Crain’s Cover Story – David Friedman, Longtime Friends, Key to Gilbert Strategy

Posted on August 22, 2011

It was almost four years ago, and Dan Gilbert knew the lease for Quicken Loans Inc. was going to come due in Livonia by 2010.

He looked to his lifelong friend, David Friedman, for a plan on how to make a splash in the city of Detroit.

It would be a massive undertaking, it had to be transformational and, above all, it had to be a secret, said Friedman, president and CEO of Farmington Hills-based Friedman Integrated Real Estate Solutions. Friedman shared details of the complicated road to buying a Detroit portfolio in a sit-down interview with Crain’s.

Part strategy, part fortunate timing, the deals came together after painstaking research, intense negotiations — and holding out for the right prices.

It was named “Project Roscoe” after the elementary school principal who oversaw Gilbert, Friedman and a number of other prominent businessmen who grew up as friends and neighbors in the Twickingham subdivision in Southfield. With the Quicken lease coming to an end in Livonia, the long-term plan was to build a new headquarters in Detroit.

But the plan fell by the wayside as the economy rocked both Detroit and Gilbert’s company in the residential loan business.

As the downturn progressed, Friedman said, it became clear that buying buildings was going to be the right route to take. But which buildings to buy?

Friedman set out to catalog every building within several blocks of Campus Martius.

“He eventually said, “let’s tie up some properties,’ ” Friedman said. “I sat down and put together a strategy of what to buy and how to buy it.”

Bad economy actually helped

In looking for a “behind-the-scenes” person, Friedman’s name would be on many real estate brokers’ lists. He’s been known for making investments in land, buildings and loans, then quietly running them for a profit.

In addition to running a leading area real estate firm with a roster of longtime brokers, Friedman is known for his office building purchases. Those deals typically involve buying properties out of foreclosure.

Friedman has bought and sold properties in Farmington Hills, Livonia and Troy. HisPremiere Equities LLC owns more than 5 million square feet of commercial real estate and more than 1,000 units of apartment buildings.

Friedman was shrewd even as a young broker; he was 23 years old when he helped developer Buzz Silverman put 25 residential parcels together for what is now the Village Greensenior housing development in Southfield.

Since then, his firm has been behind the scenes in office developments, building acquisitions and leasing deals across the country.

Friedman’s wide-ranging experience became an asset for Gilbert.

The original development plan in Detroit focused on property near Campus Martius Park, Friedman said, because Gilbert sees that as the center of things.

So as the strategy shifted to acquisitions, Friedman prepared a report on every single building within walking distance of the park. The analysis looked at the condition of each building, tenants, ownership and anything else relevant.

In the end, the economy was the best help, Friedman said, as some of Detroit’s iconic buildings became available for the first time in years.

“We were able to buy cheap in the middle of a recession,” he said. “We executed one thing at a time.”

Once all of the buildings are closed, it will represent an investment of roughly $51 million, which will likely balloon to nearly $100 million once the buildings are renovated.

But that’s still a bargain, Friedman said, when the cost of a building and parking can be near $300 per square foot — $300 million for a building the size of Comerica‘s former headquarters building, One Detroit Center.

“The time to invest in Detroit is now, especially if you subscribe to the concept of buying low and selling high,” Gilbert said in an email to Crain’s.

First: Find the parking

The buying strategy involved two crucial parts: Finding parking and picking the right buildings.

Before the buildings could be bought, parking had to be secured.

Two Detroit Center, a parking structure at 160 E. Congress St., was the first property to get under option.

“That was first, tying up the parking,” Friedman said. “Picking up Two Detroit allowed us to get the parking we need, then also use the parking that comes with Chase Tower.”

Operating under a veil of secrecy before getting the Two Detroit Center parking deck under contract was a shrewd strategy, but necessary, said Cynthia McDonell, city leader for Detroit with the Georgia-based Piedmont Office Realty Trust Inc.

Piedmont owns the Class A building 150 W. Jefferson, which will compete for high profile tenants with Gilbert.

“The same way that Mike Ilitch had to work so quietly to get the land for Comerica Park,” she said. “You need to do that so that nobody can step in and muddle up what’s going on. It was shrewd.”

The Two Detroit Center structure, purchased for $10.5 million, according to real estate sources, has 1,095 parking spaces.

Targeting the Dime and First National buildings meant adding more parking: 938 and 535 spaces, respectively.

Selecting the Chase Tower as one of the acquisitions also opened up parking because it comes with the right to use 891 spaces in the nearby One Detroit Center office tower.

Friedman and his team negotiated with longtime Detroit real estate investor Gary Torgow to work out a deal on the Chase Tower.

It was a long negotiation, Friedman said.

“In the end, I wasn’t going to let people take advantage of Dan and what he wants to do in Detroit,” Friedman said. “We held out for the right deals.”

Chase eventually closed, coming in at a reported $16 million.

After the First National building closes, the 1.7 million-square-foot portfolio will have access to roughly 3,500 parking spaces.

First National’s twists and turns

First National was the tricky deal and has yet to formally close.

With the building facing foreclosure and under receivership, Gilbert and Friedman initially tried to buy the loan underlying the building.

It’s a common tactic used by real estate investors to find a building in default on its loan, buy the loan at a discount and then exercise foreclosure to take ownership.

The ownership entity, FN Building LLC, had earlier filed bankruptcy, so the entire process had to take place in bankruptcy court.

As part of the bankruptcy process, the former owners, Jacqueline Fried and Alex Dembitzer, blocked the sale by bidding up the value of the loan by purchasing it with FNB Detroit 2010 LLC, a corporate entity they controlled.

“When we couldn’t get the note, we backed off,” Friedman said.

After Dembitzer again controlled the loan, but also faced pressure from the building’s anchor tenant, Honigman Miller Schwartz and Cohn LLP — which was threatening to leave — Gilbert and Friedman were able to go back in and buy the building outright.

“And we ended up getting it for less than we would have spent on the note,” Friedman said.

The building is still under a purchase agreement due to the layers of court approval needed for a sale, but is to be sold for $8.1 million, according to the purchase agreement.

The Dime

The last of the purchases is the Dime Building. The deal closed last week, for a reported $15 million.

The building also represents a lot of vacant space. Of the 371,000 rentable square feet, there are 134,000 square feet vacant, with several leases expiring soon, according to Washington, D.C.-based CoStar Group. A renovation was completed in 2002.

Overall, Friedman is confident that all of vacant acquired space will be filled.

“Dan has now created a market,” Friedman said. “The impact of these deals is going to be reflected on the vacancy rate by the first of next year and it’s going to show the first major move in the vacancy rate in many years.”

By Daniel Duggan, Crain’s Detroit