How Carl Dranoff dug himself out of the '89 recession

On Black Monday, Oct. 19, 1987, the stock market lost nearly a quarter of its value in one day and set in motion a recession that crippled the nation into the early 1990s. For Carl Dranoff and his partner, Steve Solms at Historic Landmarks for Living, it meant the end of a very successful partnership.

By 1989, when they split up, the two of them had rehabbed 66 historic buildings, including the Chocolate Works, the Wireworks and the Colonnade, turning faded buildings into residences as Center City became more popular.

Dranoff, founder and chief executive of Dranoff Properties, explained what happened:

So why aren’t you still together? Did you have a fight?

No.  I already told you we're in a cyclical business. You're saying to yourself probably, “Well, why is it cyclical?” Real estate is driven by a couple of factors. One is interest rates. For example, when interest rates are low, people can afford to buy more house for the money and sales go up. When interest rates are very high, they don't buy homes because they can't afford the mortgages. So right away it starts out being your business is subject to interest rates.

Then you're subjected to supply and demand, and its fundamentals. If you're in a great economy…

And demographics?

And demographics. Well, that ties in with supply and demand because if you have a lot of baby boomers buying homes ...like in the 1980s, for example, was boom time because the economy was good under Ronald Reagan, and there was a tremendous population bulge of baby boomers.

But interest rates were high. Our interest rate was 17 percent.

Well, it depends when you bought.

1980.

That was 1980, but by 1985 they down below ten percent. So, by the mid-1980s people were buying homes right and left, and that was great time for home building. The home building business surged. So, you're in this environment, demographics, supply and demand. In a recession, fewer can afford. Fewer people buy. They're fearful for their jobs. They pull back, and so if you don't have any staying power you can get whipsawed out of business. You can go broke. In fact, I can tell you that I've been in business for 42 years, and I can count on one hand the people that started out with me that are still building.

So, happened to you and Solms?

The economy crashed in 1989. We had a severe recession in 1988-89. The real estate markets collapsed. That was the savings-and-loan crisis. When all the savings and loans were taken over, all the lending sources for developers dried up.  And we went into the tank for probably five years. The market really didn't start to recover until the mid-1990s. We were in a position where we had been developing prolifically and now we couldn’t get the money to develop anymore.

So what did you do?

We had an amicable buy-sell agreement among us. Since we couldn’t develop anymore and I was the developer,  we had a meeting like this, “Look, Steve, we're not going to be developing for the next couple years. You don't need me anymore. Why don't we just separate? And you can buy out my interest in the company, and you run it.”

He still owned the majority shares. I didn't have the money to buy him out. It was more logical for him to buy. He said, “You're right. We agree. We’ll come to a conclusion.” It took a couple of months. We worked it out, and he bought out my interest, and I was in 1989, out of the company, amicably. He continued to run Historic Landmarks for Living as a management company. They never developed another building. Still haven’t developed another building. So, that was my second career. It went straight up like a rocket ship.

What did you do when there was nothing to build?

I thought, `Okay. What can I do? The market is tanked. There are not a lot of opportunities out here.  I know what I can do. I can consult for banks because they need a lot of help right now.' So, I set up a consulting company, and I started to hire myself out to help banks work out of problem loans and work out of issues that arose because of the recession. Undeniably, I had the expertise. So, I spent about four years doing that.

Then I got a call one day from Ron Rubin, titan of development in the city, who I had known over the years. His company had [bought a company], which had a real estate portfolio that was very substantial, all residential properties, and he didn't have any residential expertise. He had office buildings and retail.

He needed someone to operate that end of his company. So, he called me up and asked if I would consider coming over and running that wing of his company. I was in an in-between stage because I was doing consulting, but I really wanted a bigger stage to play on. This was a bigger stage, and it was more money, and he really wanted me, and he paid me very well.

Plus, it was closer to what you like.

Exactly. So, I joined him. I was with Ron for three years from 1995 to 1997. In 1997, I had an epiphany that residential was going to come back big time in Philadelphia because I was looking up and down South Broad Street. All the buildings were empty, and I thought, `This is a once and lifetime opportunity to bring these empty buildings back.' 

So, South Broad was no longer the “it” place to be?

It had lost its mojo. Everybody was moving out [to West Market Street], and I thought, `Wow. Here I am with historic building expertise.' I'm looking around the city, and I'm seeing manufacturing companies pulling out of the city, like this building. This was National Publishing. The very building that we're sitting in was the home of National Publishing. What do you think they made? They were the largest Bible manufacturers in the country.

So, I said to Ron, `Ron, there is an unbelievable opportunity to expand our residential portfolio with historic buildings. They're all over the place, and we can buy them for almost nothing.' But, it wasn’t in his mojo. He was a retail guy really.

So how did you handle that?

It wasn’t in his mojo at all, and he just couldn’t see it. One day I went to him and I said, `Ron, we’ve been friends and I'm turning 50 now. Maybe I was 48 or 49. Ron, you're not going to do this. I can't get you over the edge to write checks, so I'm going to form my own company, and I hope that you’ll collaborate with me in some fashion.'” 

So you helped him finish up his development that turned the PSFS building into a hotel. He gave you a six-figure commission to finish the job. Meanwhile you were looking for properties. What did you find? 

I had been sniffing all around town, and I found this one [the Bible publishing factory]. This was the mother lode because it wasn't an abandoned building. There were still people in here. When I came in this building, the printing presses were still here, and they were using it for manufacturing. It's an eight-story building. There's no such thing as manufacturing today that's on eight stories. They would start at the top and the stuff would come down. They had big elevator lifts, and they had these little old ladies with hair buns. They looked like Quakers working here. It was like an anachronism out of the 1800s. It was like David Copperfield, but in this building.

The building was for sale. They were moving, and the end result was six months later I was able to buy this building. I offered more. It was through other bidders. I bid more, and I got it: My first building under Dranoff Properties.

I got this vacant building and that was in 1998. Just when I'm ready to close the deal, it got moved back a little bit to May and June. My father passes away in May of 1998. I'm literally at the closing table and my father passes, and I have to go out and make all the arrangements. But maybe he was saying to me, “Look I'm passing away, but I know you're going to be successful because you're on our own now,” and so the timing actually symbolically is great because it was like my new career.

I started this building in 1998. This was in June. I had everything so lined up and ready to go. Remember my playbook is historic buildings, so I knew exactly what to do, and how to do it and how to do it quickly, and how to get the money.

By February of 1999, less than eight months later, the building was almost fully leased. It was such a hit. We put samples on the second floor. There hadn’t been a new building in Philadelphia for so many years, and let alone a loft building. The last loft building was from the 1980s. They were 10, 12, 15 years old, and here I was with a brand-new building. The building is still stunning 20 years later. 

Source: Philly.com