Stifled by corporate cage, Mendik flies from Vornado

Real Estate Weekly, Oct 21, 1998 by Lois Weiss

"I have nothing but the highest regard for Steve Roth and Michael Fascitelli, and I got along with them great," Mendik declared in a telephone interview last week, describing his relationship with Vornado's chairman and president respectively. "But that corporate structure is not for me. I feel stifled."

It was the multi-layered corporate decision-making structure of the public real estate investment trust that finally got to Mendik, who has been a major metropolitan real estate owner and developer for the last 40 years.

"Being an entrepreneur and being the head of a company - it's very hard for me not to sit there and make the last decision," he explained.

But as he says, his timing was "impeccable."

In the 1990's, when there were no loans available for even tenant improvements, and private owners of real estate became illiquid, Mendik started researching how to take advantage of the capital markets by organizing his portfolio of major office buildings into a real estate investment trust or REIT, which could be traded as stock on Wall Street.

As chairman of the Real Estate Board of New York (REBNY), he and the organization lobbied successfully to eliminate the onerous "Cuomo" tax on capital gains that took ten cents on each dollar, and obtained the passage of state legislation that reduced the 3 percent transfer taxes on properties that were merely being exchanged for stock and not cash.

Without the legal changes, a transfer of properties to a REIT structure would have created a 13 percent "transaction expense.' When investment bankers Merrill Lynch surveyed the then $125 billion REIT industry, they found the industry's average transaction cost for converting to a REIT was a mere .33 percent, which became a selling point for the politicians who were struggling to bring business to the city's ailing economy.

REBNY President Steven Spinola said they explained to the lawmakers - then Mayor David Dinkins and Governor George Pataki - that they were really not selling property or buying stock, and just transferring holdings from one entity to another. "Don't have a disincentive to investments by REITs," he recalled they told the political leaders. Two years ago, the statutes were passed.

Mendik and David Greenbaum, who has been president of the Mendik companies for he last eight years, began preparing for the Mendik Company public registration statement in September 1996, organizing each of the building partnerships through the roll-up process. When the Mendik offering was imminent in January of 1997, Steven Roth, Vornado's chairman, hired Fascitelli, a well-known real estate deal-maker and an old friend of Greenbaum, away from Goldman Sachs.

Within days they were meeting to discuss combining the portfolios into a multi-billion dollar debt-free company, shaking hands the deal on Tuesday, January 20, 1997.

"My timing was impeccable," said Mendik. "I protected my back end, and the company has prospered a lot faster than if I had done it myself. It's tripled in size."

Mendik's holdings eligible for the REIT included about 4 million square feet in seven Midtown properties: Two Penn Plaza, 11 Penn Plaza, Two Park Avenue, 330 Madison Avenue, 909 Third Avenue, 1740 Broadway and 866 U.N. Plaza.

These were for the most part contributed to the so-called Umbrella Partnership that was created when Vornado converted to an UPREIT status, essentially layering a holding company over the REIT. The Mendik management and leasing business, as well as its personnel, also joined Vornado.

At the time, Vornado paid Mendik and his partners about $269 million in cash, $168 million in privately placed Vornado UPREIT limited partnership units, and took on $217 million in indebtedness then held on the properties.

Although giving up personal control of his properties, Mendik became co-chairman of the board of Trustees of Vornado and was involved in the deal-making.

By the end of 1997, according to information from the National Association of Real Estate Investment Trusts (NAREIT), the Vornado Realty Trust owned more than 22.9 million square feet of property, of which about 8.3 million square feet was office, with the rest in strip centers, regional malls, industrial and other properties. They now own 30 percent of the refrigerated warehouses in the United States, and this year, purchased the Chicago Merchandise Mart.

Through the past two years, the powerful Vornado was a probable bidder on most important offerings. They purchased other city portfolios and office buildings, adding portions of the Riese restaurant portfolio, a 40 percent interest in the Hotel Pennsylvania, several other properties in the Penn Station area, 640 Fifth Avenue, a piece of 825 Seventh Avenue, the nearly million square-foot 770 Broadway from the Helmsley portfolio, and 40 Fulton Street.

Vornado, the company created out of the former Two Guys retail holdings, also owns the Alexander's site at 59th Street and Lexington Avenue, which is finally being demolished and has been a source of speculation and head-shaking over lost opportunities for several years.