▪ 4 ▪Astor Risks
BY EARLY 1942, Webb & Knapp was making money from investments, but as major investors we were barely off the ground. What we desperately needed was some outside impetus, and we received that boost, courtesy of Vincent Astor.
In 1784, Vincent Astor's great-grandfather, John Jacob Astor, a dry and rather solemn man, arrived in the United States from Germany. He made his first fortune in the fur business, then a second in the China trade, and yet a third by investing his previous gains in New York real estate. When he died in 1848, he was the richest man in America. The family split into two main branches. Some of John Jacob's heirs moved to England, where they became very British and, in the case of Lady Astor, notoriously and flippantly anti-American. The British Astor-family fortune, however, which remained largely American-based, escaped the onerous, special British taxes during the two world wars, and thus provided the British Astors with the best of both worlds. Meanwhile, the American branch of Astors also flourished, and this fortune was also New York-based. As New York continued to change and grow, the diversified Astor holdings changed character accordingly. By 1942, Vincent Astor, of the American Astors, held as his share of the estate a $50-million spectrum of New York real estate, including the St. Regis Hotel at Fifth Avenue and Fifty-fifth Street, a number of midtown apartments and brownstones, various downtown lofts and office buildings, as well as Bowery tenements, meat markets, and a few rundown houses on the West Side. Approximately one-third of those properties was unprofitable, and the net revenues of the whole were roughly one-half million dollars per year.
In 1942 Vincent Astor, a naval-reserve officer, was called to active duty. He decided to put the management of his properties in the hands of an outside, disinterested group. To this end, he interviewed a number of management companies. However, it turned out that Astor's attorney, Roland Redmond, was a close friend of Eliot Cross. Astor was socially acquainted with both Crosses (they went to school together) and Henry Sears. Therefore, when Webb & Knapp were invited to make a proposal on handling the properties, we had an edge on the competition, but the edge was very slight.
At this point, three of my partners, Gould, Landauer, and Sears, had been called into the armed services, and the fourth, Cross, was playing a relatively inactive role in the business. I had agreed to stay on and run the show until I was drafted, and therefore I was the only active partner left in Webb & Knapp. As it turned out, I was never drafted, being too old at each successive draft call.
The first I knew of a possible Astor arrangement was when I got a rather enigmatic phone call from Roland Redmond. His firm had been requested, he said, to find a management company to handle Astor's affairs while the commander was in the service. Would we care to enter the competition for this role?
I was so taken aback that I had to stall for time, and I simply answered, "I'll call you back."
The only reason for this delaying tactic was that I thought somebody might be pulling my leg. After fifteen minutes or so, I telephoned Mr. Redmond at his law firm, Carter, Ledyard & Milburn. When he answered, I knew that the voice I had heard before was the same and that I was talking to headquarters. I let Redmond know we were indeed ready and willing to be of service and asked what we might do.
"Come down to my office and I'll give you a list of the properties. You can study them and give us your views."
When I arrived, Redmond showed me a long booklet with blue backing, each page identifying a property, its cost, its depreciated book value and profitability. In all, the properties came to fifty million dollars, debt free, but with consolidated profit-and-loss tables showing a slight deficit.
I studied those tables diligently and had soon prepared a written proposal. Cross, however, also arranged for the two of us and Redmond to meet informally with Astor in his 120 East End Avenue suite. The American version of the old-school-tie system had now come into play, but it would still be my job to cinch the deal.
At the time, the Vincent Astor estate was being handled by John Carrington Yates, a tall, slender man, and John Coulter, a diminutive, very pleasant fellow with a florid complexion. Their respective sizes made them look like a very odd couple: something like the ascender and dot of an exclamation point. They were charming gentlemen, but really little more than caretakers and rent collectors for Astor. Yates had been an actor and was an active member of the Lambs' Club. He was among Astor's favorite drinking companions.
Astor, an avid yachtsman and an intimate friend of Franklin Roosevelt, held the naval rank of commander. He fancied himself chief of U.S. antisubmarine operations off the Atlantic Coast. The Navy people with whom he worked had other ideas, but the millionaire socialite's post did give him and his naval friends a certain amount of convivial shore time in New York, and it was on such a visit that we met him. He was then in his early fifties, had a reputation as something of a ladies' man and also as an earnest drinker. I once saw him in later years put a lump of ice in a nearly full water glass and swig it down in almost one gulp. It wasn't till he mixed a second drink that I realized those were martinis he was swallowing by the tumblerful.
That afternoon, in the spring of 1942, he drank Scotch until, after an hour or so, he said, "Well, it's time for cocktails now," and started on dry martinis. As the hours went by, he became slightly less comprehensible, but he had a terrific capacity, and the business aspects of our meeting were over relatively early. His first question was what I thought of the idea of various firms submitting written proposals on how his estate should be managed. My response was that it was a fine way to conduct a letter-writing contest but no way to select a real-estate man.
"What are you talking about?" he growled.
"Each of these companies is going to submit the best letter they've ever composed, but a letter-writer is not necessarily a real-estate man. What you should do is ask these men to demonstrate their ingenuity and wisdom by showing you what they've already accomplished. Find out what they have been able to prove about the evaluation and the growth and development of values in real estate. You don't have to know how clean they're going to keep the doorstep and or how they're going to fire the superintendent if his shirt is dirty." Astor, seated in his chair, gave a grunt and paused. He nodded a bit over his drink and finally asked, "Well, what do you think of my properties?"
"For the most part, Commander, they stink; they are outmoded."
No one said a word. The creak of someone stirring in his chair crackled like gunfire in the silent room. I knew I was the only bona-fide real-estate man in the room. I had been doing some keen trading for Webb & Knapp on a modest scale (where it is most difficult to do). We were sitting there drinking Astor's liquor courtesy of the "old-boy" network. As Webb & Knapp's "new boy" I was pretty sure of myself, but obviously I had to approach Astor from a strictly professional standpoint rather than a social one. And I saw that as a distinct advantage, since this was a business talk and not a class reunion. Cross and the others had the social weight, but I was the only cutting edge that could make this weight count, and I sensed rather quickly that straight talk appealed to Astor and that he probably found it a welcome relief.
When given the chance, I told him which properties he should get rid of, how to get rid of them, and what he should acquire in their place. None of this took very long, but we stayed for a few extra rounds of drinks. When we left in the early evening we were in a mild glow composed of three parts alcohol and one part feeling we had won our case. We had.
On a June afternoon in 1942, we were engaged as exclusive consultants for the reorganization of Astor's holdings. The next morning I went to our apartment door to pick up The New York Times, and there on the front page was the story. This front-page coverage made us overnight the most important real-estate firm in America. I began to get congratulatory phone calls and offers of doing business from dozens of people I had never heard from before, and we immediately, and with a purpose, began moving and dealing in a dozen directions at once.
The
business of selling off Astor's less desirable properties was even less difficult than I had expected and taught me anew that there are a great many nonrational though quite real factors in real-estate values. Some, for instance, have to do with whom or what a piece of land or property is associated. The inn where George Washington slept, the house where Washington Irving lived, the sword General Sheridan waggled at his countrymen—all these properties take on a certain associational virtue and value. I soon learned there was an invisible but tangible aura about the Astor properties that made them attractive: if the great Astor estate had owned them, they must have extra virtues, because Old Astor had been so shrewd. But this was only one incidental part of the attraction of these properties.
At this time a number of refugees who had come to the United States from Hitler-controlled Europe were becoming modestly prominent in the dormant New York real-estate market. These new buyers were far less interested in the total price of a property than what the actual down payment would be. A low down payment gave them maximum leverage for the inflationary rise in values that they were anticipating. Taking a reverse lesson from the Clews-mansion deal, and the opposite tack from my cash-hungry friend Mr. Blumenthal, I sold for very low cash down payments but at steep prices. In this way I got a sales price of, say, a million dollars on a property that would have sold on the cash market for $400,000. Of the million dollars, I might take $50,000 or less as a down payment, in addition to a piece of paper in the form of a mortgage. Then I would turn to the mortgage companies to sell off my paper. They would ask, "What is the price of the property?" and I would say, "One million dollars," and when they asked what we wanted from them in cash, I would suggest a peak of, say, $666,000. I would immediately follow this with the announcement that Astor would accept a second mortgage for the remaining $284,000 of the million-dollar price. The fact that Astor would take a subordinate mortgage served as a psychological guarantee, making the mortgage buyers courageous enough to take our paper.
Having converted our paper mortgages into usable cash, we then went forth and bought blue-chip properties; we would mortgage them at a good rate (their good income and the Astor name again helped), and with this second wave of cash I would again go out and buy up more choice properties at cash discounts in order to repeat the process. We bought property in Texas, California, in Georgia, Long Island—across the whole of the continent. In this way we not only made some shifts in Astor's New York City holdings but also put twenty-five percent of the profits of the new Astor empire into growth areas about the country.
When we made our initial proposal regarding the management of the Astor estate, I had refused to state a flat fee. I explained that when we delivered he could pay us what we were worth: if we didn't deliver, he didn't have to pay anything. At the end of the first year we had added enormously to Astor's assets and tripled his earnings. Through his lawyers, Astor kept prodding us to present him with a bill, and finally I did so, for the amount of $350,000. At the same time, I commented that he did not have to pay us a thing if he thought the bill out of line. I held my breath. Astor's lawyers blanched when they saw the fee, for the commander was known to be tight with a dollar, but when they presented my bill Astor said, "Pay him, and send him a bunch of flowers from me."
We turned Astor's properties back to him in September of 1945, some 152 transactions after our first sale for the estate. The estate had increased by $15 million and Astor was now taking in $2.5 million in yearly profits.
My relationship with Astor gave me my first close look at and contact with a world which, because of its wealth and exclusiveness, fascinated and attracted me. However, this world did not always capture my respect. I found Vincent Astor quite amiable, sometimes humorous, but not very bright. He had inherited a native shrewdness from his forefathers. Nevertheless, if he had not also inherited his great fortune, he probably could not have done much on his own. Although he ruled his employees and dependents with a willfulness and sometimes a harshness that brooked no independence, our own relationship was always cordial, for I was not his subordinate but his consultant, and I was making him a lot of money.
Astor was very consciously social and outspokenly snobbish. He lived in a very narrow, self-satisfied, but not particularly brilliant or generous circle. He had, I remember, a particular dislike of his half-brother John Jacob Astor, a great hulking man whom Astor and his friends referred to as Jack Ass. As scion of a famous American family, Astor felt an occasional urge to flamboyance and noblesse oblige. He wanted to be a noted philanthropist but was too engaged with the social aspects of being an Astor to do very much about it. He had a series of very nice wives, three in all, but he left no heirs except his foundation. Astor's fortune is one more that will gradually filter back to the community. There was a certain low-key tragedy in all this. Like the last of a long line of kings, he was the last of a long line of Astors, cast in the shadow by some of his forebears, but was too much a prisoner and lover of his own background to break out into his own.
After Astor took back control of his properties, we tried a number of times to interest him in various propositions. He turned down the great majority of these suggestions and kept his own counsel. Soon we drifted apart, each having served the other well. We left him a much richer man than he had been. And his fees to us created the capital base from which Webb & Knapp's real-estate empire grew.
▪ 5 ▪The Mechanics of Progress (1942-1945)
BETWEEN 1942 and 1945 Webb & Knapp earned $835,000 in fees and commissions, plus $872,000 in profits from operating various properties. During this same time, our total assets grew from two to seven million dollars while our tangible net worth of assets over liabilities had climbed from minus $127,000 to over two million dollars. This was just the beginning of our great growth period.
How did we do it? It was really very easy. It was also great fun, and as some have suspected, we did it with mirrors. The formula also calls for contacts in proper places, lots of travel as well as travail, a pinch of ingenuity, careful study of the tax laws—and a crystal ball.
The crystal ball we used was the simple, built-in type. The only trick was not to be so awed and frightened by the present that you were not able to see the future that lay within it. In an America that had been traumatized by the Depression, I was one of those who recognized that the Depression was past and then acted on this recognition. A great many others, thinking the Depression was still with us, did in fact keep it here for themselves, out of sheer habit of thought.
The reasons for this mental freeze were as varied as the individuals I met. All over the country I found a great many men who had been so humiliated, so jolted by the Depression that they never regained anything close to their pre-1929 trust and confidence in the world or in themselves. I discovered others who for various reasons had grown accustomed to the status quo determined by the Depression. They did not look for and did not see the implications of the new jobs, the new growth, and the resultant changes underway around them. Both groups, conditioned by disaster, were prepared for nothing else.
Given a different perspective, it took only a modicum of imagination to spot properties which were highly undervalued and which it would be wise to buy. The problem was not in understanding what was going on but in convincing others that it was indeed going on—and might continue for a few years. That is why, in order to get some major retail companies to move into properties we held, I took to offering them low, depression-proof rents with a percentage-of-profits clause in the contract. We had more faith in their eventual success than they did, and this faith paid off in handsome profits for them and for us.
Excepting barter, which I have sometimes resorted to, the acquisition of sizable amounts of property calls for sizable amounts of money. While learning the virtues of buying for cash and selling for credit, I was discovering that there are multiple sources and uses for money in real estate. In addition to our Astor earnings, we used, as I have previously indicated, bank money, first-mortgage mon
ey, second-mortgage money, and sectional mortgages (regular first and second mortgages divided into two or more sections and sold to small investors). Another way of garnering quantities of ready cash is to make money for others, and we had done this by syndicating special projects with both individuals and groups. We organized twenty-two such projects from 1942 to 1945.
One company we did syndication work with was the Interstate Realty Corp. of Boston, of which Benjamin Swig, the hotel man, was a principal. With them we entered into at least a dozen purchases and sales of retail properties all over the country. We sold property in Texas which had cost $141,000 for $165,000 after leasing it to F. W. Woolworth Co. In Syracuse we bought a $357,000 department store and sold it five months later to Bond Stores, Inc., for $425,000. Usually we handled the details of the transaction, although Interstate handled the purchase of Hotel Edison in New York.
Franciska Bator was another partner of record with us in a number of ventures, but she was acting for her husband, Victor Bator, a Hungarian emigre, lawyer, and unofficial investment scout for a group of his fellow nationals. Another continual investor was Irving Geist, a vice-president of Consolidated Retail Stores, but our cast of backers, like our business, was constantly changing. In 1944 Webb & Knapp, Interstate Realty, and four individuals bought a small mill in York, Pennsylvania, from the Southern Kraft Paper Co. for $25,000, which we then sold to a manufacturer, who needed new manufacturing capacity, for $65,000. Again, with Louis Kramer, a long-time New York real-estate investor, we worked out a variety of transactions, including the purchase, for half a million dollars and resale, for $650,000, of Best & Co. on Fifth Avenue. As word of our activities got around, we had less and less trouble finding backing and partners. Who turns away a man who could make money for you?
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