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Imagine the distress of Ferdinand and Imelda Marcos at what has become of their Manhattan real estate -- properties reportedly worth $350 million. Because the Marcoses were living 8,618 miles away in Manila, they are said in congressional testimony to have entrusted three of their buildings -- valued at about $250 million -- to Joseph and Ralph Bernstein, brothers who grew up in the Philippines but who now have a management and development business in New York.
Herald Center, the nine-story shopping mall the Bernsteins created in the shell of a former E.J. Korvette store, stands half-occupied a year after its grand opening. And the 37-year-old Joseph Bernstein says that, among them, the three properties don't generate enough income to pay off debt. Their owners have been forking over $2 million a month to make mortgage payments, Mr. Bernstein says. The Bernstein brothers want to buy the three buildings from whoever it is that employs them to manage the properties. Perhaps they could do a better job of it if they owned the buildings that they have merely managed.
The unfortunate saga began in late 1982 when the Bernstein brothers' New York Land Co. entered the big leagues of Manhattan real-estate operations by assuming control of the multimillion-dollar properties and announcing plans to renovate them. The brothers were relatively young -- Joseph today is 37 and Ralph is 28 -- and inexperienced in real-estate management. Joseph Bernstein is a lawyer. Ralph Bernstein in 1982 was a fairly recent college graduate.
NEW YORK -- Owning rental property can be a big headache, particularly if you aren't around to take care of it yourself. It is so hard to get good tenants, and you just can't rely on hired managers to exercise an owner's diligence.
Imagine the distress of Ferdinand and Imelda Marcos at what has become of their Manhattan real estate -- properties reportedly worth $350 million. Because the Marcoses were living 8,618 miles away in Manila, they are said in congressional testimony to have entrusted three of their buildings -- valued at about $250 million -- to Joseph and Ralph Bernstein, brothers who grew up in the Philippines but who now have a management and development business in New York.
There is evidence that the Marcoses, who recently moved to Hawaii, haven't been happy with the Bernsteins' management and have tried to replace them, but these things are difficult to arrange from such a distance. And a further complication, unknown to most landlords, has limited the options of all concerned. Mr. Marcos, whose annual pay as president of the Philippines was a paltry $5,600, has never found it opportune to admit that he owns any property in the U.S., let alone a rather glitzy shopping mall across the street from Macy's, a Fifth Avenue office building and 40 Wall Street. It isn't easy to fire a couple of guys you don't admit work for you.
The Bernsteins, for their part, deny that the Marcoses own the buildings they run, although they do imply that the real estate is owned by foreigners whom they won't identify. The Messrs. Bernstein last week were cited for contempt of Congress for being so closemouthed about their association with the Marcoses. The investment in the three buildings is losing money for the mysterious owners, who would like to sell but can't because of a New York State Supreme Court restraining order granted at the request of the new Philippine government.
If all this sounds like trouble for absentee landlords, it is merely the latest trouble for the Bernstein-managed properties.
Herald Center, the nine-story shopping mall the Bernsteins created in the shell of a former E.J. Korvette store, stands half-occupied a year after its grand opening. And the 37-year-old Joseph Bernstein says that, among them, the three properties don't generate enough income to pay off debt. Their owners have been forking over $2 million a month to make mortgage payments, Mr. Bernstein says. The Bernstein brothers want to buy the three buildings from whoever it is that employs them to manage the properties. Perhaps they could do a better job of it if they owned the buildings that they have merely managed.
The unfortunate saga began in late 1982 when the Bernstein brothers' New York Land Co. entered the big leagues of Manhattan real-estate operations by assuming control of the multimillion-dollar properties and announcing plans to renovate them. The brothers were relatively young -- Joseph today is 37 and Ralph is 28 -- and inexperienced in real-estate management. Joseph Bernstein is a lawyer. Ralph Bernstein in 1982 was a fairly recent college graduate.
Acquaintances say that Joseph Bernstein often intimated that the money behind the projects was coming from the wealthy Gaon family of Switzerland, of which his wife is a member. "Our overall impression when we were selling to them was that he {Joseph Bernstein} had married a wealthy Swiss girl and that it was Swiss money," recalls George Comfort, who helped negotiate the sale of the 40 Wall Street office building in 1982.
New York Land spent $15 million decorating the Crown Building on Fifth Avenue with gold leaf and making other improvements. And it spent $70 million to buy and redo the Korvettes store into a collection of expensive little boutiques. That project apparently resulted in a $30 million cost overrun.
The first hint of impending troubles came early to those observing New York Land's spending habits. The company paid employees more than others in the business did, a competitor says. It advertised Herald Center heavily, even before it was ready to start leasing. It threw a big bash for New York's Mayor Edward Koch in Herald Center after the opening of an Off-Broadway play based on his memoirs. It staged a Madonna-lookalike contest that attracted hordes of young girls made up as the rock star in secondhand lingerie. All of which attracted attention but not the right kind of business to the center's chic shops.
Kenneth Laub, who has a Manhattan real-estate company, says he hasn't been favorably impressed with what he has observed of the Bernsteins' performance. "It's easy to spend," he says, "when it isn't your own money."
The Bernstein's spending has also mystified Donald Trump, one of New York's most prominent real-estate magnates. In 1982, Mr. Trump was a tenant in the Bernstein-managed Crown building on Fifth Avenue. He occupied second-floor offices that he says he was planning to vacate. "Across the street, I was building Trump Tower," he says, "and I was {going to move} out of the Crown space." Meanwhile the Bernstein brothers, hoping to lure big tenants to the Crown building, were paying bonuses to certain tenants to leave.
Accordingly, they paid Mr. Trump $500,000 cash to vacate his desirable second-floor space, and they gave him a 15-year lease covering offices on a higher floor. The rent: $1 a year.
The plan so far has enriched only Donald Trump. He has sublet his dollar-a-year quarters to another tenant for $500,000. The second-floor offices still stand vacant. (Joseph Bernstein says someone has an option to rent them in 1991.) "I've been in this business a long time," says Mr. Trump, "but I've never seen anything quite like that."
The Marcoses tried to rein in the Bernsteins beginning in 1983, according to January testimony before the House Foreign Affairs Committee. Glyceria Tantoco, identified in testimony as a close associate of Mrs. Marcos's in the U.S., hired Barry Knox, a Connecticut lawyer, to look over the Bernsteins' shoulders. She had a "concern that she wasn't being sufficiently apprised of the details of operations" of the three buildings, Mr. Knox testified. "She engaged me to provide an oversight . . . to review with Joseph Bernstein his monthly reports and to talk with him and do whatever else I needed to do to give her a monthly report."
In June 1984, a Filipino auditor showed up to monitor every New York Land expenditure, according to the testimony of Victor Politis, a former executive vice president of the Bernsteins' operation. New York Land couldn't hire, give an employee a raise or withdraw money from a bank without the auditor's approval, he said.
New York Land didn't sit still for that kind of surveillance, however. "Certain shareholders decided they wanted representation in our office," acknowledges Joseph Bernstein. But in February 1985, the auditor "was booted right out . . . literally thrown out of the building," he says.
As the split between the owners and the Bernsteins widened, costs continued to spiral. Around the fall of 1984, according to congressional testimony, Mr. Knox met with the Bernsteins, Mrs. Tantoco and Mrs. Marcos in a Manhattan town house to discuss Herald Center. Earlier, "Mrs. Tantoco had been told by Joe Bernstein that the completion of the Herald Center was going to cost about $20 million," Mr. Knox testified. "She . . . had requested that he try and reduce that to $16 million."
But at the meeting, Mr. Knox broke the news that Herald Center needed $46 million, or $30 million more than the Filipinos had already invested. Moreover, in two subsequent meetings with Mrs. Marcos, it came out that 40 Wall Street, which was built in 1929, needed $10 million in renovations.
The owners never gave New York Land all the funds it asked for. "There was a very, very major dispute," Joseph Bernstein says. Meanwhile, the owners were looking for new managers to replace New York Land.
By last July, the owners had had enough. They fired New York Land as managers. According to the congressional testimony of Henry Bullock, a vice president of Security Pacific Mortgage Corp., one of the bank lenders, there was a squabble over who was authorized to act for the owners: New York Land or Mrs. Tantoco's representatives.
In any case, the firing didn't stick. No sooner was New York Land ousted, Mr. Bullock testified, than "the termination letter was immediately rescinded." The owners, industry people speculate, realized that if they wanted to remain anonymous, they couldn't go ahead without New York Land.
Both sides finally agreed that selling the properties was the only alternative and that New York Land itself should buy them. "If you have real estate that is 100% owned by individuals who don't want to be identified . . . that owner doesn't have much choice," says an industry expert.
But for now any sale is out of the question; the properties are among five buildings frozen by the New York court because the government of Corazon Aquino charges in a lawsuit that the buildings were bought with money looted from the Philippines.
Credit: Staff Reporter of The Wall Street Journal
Copyright Dow Jones & Company Inc Mar 6, 1986