APRIL 04, 2014
How a leaky roof jump-started Jeff Sutton’s real estate career
Wharton Properties boss discusses, among other things, his big break in the business.
Jeff Sutton, the founder and president of retail giant Wharton Properties, made a rare public speaking appearance yesterday at Baruch College, addressing students as part of a management series.
The real estate mogul, who owns over 120 properties citywide including 717 Fifth Avenue and 650 Fifth Avenue, and has signed major leases for flagship stores like Giorgio Armani, American Eagle and Abercrombie & Fitch, spoke about his own personal history, the goals of his company and his keys to success. Read on for a closer look.
On getting his start in real estate:
I’m 30 years old and I’m sitting in this office and I get a call from the secretary. She says to me ‘there’s this guy out here, yelling and screaming about some roof leak.’ I said ‘what are you calling me for?’ The guy that manages the building wasn’t there that day so I had to go out and talk to that guy who had nothing to do with my business to help the secretary deal with him.
I said to him ‘it’s not my building but I’ll try and help. I know a couple of guys who fix roof leaks. I’ll give them a call and tell them it’s an emergency.’ I got him a cup of coffee and sat with him and calmed him down. He was very appreciative and he asked me ‘what do you do?’ I said ‘I’m in the real estate business. I’m not doing much now but I’m trying to do something.’ He said ‘what’s your background?’ I said I went to Wharton. He said ‘Wharton, oh that’s nice.’ We spoke for a little while and then he said ‘maybe we’ll do something together.’ I thought this is my lucky break.
Sure enough, he left and I didn’t hear from him for two months. I called him up a couple of times to pursue my lucky break but it didn’t happen. One day he called me back and he said ‘I have good news and bad news. The bad news is that I’m no longer at the company I was at. I just left after 27 years to go to Payless Shoes. Payless Shoes has 3,000 stores in the country but not one store in New York and we want to open up 100.’ He said ‘after meeting you and seeing the kind of guy you are and your great background, you were nice enough to fix my roof and I think you’re the kind of guy that could help me.’
On his first acquisition:
[Payless] wanted to be on every top street in the best locations possible. They wanted to be in front of the train, in front of the bus. I said ‘where do you want to be, Richard?’ He says ‘right there.’ He’s pointing to a building with two tenants in it already.
I said ‘ok, I’m going to get that location for you, I’m going to get rid of those tenants and buy both of those buildings for you. I’m going to put the [retail spaces] together and make one giant store for you. But I need one thing from you. I need you to give me a lease. Of course, the lease would be contingent on me doing all those things, getting the tenants out and putting you in there.
The lease is financing. Now, I can go to a bank and say I have a lease for the next 10 or 15 years with a triple A company.
He said ‘I hear you, but I’ve never heard of signing a lease before the guy owns the building.’ I said, it’s like any invention in life. What do you have to lose? Don’t buy any inventory, I’ll tell you how long it’s going to be before you can take the space and you can plan it. If we do one lease and it works, we can use the same lease again and again.’
I convinced him and then he convinced the guys in Topeka, Kansas, which wasn’t easy either. They threw him out of their office a couple of times.
I had no money but I had a lease.
The good thing about doing custom real estate like that is you can charge [the rent that you want] because you’re giving the guy exactly what he wants, kind of like a custom suit.
We eventually did 50 or 60 Payless stores and bought 18 or 20 buildings that way.
On his career trajectory:
My career has been like dominos. Each thing led to the next. Payless became the king of New York, putting all its competitors out of business. The guy that I was doing the deals with, his boss went to Foot Locker.
The first thing he did at Foot Locker was say ‘if you want to do business in New York, talk to Jeff Sutton.’ His counterpart in the south then went to Gamestop and the first thing he did was call me and say ‘Jeff, I want you to do for me with Gamestop what you did for Payless.’
The head guy from one of the shoe companies Payless had put out of business [the store Thom McAn] ended up going to CVS Pharmacy. He called me up and said ‘I want you to do for CVS what you did to us. When stores become available, we can’t move that fast so we can’t get the boxes we want, the size we want.’
That was a big turning point for me. In 1997, I became the CVS Pharmacy exclusive for New York City. CVS was the entrée into Manhattan proper for me.
On the secret to success:
It’s very important to really know the person you’re meeting with. Before you even get there, you should understand what are their goals, their capital expenditures and how much money they want to spend opening up stores.
The more I truly cared about people the more money I made. Don’t come in there focused on what you want. That will come the minute you understand what they want. Understand everything about a pro forma for a retailer, how they can hit their hurdle rates, return rates, their IRRs, and all the things that are necessary for them to get the approvals you need them to get.
In 99 percent of situations, there’s some key to opening the door. You walk into a guy’s office and ask to buy his building. He says it’s not for sale. You could just go home, a lot of people do. You ask ‘what’s the issue?’ It could be a very sentimental thing like his grandfather owned it and he wants it to be in the family forever. ‘No problem. Give me a 99-year lease for a dollar and I’ll give you the purchase price as if I bought it. In 100 years, your great grandson will get it back.”
On breaking with tradition:
I realized that CVS had such great credit that if I did a 20 or 25-year lease with them, I could go to Wall Street and have them give me the discounted value for all of CVS’ rent for 25 years.
Everyone thinks you go to buy a building for $10 million, you get a mortgage for $6 million or $7 million, put up $3 million or $4 million and you walk out with the deed. No one would ever figure you could buy a building for $10 million, walk into the room and ask them to give you $3 million because you got a mortgage for $13 million. You can create a situation where you can borrow more money than the building actually costs [because it’s supported by the CVS rental stream].
On making a deal with American Girl at 609 Fifth Avenue:
I was at dinner one night with a good friend of mine from Foot Locker who lived in Chicago. At the time, I was marketing the retail space [at 609 Fifth Avenue] and he asked if there were any leads. I said not really. ‘I just had one from a doll company,’ I said, ‘but I can’t remember the name of it. Can you imagine, paying $6 million in rent and they want to sell dolls? They’re never going to make it.’
He goes ‘let me give you an analogy of what you just did. Imagine it’s the 1960s and you own land in Orlando. Some crazy guy calls you to put rides on your land and you hang up on him. His name is Walt Disney.’
I panicked and called the broker whose offer I’d thrown in the garbage. I said ‘listen, I’ve made a mistake.’ The girl said it was too late. They had another site at Rockefeller Center by the ice-skating rink.
I said “tell the guy he’s got to fly out to New York and see the space. I’ll pay for his ticket.’ She calls me back, says he’s not interested. “Ask him if he’ll let me fly out to L.A. and meet him for 25 minutes.” I asked her for a week [delay] to think about how I’m going to get him off of his Rockefeller Center [site].
I hired two guys to video both sites simultaneously for three days. We showed [him] this video, showing every hour on the hour. There was a on his site where no one walked by. Fifth Avenue was 10 times more [traffic] than Rockefeller center at some times.
We did a bit of research into who the architect was for the American Girl store in Chicago. We hired that guy and had him draw our building with all of the awnings and signage, with every doll and library book. Rockefeller Center is landmarked. You can’t really do signs; you can’t do awnings.
Finally, I unzippered this huge rendering of my building with the American Girl store in it. This guy was not a good poker player because he went [look of amazement].
I was killing myself. I should have asked more (joking).
On the market:
For every guy you see on the cover of Forbes who made a good bet, there are 10,000 guys that jumped off bridges because they made wrong bets. Three years later, the same guy that made the good bet takes the same risk the other way and he’s broke.
There are so many factors that create an inability to be very precise, so what do you do? We bring the world to today, because today we know what today is. I know the rents on the street today, but I don’t know what they’re going to be seven years from now. We want to take advantage of what we know now.
If you [buy a building that has] a lease that has 15 years left, I’m not going to wait 15 years to see what’s going to happen. I’m going to go out there, buy out those guys and make the space available so I can rent it now, finance it now and make the money I’m going to make. That’s better than sitting around praying and hoping that not only am I right about the street, [but] that I [also] have the exact right timing that we won’t be in a slump when the lease comes due. That’s the difference between winning and losing, simple as that.
On history and partners:
History is very important in the real estate business. I grew up in the late 80s and 90s in real estate and I learned a lot of great lessons. There was a company called Olympia & York, run by the Reichmanns. They had an unbelievable track record, 15 hall of fame deals in a row. In the 16th deal, they invested all the money they’d made, $3 billion, into Canary Wharf in London and they lost billions of dollars.
Even when I have my own money, I still like to lower my risk and have other people come in as well. I own 75 or 80 percent of my properties myself but sometimes I don’t want to put all my money in a deal. SL Green [Realty] is a great partner in not only giving money but expertise as well. When you think you’re great at everything, [that’s when] you’re guaranteed to fail.