Q&A with Joe Berko: Big Deals, Israeli Bonds, and Why They Could Be the Next EB-5
A reigning CoStar Power Broker of the Year award winner, Joe Berko's an up-and-comer in New York's investment sales circuit.
Despite setting a personal best with a $182M deal lat year, Joe's biggest play has been his foray into Israeli bonds, a popular source of capital for New York's biggest players. By partnering with two key Israeli underwriters, Joe's become a player himself in this newfound source of capital.
We spoke to Joe about Israeli bonds, how they compare to the EB-5, and how they could fuel the next wave of developments in New York.
Bisnow: How did you break into the business?
Joe: 1500 Walnut St, a 360k SF, 22-story art deco office tower with a glass extension and a 60k SF garage. We sold it to a New York investor. It was just a fun transaction.
Bisnow: What were some of the big deals you closed last year?
Joe: I have advised on a sale of an $182M conversion of a 300k SF office building to a Marriott hotel near Times Square. It was an interesting transaction with lots of moving parts. Another large transaction was a 180k SF loft building in Bushwick we sold to Savanna and Horing that will be converted to an office. I negotiated a 67k SF hotel development site in the Flatiron District off Fifth Avenue, and the list goes on but these are the ones I enjoyed the most.
Bisnow: There’s an interesting trend in real estate lately with the rise in popularity of Israeli bonds to raise capital for new projects. Why are developers going that route?
Joe: Cheap money with very little strings attached other than being able to properly debt service—and it’s a very liberal approach to tap into your existing equity. The best way to see it is to say if I need to tap into my existing equity, what are my options? The first option is I can call my friend and ask him to come in and buy a piece of the company and I’ll give up on that equity forever.
The second part is I could reach out to a mezzanine lender and ask him for a second position loan but those are usually very expensive, 12% to 14% and sometimes higher. They’re very restrictive and require a lot of bureaucratic work.
Not a lot of other alternatives are out there that make sense that can actually work financially. Fast-forward and we have Israeli bonds. As an Israeli, I’ve been looking into the market for the past five years and I feel that right now, the market is flushed. It’s full of cash, there’s need for investments and ultimately tapping into the Israeli market is essentially getting those options at around a 4% to 5% interest rate. So as an alternative, this is far superior. It carries a small bureaucracy as well. It requires a certain amount of work, working with foreign attorneys and opening up a British Virgin Islands account and creating all those things, but the benefits alone are well worth it.
Bisnow: Joe Moinian raised $361M (at 4.2%) for a project this year, the biggest for a US real estate player. Jeff Sutton is expected to raise $500M. Do you think it's going to catch on on a broader scale?
Joe: I think it’s getting warmer and warmer, and I think that the Israeli market is warming up to more and more locations in the United States. And the local investors are warming up to the idea of tapping into debt and equity fairly fast.
It’s not a fit for everyone; there are some limitations to this. It took a while for the market to warm up to the EB-5 and that’s taken on very nicely. If I had to compare an EB-5 transaction to a floating bond transaction, I think that maybe the first time around they’re both complex. It takes about a year to raise money for an EB-5. It takes about half that time to do Israeli bonds.
Bisnow: Switching gears. What’s the latest in New York, what are dealmakers looking at?
Joe: The multifamily market is on steroids and there’s just not a lot of product in the market. Developers are paying premiums to convert quality assets and push up rents. Last year, there was a lot of supply on the market because of steep price increases and many owners decided it was time to sell. It was a record-breaking year, in terms of number of transactions. In 2015, there is a little bit of constraint. But demand is still very strong, and buyers are flocking to this city from all corners of the earth to buy New York real estate.
