▪ 3 ▪From Journeyman to Master
WHEN I WAS still a boy in knee pants, the City of New York passed amajor new pollution-control measure. Steam engines were banned from the city; electric engines must be used in their place. The New York Central was ordered to cover up the railroad tracks (from Ninety-sixth Street to Forty-fifth Street) that led into Grand Central Station. The ensuing resurfacing and cosmetic job created Park Avenue and a land boom. As soon as Park Avenue was created, smart developers began lining up to acquire leases in order to build luxury apartments over what had once been railroad yards and right-of-way land. The owners and managers of the Central, though they had at first fought this redevelopment vigorously, now found themselves the pleased owners of a fabulous realty empire. The railroad did little development as such, but leased its land to builders and developers.
In 1922, when I was entering college, four gentlemen organized a new company to, in part, help the New York Central handle some of its leases. One of these men was W. Seward Webb, a descendant, on his mother's side, of Commodore Vanderbilt. Another was Robert C. Knapp, a vice-president of Douglas L. Elliman & Co., a well-known realty company. The other two partners were John and Eliot Cross of the architectural firm of Cross & Cross. The new company was called 385 Madison Avenue Inc., after the location of its offices. The building stood on railroad land, and the Crosses had designed it. The new company took over the management of New York Central's ground leases in such locations as the Barclay Hotel, the Park Lane, the Yale Club, and other choice sites.
In 1933 the company changed its name to Webb & Knapp. Knapp died, however, and in 1936 both John Cross and Seward Webb decided to retire. Eliot Cross, no longer much involved in architecture, was left in charge of Webb & Knapp, and that year he took in two new partners, a young lawyer named John Gould, and James Landauer of Douglas L. Elliman & Co.
Eliot Cross was an urbane gentleman, a graduate of Groton and Harvard. With his brother John, he had designed many of Long Island's finest houses. They also designed New York Hospital and the Tiffany Building on Fifth Avenue. The Crosses designed excellent buildings but were traditional architects. The only modern structure they ever put up was the General Electric Building at Fifty-first Street and Lexington Avenue. Legend has it that while they were visiting in Europe a younger associate carried the project so far forward along modern lines that it was impossible for the Crosses to change it back.
In any event, in 1936 Eliot Cross was trying to revitalize Webb & Knapp by bringing in new blood. In 1937 I had been the broker in the sale of an office building at 369 Lexington Avenue to Webb & Knapp. The next year, when several major tenants moved out, the building began to lose money. Webb & Knapp asked me to bring in some new tenants. I was able to repopulate the empty floors rather quickly. John Gould, who was company president, invited me to join the firm, and I accepted.
My association with Webb & Knapp brought me a perceptible increase in general esteem among my fellows, a degree of economic stability (I would be sure of a paycheck), but I also took a cut in salary. Even as a partner I drew only nine thousand dollars a year. The solution to this situation was to get the firm making more money, but except for a few side ventures, I did very little at first. From 1938 to 1940 Webb & Knapp devoted its primary energies to consulting and to the management of buildings in which we or our clients held an interest. It was not till 1940, when Henry Sears, a well-to-do young cousin of Cross's, joined the company and contributed $400,000 in working capital, that we began actively to acquire new properties on our own account.
Of the five partners now in the company, one was an architect, one a lawyer, and one a capitalist; Landauer and I were the only real-estate men, but Landauer was essentially a manager-consultant. What I brought with me to the company were thirteen journeyman years of experience in the buying, selling, financing, and renting of New York real estate. I was familiar with almost every block of property in town, knew or was known to most important brokers and a great many bankers, as well as numbers of insurance men. I also brought ebullience and personal drive. If some of my partners were rich, I was ambitious. Thus, through a combination of background and personality I became the chief enthusiast, contact, and idea man for the organization. Inevitably, I began to draw the firm in new directions and into new developments, with some results which proved as much of a surprise to me as to my partners. For example, there was the matter of Webb & Knapp and its first fling at high life, via the acquisition of a nightclub.
One of the first properties we bought after Harry Sears joined us was a two-story building on the corner of Fifty-fourth and Madison. The building, which cost $400,000, subject to a $250,000 mortgage, contained a series of stores on the avenue side and the Monte Carlo nightclub on the Fifty-fourth Street side. The club was operated by Gene Cavallero of the Colony Restaurant and Felix Ferry, who was known as Fefe. Fefe, a Romanian, had made a name for himself as a showman in Europe. His most famous enterprise was importing long-legged, good-looking American showgirls to Monte Carlo for his "Monte Carlo Follies." He had a fine thing going until he made the tactical error of taking the show to London. There, to the delighted horror of the tabloids, a sizable number of his long-stemmed American beauties ran off to marry smitten young English noblemen. Those of the girls who stayed married eventually became highly respected ladies of the realm, but the abandoned Fefe, his chorus line sadly depleted, decided to recoup his fortunes via a new Club Monte Carlo in New York. Fefe's new club was the plushest combination of snobbery and effrontery New Yorkers had ever seen. Even in black tie a man felt out of place; white tie and tails was the style. Of course, the nightclub was a great success.
The Monte Carlo attracted many distinguished society people plus a crowd of hangers-on, but a number of these fashionable people, as I later learned, were buying on the cuff. To an outsider the place seemed a gold mine. The inner entrance was always crowded with standees waiting to be seated. The cash registers tinkled comfortingly, and since I found it difficult to get past the inner entrance, I was impressed. This just had to be the most successful and profitable night club in America.
Lulled by the obvious security of the income from a lease held by such a successful nightclub, we bought the building that housed it. And, as one of the landlords, I could now hope for a decent table. We had owned the property only a few weeks, however, when Gene and Fefe came to pay me their respects.
"Boys, what can we do for you?" I asked.
"We're broke," they announced.
"You are what?"
"We're broke. We owe money to contractors, to trade creditors, we . . . just ran out of working capital." But, they said, the nightclub was in process of turning the corner. Fifty thousand dollars was all they needed to get out of their bind.
Naturally, I was shocked; our double-hulled, unsinkable investment was beginning to look like a miniature Titanic foundering in ice cubes. Here was a nightclub so popular you couldn't get into the place, yet its operators could not pay their rent. Webb & Knapp didn't want to go into the nightclub business, so we agreed to refloat the boys with $50,000. After all, there were all those customers at the door. A few months went by, and Gene and Fefe were back at my office. They needed another $50,000. Again we reluctantly handed out the cash. That must have seemed to them like the beginning of a beautiful friendship, because six months later I looked up, and there they were again. By now I was getting the best of service at this haughtiest of places, but I was about to prove there is no gratitude in this world.
As our tenants walked in, I said, "Before you talk, boys, I want to ask you a question. Are you here for another fifty thousand?"
"How did you guess?"
"Well, I just invoked divine guidance and got the message. But I have news. At the prices you are charging us, we can't afford to eat there anymore. That means you are out and Webb & Knapp is in the nightclub business."
The situation was grim, but we immediately changed the club's policies, dropped the white-tie rou
tine, cut off the socialite spongers, and encouraged the cash-paying middle class. I put in as manager a Runyonesque character I knew named Dick Flanagan. Later I hired Sam Salvin, a famous restaurateur, to handle food and beverages. Within six months the club was making money. At its peak, it did a greater volume than all the rooms and restaurants of the St. Regis Hotel put together, and had netted a half-million dollars before we sold it in 1948.
Part ownership of a nightclub turned out to be great fun. I had my own corner table, with phone, plus the solicitous attention of the waiters and chef. For five years I dined at the club several evenings a week entertaining friends, business acquaintances, and occasional passersby. I did as much business there as from my Madison Avenue office. There was a certain comfort in knowing that at least part of the money we spent went back to Webb & Knapp, but what gave the entire period its greatest flavor was that my second wife, Marion, was my constant companion and hostess at these sessions.
My first meeting with Marion could have come from a romantic movie writer's opening scene for a film about the Big City. I was walking through the Upper East Side one spring evening and had stopped for the light when I heard a commotion behind me. I turned and saw a pretty woman with a poodle on a leash. Her dog was being mauled by a very angry bulldog who was not on a leash. I grabbed the bulldog and threw him to one side, at which point the owner ran up and took the animal in tow. This kind of attack was unusual, as the poodle was a female and the bulldog a male, so I wrote down the bulldog's license tag and rabies numbers. The poodle's left ear had been slashed, and we took her into a nearby drugstore for a touch of mercurochrome and a Band-Aid. Throughout all this I noticed that the poodle's owner was extremely attractive, and though obviously upset, very gracious. While she was thanking me for the second or third time, I introduced myself and suggested that we could use some first aid ourselves. Would she join me for a cocktail?
As Marion later said, "After all he had done, it seemed a little silly to say, 'How dare you!' "
I found her very intelligent and utterly charming. More adventurous than her sisters and friends in Waycross, Georgia, she had come to New York some years previously. By the time we met she was a devoted New Yorker. We were married in Palm Beach, Florida, in December, 1940. After our honeymoon we drove up to Georgia to visit Marion's family, then headed home. On the return trip, driving through Pennsylvania at night, we were caught in a small-town speed trap. A local justice of the peace cheerfully took the last twenty-five dollars I had in my pockets and a few hours later, with the gas gauge nearing empty, we approached the George Washington Bridge. The toll ate up the last of my silver, and we wheeled into town flat broke, very happy, and with nowhere to go but up.
Later that year Frank Russell, of Brown, Wheelock, Harris, Stevens, Inc., old and reputable New York real-estate brokers, came to my office to find out if Webb & Knapp were interested in buying the fashionable building at 1 East Sixty-second Street.
I told him we were basically brokers and managers of properties, rather than dealers, and that we didn't have enough capital for that sort of transaction.
But word must have been out that we did have a little venture capital, because Russell kept feeding out more information. "Old George Blumenthal, the investment banker who married the widow of Henry Clews, moved her out of the Clews mansion up to his property at Seventieth Street and Park Avenue. It's really more of a merger than a marriage, they've both got so much money. . . .
"Anyway," he continued, "the old Clews home has been converted to an apartment building by an architect who bought it from them, but you know how architects are; he went overboard on his construction costs and was caught short. Blumenthal has foreclosed a $148,000 mortgage on the property. That $148,000 is lots less than the cost of the alterations, but that's all Blumenthal wants. Bill, it's a good deal."
I answered that we might pay $148,000 if Blumenthal would take a small amount of cash, such as five or ten thousand dollars, and extend us a mortgage for the remainder. That kind of money, we could raise. A day or two later, on a Friday, Russell called. He said, "Mr. Blumenthal wants to meet you. Be at our office at three o'clock."
I showed up as asked. After a bit of chit-chat, Blumenthal said, "Well, young man, I understand you want to buy this building for $148,000 with a mortgage. . . . But we in the investment business aren't accustomed to buying and selling that way; we deal in cash."
It seemed incongruous for an investment banker to shy away from a simple mortgage. I said, "We brokers are poor, and you bankers are supposed to be rich. Why don't you lend us the money? We'll work it out for you." He held off, however, and we talked and finally brought down the sales price to $125,000 plus another $5,000 in cash from us, but he was still unhappy. Finally he said, "Give me a cash offer."
"All right sir, I offer you $72,000—all cash."
"That's ridiculous."
"Well, you wanted a cash offer. There it is. Why don't you take the weekend to think about it?"
On Monday morning Frank Russell called. "Bill, now you've got puppies." Blumenthal had accepted our cash offer.
Stalling for time, I said we would need to search the title.
Russell gave us thirty days, which meant that we had thirty days in which to raise $72,000. I took a deep breath, signed the contract, put up five thousand of our own cash, and started looking. I had heard that the Troy Savings Bank was in the market for New York City mortgages. When I showed them the certified $148,000 balance sheet of the company that owned the building, the Troy people said they were sorry, but the very most they would lend was $105,000 at four-percent interest. Even my simple arithmetic told me that the $105,000 loan was $33,000 more than I needed, so I agreed to the offer. The Troy bank, however, would give us a mortgage only after we had acquired the property. I still needed cash to pay off Blumenthal. So next I went to see the New York Trust Company and my friend Charlie Stewart, later president but then a vice-president in charge of the branch at Fortieth Street and Madison. He lent us the $105,000 so we could give Mr. Blumenthal the $72,000 in cash. Stewart was perfectly safe in doing so, because he had a commitment to get his cash back in the $105,000 mortgage from the Troy Savings Bank.
That gave us the title to the property and a sweet little profit of $33,000, but then I went through the rent rolls and found that the penthouse duplex apartment was occupied by Mrs. Vivian Clews Spencer, a niece of the deceased Mr. Henry Clews. I called on Mrs. Spencer and suggested that she buy the house.
"Mrs. Spencer, your rent is five hundred dollars a month. Even at the top interest rate of four percent, six thousand per year of rent represents the equivalent of $150,000 of capital tied up just to pay this rent. But, madame, if you buy this building, you'll get enough income from rental of the other apartments to carry the building—and your own rent will be free! This will free $150,000 of your own capital, and that is like finding money on the street." She was intrigued. After further talks with her lawyer, we had a deal—on one condition: she wanted to unload her two houses, one in Tuxedo Park and the other in Southampton, at fifteen thousand dollars each. We agreed to this second-hand-house rider. She turned over to us $20,000 in cash plus the two houses, and took over the $105,000 Troy Savings Bank mortgage. This gave us another $20,000 of cash in hand, for a total of $53,000. We eventually sold her two houses at close to $15,000 each and wound up (on a $5,000 investment) with a profit of $83,000.
On this one operation, which took a little over a month to arrange, we had made twenty times the profit that would have come to us as mere agents. But the Blumenthal-Clews transaction not only highlighted the advantages of being solely in charge of an operation, it brought into focus a number of other factors. Specifically, I became aware of the existence of a Depression market of sellers, such as Blumenthal, who would sell property at tremendous discounts if they could get cash. At the same time, partly because Depression-caused retrenchments had left various institutions with idle cash, one could get some quite extraordinary low-co
st, long-term loans and mortgages from banks and insurance companies—if these lenders saw a "safe" investment. Moreover, if you could provide them with a "market rationale," the value these mortgagers put on a property could be quite high. By providing a cash market for Blumenthal, by doing this through the device of providing a "safe, high value" mortgage market for the Troy Bank, and then by providing Mrs. Clews Spencer with a self-liquidating income property, I had provided a needed service to three quite separate principals, to everyone's immediate advantage and at a handsome profit to us.
This made me keenly aware that it paid to look at the real-estate business not as an end in itself but as a device for bridging gaps between the needs of disparate groups. The greater the number of separate groups (or their needs) that one could interconnect (or satisfy), the greater the profit to the innovator-entrepreneur.
These insights on "service" and the uses of "complexity" were to become elements in the majority of my most successful real-estate ventures. There was a gap, however, between my newly developed insights and the opportunity to apply them on any scale. Webb & Knapp didn't have the capital or credit to make a proper, profitable impact in the field of real estate. And that is the way things remained —all of us working hard, doing well, but not accomplishing anything truly spectacular.
Drawing on our own modest capital, with additional loans from some of the partners and their families, we began to do a bit of buying and selling. We picked up income properties in the Middle West, Pennsylvania, and, of course, New York. These purchases ranged from as low as $5,000 to as high as $500,000 in price. Where Webb & Knapp didn't have the financial weight to swing a deal alone, we syndicated our projects with other investors. By the end of fiscal 1942, we owed $740,000 on various loans, but controlled assets of some two million dollars. Webb & Knapp was on the move. My salary was back to twenty thousand dollars a year, but my personal financial situation was unchanged. The check for my son's first term at Lawrenceville was returned with the notation "insufficient funds," and my tailor was waiting payment for my last two suits. By now he knew that I would always pay, but he also knew that he might have to wait.
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