- Miki Naftali is a New York City-based real-estate developer from humble origins who worked his way to a career portfolio worth billions.
- Well-known for orchestrating the redevelopment of the Plaza Hotel in 2004, he operates on a number of strategies that inform how he does business.
- Protecting the downside and focusing on market value are just two elements to successful dealmaking Naftali keeps front of mind.
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Real estate in New York is an industry long dominated by dynastic families like the Dursts and Trumps who have led the city's development for decades.
But some developers didn't get their start in the family business and have still managed to make a mark on the city's skyline with hard work and strategy.
One of them is Miki Naftali, the 30-year industry veteran who says he's developed more than $9 billion in real estate over the course of his career, including New York's landmark Plaza Hotel, a major renovation project he spearheaded as CEO of Elad Group in 2004.
Now CEO of Naftali Group, the eponymously named firm he founded in 2011, the Israeli-born magnate specializes in acquisitions, and works across all areas of development, from a property's financing to its architecture, design, construction, marketing, sales, and management.
Having built his own brand and a growing portfolio of assets from new development condominiums to income-producing mixed-use properties and more, Naftali, 58, knows what it takes to structure a good deal, and he operates on a number of strategies that inform how he does business.
Protect the downside
In real estate, downside refers to the level of risk an investor takes on with a project.
"It's really about thinking about the downside," he said, adding that he never takes on too much debt, which other investors don't mind. "We don't control the market, things are changing. The most we can do is prepare for the downside as much as we can while we're doing deals." In other words, being adequately prepared for risk is critical to protecting an investment.
For example, Naftali once sought to acquire a site near Bloomingdale's in midtown Manhattan, but refused to pay the asking price, which amounted to more than a $1,000 per square foot. Ultimately, he chose not to do the deal. Naftali says the seller came back to him to negotiate more than once, after other firms' deals fell through, but he continued to turn it down, even when offered a 10% discount. Naftali and his underwriter felt the deal was still too expensive, and the firm's downside wouldn't be protected should they take on the project. "The site was finally purchased by a third party and was never developed," Naftali added.
Naftali says his investment strategy is a balance between being aggressive and taking calculated risks. Return goals depend on partnerships, and whether Naftali has a partner in a project.
Private equity funds usually look for higher returns, he says, but partnerships with family offices and private investors sometimes means a more willingness to be flexible. Overall, the typical deal looks for income-producing returns in the mid to low-teens, while wholesale development projects often look for a return over 20%.
He treats every dollar he invests in a project like it's his own, despite having some investors. "It's not rocket science," he said. "Just realistically understand that things are not in your control."
In real estate, leverage uses borrowed capital or debt to increase the potential return of an investment.
But Naftali says it's the killer of business for real estate investors and developers. If you take too much leverage, you won't be able to keep up in a volatile market. And you can't over-lever your positions if you want to ride out a storm, that's how he protects the downside.
Throughout his career, he says that he's never taken more than 65% financing on a deal. While he says some competitors took 90% financing and made more money than him when the market was great, Naftali doesn't care, because it's simply not worth the risk. No matter the property, the market is always changing, he says, and if there's a problem, little leverage means you can ride out the storm because you'll have less debt.
For example, a rental building acquired with 90% financing and loans could turn bad, fast. If occupancy drops from 95% to 90%, and rent collection decreases, on top of a rent decrease by 7% to 10%, "you're done," Naftali said. "You have to take the keys and walk away. You have to walk away from whatever equity you had in the deal." And he never wants to be in that position.
Focus on market value, not comps
Comparable properties — or "comps" — are a regular part of real estate parlance. They're often used by real estate agents to appraise the value of a home, based on the recent selling prices of homes in the same neighborhood with similar attributes.
But to Naftali, if somebody is paying $1,000 per foot for a piece of land or an old building, it doesn't mean the piece of land available across the street is worth the same. He doesn't care if a broker tries to convince him to pay the same or more. "That's not the market," he said. "It's really about following the science and the numbers, does it make sense or not?"
Years ago, Naftali pursued a large development site in Brooklyn, where he says the seller was asking too much money for land at the time. A few years later, when most major developers lost interest in the site, he stepped in again and negotiated hard to get the deal done, but at a much more favorable price than originally asked. "Most major developers in New York tried to purchase the land but ultimately couldn't get the deal done," he said. "We did."
As long as he has the right information, he'll pay. But a deal is dependent on his team's due diligence and their ability to find the right information. If a deal's underwriting — it's evaluation as an investment — is wrong, it could mean the difference between a profit and a loss, or missing out on a good deal entirely.
To make sure he understands the opportunity in full, he often does "back of the envelope" underwriting while his team runs numbers in Excel, and then they compare notes. And he encourages arguments to find a deal's real value. If the value is really there, he'll pay the price. But what an agent or broker tells him is irrelevant. The market value has to really be there, and the team has to justify it first.
No location is an "always say yes" deal, and locations in high demand are always the strongest.
Prioritize strong teambuilding
Loyalty and honesty are two of the most important things to Naftali, and he encourages team debate if it gets to the heart of a deal's value. Naftali likes to be sure every dollar is justified, and his team's analysis of a property helps him get there.
Naftali takes pride in having trained a number of smart, highly-motivated people who he says learn fast and contribute a lot to his business. And he says he's always looking for someone that's eager, intelligent, and willing to learn to be a part of his team.
"People are so valuable," he said, emphasizing that a strong team is essential to his business. "The real estate business is a marathon, not a sprint. Not a single person can do it by him or herself. You need a really good team."
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