Building a dynasty of bricks and blood

Pioneering developers Sam and Richard LeFrak analyze the real estate market today, lambaste other great real estate families (including the Trumps), and explain how to keep the next generation interested in the business.

The Lefrak Organization began as a simple construction company launched by architect Harry LeFrak in 1905 soon after he emigrated from France to New York City. Today, it is a $3 billion multi-building, mega-construction company that rents more than 94,000 apartments and millions of square feet of commercial and retail space, largely in the New York metropolitan region, with real estate investments all over the world. The LeFraks have diversified into the oil and gas, entertainment, film, and music businesses, which account for nearly 25 percent of their company's total revenues.

Despite its imposing size, the Lefrak Organization (spelled with a lowercase f) remains a family business, pure and simple. Harry LeFrak's father, who had been a builder in France, joined him a few years after he began the company. During the years of prodigious growth, it was under the direction of Harry's son, Samuel J. LeFrak. Now 72 years old, Sam LeFrak is still chairman, but day-to-day operations have passed to his son, Richard LeFrak, 44, president of the company.

Louis Moscatello, senior editor of Family Business, recently visited the LeFraks in their offices in Rego Park, Queens, for a wide-ranging conversation that covered the state of the real estate market, the impact of Japanese investors, and the record of the other great real estate families such as the Trumps and the Reichmanns. They also talked about the LeFraks' newest project, the $10 billion Newport community along the Jersey City waterfront across from New York's financial district. It will house 30,000 people when completed in 1996.

And, of course, they didn't ignore family matters., Richard and his father both live with their families in the same Fifth Avenue apartment building, one floor apart. How do they manage to keep their work and home lives in separate compartments? In this case, familiarity breeds dynasty: It gives Sam LeFrak the opportunity to get his grandsons ready for the next generation of building.

— The Editors

FAMILY BUSINESS: Sam, when did you realize Richard could fill your shoes?

SAMUEL LEFRAK: I always believed that the apple doesn't fall far from the tree. And when you bring them in young and get them, well, addicted — that's a word I hate to use — they become part of the game. Ever since Rich was a little boy, I've taken him to the office and to meetings. Once, when a certain firm wanted to do an underwriting of our company, I took him to the meeting and said, "This is my partner." Rich was 14 years old at the time. After we came home, I asked him, "What do you think?" He said, "They're a bunch of crooks. I wouldn't deal with them." We didn't do the deal.

I didn't treat him like a baby, you know, "Here's a lollypop." I treated him with respect. We still have a great relationship. We come to work together. He does his thing, and I do mine. Sometimes he thinks I'm nuts. But he doesn't interfere.

RICHARD LEFRAK: Actually, I started working with him even earlier, when I was 13. This may sound trite, but I started as a messenger boy, doing the most menial things. As I got older, I did more. I spent a couple of summers working in the field. As a result, I became fascinated with this business. There was some proselytizing, but I wouldn't say he pressured me. It was more like propaganda, you know, "the glories of the business," and so forth. I was hooked. I started working full time in the second semester of my first year at law school.

SAM: What you do is glamorize the business. Make it exciting. Give the kids a feeling of belonging.

We have a tradition here. Look at the pictures on that wall. We go back to 1845. This is my great- grandfather. That's my grandfather. That's my late father. There are five generations here. My father was an architect. After dinner, he'd clear the table and open up blueprints. He'd point and ask, "What's that? And that?" So when I was eight years old, I could read a blueprint.

We're preparing our sixth generation. My son's oldest boy starts college this year. He'll work here this summer.

FB: So, Richard, you're giving your children the same sort of exposure to the business that you had from your father?

RICHARD: Well, they're just starting and they didn't come quite as early, I have two of them, so I guess if I get one interested, that will suffice. We take them on Saturdays to jobs and sales offices to see what people do in a business.

FB: How would either of you feel if they wanted to do something other than follow you both into the business?

SAM: If one of my grandsons decides that, so be it. But it will never happen. You know why? I've made the business so exciting for them. Let me tell you about planning for the next generation. I live on Fifth Avenue with my wife — we'll be married 50 years next year. We have the entire seventh floor. My son lives on the entire sixth floor. My grandsons are in my house all the time. We have such a great relationship. We're developing a dynasty.The younger one will call me up and say, "Hey, what about that deal?" Or, when I prepare a lecture, I'll say to the older one, "Give me your opinion."

FB: What sort of give and take occurs between the two of you in making a major decision to proceed or not on a project — Newport for example?

RICHARD: We discuss everything quite thoroughly. It's not a formal process; we don't have a board meeting. But we have very close communication. If we both feel it's a good idea, then there's no problem. If either one of us has very strong opinions on a subject, those are the opinions that prevail. That's generally the way we decide if we can't agree.

SAM: We've never run into that.

RICHARD: On projects calling for major investment, we've never really run into any kind of serious conflict. We look at an investment as a bus: If you miss that bus, there's always another bus. We've built tens of thousands of units prior to my being here, and, since I'm here, we've done close to 10,000 units and millions of square feet of office space. So it's not that we have an empty plate.

FB: How do you interact day to day?

RICHARD: My father has a broad outlook on things and doesn't micromanage. He's got a lot more skill and ability than I do in the marketing end of the business, so I stay out of that. I take care of the financial transactions, although we consult on those. When he wants to tell me something, he certainly does. He's just not that involved in day-to-day operations at this point. So, in a typical discussion, he'll say, "It's time to go out and finance these properties." He just wants it done.

FB: How does your work relationship affect your father-son relationship?

RICHARD: My father says you must divorce the professional from the social. During the workday, we behave like people who are business associates. After that, we're father and son. The confusion in a lot of families comes from the fact that the chairman can't decide whether he's a chairman or a father. And the son can't decide whether he's a president or a son, so he wonders, "Why is the chairman treating me like that? I'm his son." We've been fairly successful in maintaining the proper dynamics. We work very carefully with each other, without the friction that some people have.

FB: Richard, what is it like being the son of a father who is so well known and so outspoken?

RICHARD: Frankly, I'm not quite as flamboyant as my father. He makes very good press, even today. I don't feel that I have to compete on that playing field. At the same time, it's pretty well recognized within the industry who has run this business, day to day, for the last 10 years. By and large, the actual operations are in my control.

FB: Do you think the New York real estate market is going to be pretty rocky for the next few years?

RICHARD: We're suffering less than the press says, but no question the market is softer than a few years ago. By and large, the supply of products is now mostly shut off. Real estate is a lender driven industry: If funds are available, developers will take advantage of them; when the funds dry up, that affects speculation. Right now, the funds have dried up. The banks are not lending except to a few developers, and, because of that, you'll see shrinkage in supply. If we don't suffer from cataclysm in our local economy, eventually the vacancies will be absorbed and business will pick up. But it's always been a cyclical business.

SAM: There are too many hotels and office buildings. One was needed, and developers built ten. Corporations have moved out, but they're still building.

FB: How have you managed during this slow period?

SAM: There's too much of everything except moderate and affordable housing, which is where we come in. Our cost of operations is kept at a minimum. We don't believe in debt; we own most of our buildings free and clear. We have plenty of cash, and good cash flow. It's all rental housing, though we've tried a few condominiums.

We do everything in-house: engineering, architecture, insurance, financing. We make our own cement; we have our own sandpits and gravelpits. We even own a forest. I had the biggest brick plant in the East here, until the day I could buy brick cheaper and truck it in. Then I closed the brick plant, but I'll reopen it if prices get too high. What I'm saying is that we have a different philosophy that allows us to get through this easily.

FB: Families have always played a large role in the New York real estate market the Trumps, the Reichmarms, the Zeckendorfs. Do you foresee problems for any of them?

SAM: I've seen Donald Trump come in with his ritzy-glitzy operations. When be bought the Plaza Hotel and paid $400 million, what did he do? The first thing, he doubled the rates. How many people can afford to stay at a hotel for 500 bucks a night? He thinks consumers will swallow it. Well, some of them are now getting indigestion.

He's getting hurt now in Atlantic City. There are only so many disposable dollars for gambling, and many facilities competing for those dollars. Now he's got his new casino, the Taj Mahal, which is like the black hole — nobody knows how much it cost him. But he's going to take it from his castle or from his Tower, the Trump this and the Trump that. You know he conned a lot of guys about that great location for his Trump Tower; I haven't heard of any of the businesses in there ever making a profit. He's got Trump cars; they're not selling. He's got a turkey down in Florida, the Palm Beach Towers; he bought it for $40 million, but it's not a marketable piece of property. Why? There's a freight train that comes through with 500 railroad cars for four hours. You get bump, bump, bump, and the walls shake. And he thinks he's going to market this thing?

Look what he did with the Trump Shuttle: He doubled the price. Now you know what's happened? People say, "The hell with him, I'll take the Amtrak train to Washington. I'm not giving him 100-plus dollars to fly for less than an hour." You understand?

FB: And what about others, such as the Reichmann family?

SAM: Let me tell you about the Reichmanns. These guys came down to Battery Park, where I was like a surrogate mother. We were the sponsor of the Gateway Plaza development. I went through 18 years of pain, filling it, developing it, building the infrastructure, building the esplanade, putting up the first group of buildings. At that time, my relationship was with Governor Rockefeller. When Hugh Carey came in, I had a falling out with his guys. All of a sudden, they decided they wanted to have a competition for the World Financial Center, 6 million square feet. Reichmann's Olympia & York got the contract. We just weren't treated right. Now Wall Street has its problems. Merrill Lynch is moving across the river; Shearson is looking for money.

That's chapter one with the Reichmanns. Chapter two is their ITT building, which is so full of asbestos that they're going to have an expensive time with it. Chapter three is Canary Wharf in the Docklands, their big development in London. It's three miles from the financial center, and there's no transportation. From the financial center of London to the Docklands is gridlock. Gridlock! They've got one little Toonerville Trolley that goes out there maybe once every hour. They want to build a new subway. Meanwhile, they've got commitments up the kazoo.

And chapter four, they had big eyes and a big appetite with Campeau, which owned some real estate. They came in for about $250 million in loans — I understand it's probably more than that.

The final chapter hasn't been written yet, but here's the old story about the race between the turtle and the hare. Sure the hare ran like hell, but the turtle finished first.

FB: What impact are the Japanese having on New York real estate values?

RICHARD: There is no question the Japanese are having an impact. If you want to sell buildings on 57th Street or Fifth Avenue, the Japanese will be there, But as soon as you get out of that little strip, they are not aggressive buyers.

FB: They lack the sophistication?

RICHARD: Their philosophy of real estate has always been that they are long-term holders and want to buy the best comer on Tokyo's exclusive Ginza, but can't buy it at any price there. So, if they see the best corner in New York come up for sale, or a great corner, they'll pay the price. But they don't want to go off the beaten path.

SAM: They look for trophy buildings here, like Rockefeller Center. They don't give a damn about the bottom line because they have staying power.

FB: What do you think about the price they paid for Rockefeller Center?

SAM: Biggest bargain in the world.

RICHARD: They bought the preeminent piece of real estate in the United States for $800 million. And if they went to Tokyo to buy that same piece of real estate — if they could buy it — they'd probably have to put another zero on that number.

FB: Will New York continue to be the major focus for your real estate development?

RICHARD: I don't think so, but it will be a big component. Today the best real estate is not changing hands. People with strong hands in real property don't give it up that fast. I think that there are, by and large, better opportunities out of New York City. That's not to say that there aren't going to be some opportunities here. But they have not been coming fast and furious.

FB: Richard, in the future, do you see taking this company in different directions from those you and your father have taken together?

RICHARD: Well, we've diversified this company in the last 20 years. We developed a very nice oil and gas exploration company. We have a music and entertainment company. They're really very different businesses, different from what we started with and different from each other.

My philosophy is that you have two things: You have talent, which is the most important thing, and you have capital. And you have to move where you can use your talent and capital. There's no question that in the development business we're as good as anybody. To the extent that we're going to play on a field tilted in our direction, that's the business for us. We have the staff, the contacts, the infrastructure to be successful at it.

On the other hand, the conditions that affect the development business are way beyond our control. If development turns into a dead end, we're not going to knock our heads against the wall. We are not afraid to go forward and try new businesses. Also, we like the idea of starting a business instead of just buying.

FB: What about international opportunities for your company?

RICHARD: We live in a different world today than we did just six months ago. There are new opportunities to do things overseas. I'm on my way to Japan in the next few weeks for my second visit in 12 months. That's what's required today. You just can't think that the world begins and ends between the Hudson River and the East River.

FB: Are you raising capital in Japan?

SAM: Sure. They've got all the money!

FB: And are you selling the New Jersey condominium units in Japan and in the Far East?

SAM: Yes. Though we're 80 percent sold out [on Newport], we decided that we would look at other markets. We have opened up big sales operations in Tokyo, Hong Kong, Singapore, and Taiwan.

FB: And you sell these individual units to investors over there who then use them or rent them out?

SAM: That's right. We also own real estate all over the world. We have good partners in France, England, and Scandinavia. We're also in the international market through our oil company and the entertainment company.

FB: Do you encourage your sons to take a more active educational interest in subjects that prepare them for international diversification?

RICHARD: My older boy is quite a linguist. He speaks fluent French and some Spanish; he's studied Chinese, and he's now decided to learn Japanese as well. He recognizes that the world is getting smaller and that being a success may depend on the ability to speak these languages.

FB: Richard, you have three sisters who are not involved in the company. What is your relationship with them? Is there any jealousy on their part because they're not in the family business?

RICHARD: I don't believe so. They're all engaged in other ...

SAM: They're doing their own thing.

RICHARD: I don't think they miss being here. I'm not so sure that would be the case if we were all starting today. But 20 years ago real estate development wasn't seen as being for women.

At this point in time, I think they're all quite satisfied doing what they're doing. One of them is producing movies and that's quite a glamorous life. She also is quite independent in what she does. She has her own company.

SAM: We've invested in some plays that she produced.

RICHARD: I have another sister who sells expensive co-ops and condominiums in Manhattan, but not through us.

SAM: My daughters know that doesn't conflict with what we do. Richard's job is to look after them. Richard is my surrogate. All my children share. They are limited partners. I have one full partner — my wife. They know that.

FB: Do you see any problem down the line with your children in terms of splitting the equity of the company between active shareholders and inactive shareholders? These sorts of problems have been known to force sales of companies.

SAM: This has all been taken into account. It's all done. My children have been told they're being taken care of. And look, who the hell knows what tomorrow brings? What do we have, a crystal ball?

Listen, right now the attitude in Washington is confiscatory. They don't want anything to pass on to the next generation. They want to confiscate it. But we'll be able to pay their tax bill. Remember, I've got liquidity; I'm tied up in cash.

RICHARD: You can't guard against jealousy. It just happens. But I think to the extent that preparation is required so there are no surprises, it's being done.

FB: Would you ever consider taking your company public?

SAM: Not me.

RICHARD: No, never. People do it because they either need to get liquid or need capital. I like to think we've got more capital and more liquidity than most of the firms on Wall Street today.

FB: Going public has a lot of drawbacks?

RICHARD: Yes. The pressures that are put on companies to perform, to do things the wrong way, just for short-term results, are ill-advised. I don't have to show my report to anybody but my bank, and if they're happy, then everything is okay. They don't say, "You made a little more or a little less this year." Or, "How come you don't have any dividends?"

FB: What are some of the newer projects that you're tackling?

SAM: We have just signed a 20-year lease with the City of New York on two buildings that we own right down the street. The Department of Environmental Protection will consolidate from 20 different offices into two locations. We're equipping the buildings with state-of-the-art everything-laboratories, air- monitoring equipment, fiber-optics, microwave. They're going to have the finest communications system. They'll be able to operate seven days a week, 24 hours a day. This is a first, and I've done it for a rent of $9.40 a square foot, which you've got to admit is pretty cheap.

FB: At that sort of rent, it's obviously not going to be a money-maker for you.

SAM: I have no mortgages on the buildings, so I can afford to be a great hero. I make something. When I add in the depreciation and everything else, I'll see about an 8 percent return, about the same as a Treasury bond. But look at the benefit that I'm going to get. I want to straighten out New York because I was born here. We've had five generations living here. My grandparents, father, all buried here. My children are all New Yorkers. And we're proud of that.

Look at the example I'm setting for my grandsons: Be there and do things for people. When you do things for people, then you'll benefit financially and otherwise. Look, I did not make this company on smoke. It was built with these two hands. I'm here very early in the morning, a hard-working guy. I'm not going to Palm Beach or Palm Springs hitting that little white ball, because that's not my game.

FB: Do you have interests besides work and family?

SAM: Underwater archeology. Right now an expedition I'm sponsoring has a sighting on a Christopher Columbus boat in St. Ann's Bay, Jamaica. I hope to bring it up. We have a team out there now. The boat is 72 feet long and that's a Caravelle. It may be the Santa Maria, which was a Caravelle. If I could raise it and put it next to the Statue of Liberty, boy, that would be one of the great achievements of my life.

FB: What advice can you offer family business people on how to get their children involved in the business?

SAM: Bring them in young. Get them involved by communicating. Ask their advice, draw them out, encourage them to express themselves. Have an interchange. Get that fresh point of view from them. You want them to feel proud to feel part of the team. If you say to them, "What do you know — you're only 16 years old?" you'll squash them.

FB: When do you let them fly on their own, and when do you bail them — and the business — out?

SAM: When my son became president in 1975, 1 said to him, "Richard, this is your bend in the river. You have my full confidence. Decisions are now yours to make. You can always use me to fall back on; you can check your decisions with me — or not."

FB: So you advise older generations to let go, to turn over full authority to the next generation?

SAM: It's not that I'm letting go. I'm there to advise and counsel. Encourage your children. Go to their strengths, stop criticizing their weaknesses. Parents are too critical. We're all different. Go to the positive and eliminate the negative.