 2021. We started another platform for buying existing industrial buildings in the same markets. So today, since then, we've assembled 1.5 million square feet of existing class B industrial buildings, all value add; I know you like that sector talking dirty in New Jersey, Boston, and Philly.

We opened up an LA office about a year ago. We haven't done anything yet, but we look forward to doing our first deal there. Today's class B market is very strong. We're very excited about that market. They need to build more class B buildings. Tenant renewal in those markets.

They are extremely strong because the tenants have nowhere to go. We're very excited about that and hope to keep growing it. 

Chris Powers: Okay. I remember we talked about this at IMN. I buy in the red States, and you buy in the blue States. You pick the hardest markets in the country to own property: Boston, LA. Why do you choose these markets that have all this extra stuff going on in them?

Dov Hertz: Because I can. 

Chris Powers: What does that mean?

Dov Hertz: The philosophy is like this: we buy in urban infill markets. They are the hardest markets to get into, but when you get into them and have products in those markets, your competition is much less than in the type of markets you buy in developing.

I've honed a skill set in New York that I've been able to transfer to other urban infill markets. So that is the answer to the, I can't. 

Chris Powers: Do you all raise deal by deal, or are you a fund? 

Dov Hertz: We don't, we do not have a fund. It's deal by deal. We have a loose understanding with an institutional equity partner in this platform, but it's deal by deal.

Nothing's crossed. It's all deal by deal. I like it that way. Each one has its pluses and minuses, right? Having a fund has a plus because you have the money on hand, but it's got its minuses doing deal by deal has a minus. You have to raise money for each deal. It's got pluses, too. You have more control.

You're typically able to negotiate better deals for yourself. And the promote and promotes, nothing's crossed. So, every deal stands alone. If you have a stinker, it only brings down part of the house. 

Chris Powers: If I were to come to you and say, Hey, I'm a Texan. I'm coming to New York. And I want to put together a site.

Please first tell me not even to try. The game is so dominant. Is there even a site for a Texan to put together? Or would I be the fish out of water showing up? And I'm the jokes on me.

Dov Hertz: Real estate is local. You know that. So if I came to Texas and said, um, Chris, I will compete against you. You'd live, so you can't compete against me. I know everybody here. I know the sites. I know the people. I know how the game is played. It's the same thing in New York. It's not different.

If you want to come to New York, you better hire a local who knows what he's doing.

Chris Powers: I’m partnering with you. I'm not hiring anyone; we're going to JV. I'm not even attempting to enter that world without you. All right. You've built an awesome career, and negotiating threatens your career.

You've negotiated with Japanese actors. You've negotiated with parking garage owners. You've negotiated with a hoarder. You've negotiated with Vornado up and down the board. You've made deals happen. The Ring brothers. What do you know about negotiating that? You've learned over all these times: Is there always a price for everything, or is there something you've been able to masterfully understand about negotiating that's gotten all these deals done?

Dov Hertz: All right, so, of course, I'll tell you a story.

I was negotiating to buy a building as part of an assemblage last bill, the last building on the site that I needed, and there's a book written about New York holdouts, where they show you buildings that have been built in weird shapes, like where they built around the building because they couldn't get that one building.

And I bought it, and this guy was giving me a hard time. He wasn't going to sell. And I bought him the book. And I said, here's your choice. Do you want money, or do you want to be in the book? Those are the choices. Okay. So he's flipping through the book and sees, Oh, I know the story behind this. I know why there was a tenant on this site; there was a holdout.

I know why it was a woman who didn't move. I said, Greg, tell me the story; I'd love to hear it. He said, and they offered her, the developer offered her, that she's living in a four-story walk-up, on the top floor, okay, in a studio apartment. Nothing to write home about. They offered her a condo on the East side, a doorman building, and three bedrooms.

It would have been the lap of luxury. Any normal person would have taken it. He said I'll tell you why she didn't take it. I said, go ahead. Why? He said she had alcoholism. He knew the woman. He said she was an alcoholic, and she'd go out every night to a bar and come home dead drunk. And she was embarrassed to move to a doorman building because she didn't want the doorman to see her coming in every night drunk.

And that's the reason she did not move. To me, That is the lesson in negotiating. You've got to get to know the person you're negotiating with because money sometimes pushes the button. Had they bought her, had they moved her into another four-story walk-up with a bar? On the first floor, she would have gone in a heartbeat,

but they weren't talking to her. They were talking over her. And that's what you want to know. The critical component of a good negotiator is listening. Understand what will move the needle for the person on the other side of the table. A lot of times, it is money. But it is only sometimes money or the structure of the deal.

There are different components. You have different levers in the negotiation. Understand what moves the needle for them. It's as much as real estate is about the numbers. It's as much about the people you get; you have to get to know the people. 

Chris Powers: Dove. It was awesome. I'm a huge fan, and I appreciate you sharing your stories 

Dov Hertz: Today for the honor of appearing on your podcast.