Despite Economy, Boon For Builder
Rumors of Joe Farrell’s demise greatly exaggerated
 Farrell Building Company
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(11/13/2008) In an economic downturn, schadenfreude, or the enjoyment derived from the troubles of others, often mixes with paranoia in the stew of rumors that result from the actual bad news that is reported.
Those who would like to think that Joe Farrell, the house builder for celebrities, politicians, and hedge-fund wunderkinds, is doing poorly will have to wait for a different downturn. Indeed, the bills are stacked up on his desk, but they all have checks attached to them, waiting for his signature.
Jack Bryant, an outside sales representative for Amagansett and Florence Building Materials, said Farrell Building in Bridgehampton has done up to $3 million of business this year with his company alone. “He pays his bills every four days. He never gets past four, five days.”
Ask construction suppliers around town and around Long Island and it’s the same story. Mr. Farrell, even now, pays his bills on time, enjoying the 5-percent discount he negotiates for paying in full within 10 days of receipt. “When you’re spending $20 million a year on materials, 5 percent of that is a million dollars. I’m using hypothetical numbers, but it’s an enormous amount of money I save. I haven’t missed a discount since 1998.”
He said he had gotten out of the spec-house building business three years ago after seeing the downturns in Florida and the rest of Long Island. “I figured it had to come here.” Maybe things have not been as dire as the rest of the country, but prices have cooled and sellers that want to move a property have had to take less for it.
 Morgan McGivern
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And while he is the builder of five houses around town that have his company’s name on them, he said he has no financial commitment in any of them. Two of them have been built with money fronted by the Carlyle Group, a global investment firm that became a partner with Farrell on a project-by-project basis last year. The other three have been underwritten by a group of independent investors.
Mr. Bryant noted that Mr. Farrell’s company often has more than 30 jobs going at a time. “I’m sending doors to five jobs in the next week. I have multiple trim orders at $100,000 at a clip that we’re special ordering and incurring that cost. We would never do that normally. If every one of my customers paid like him, our business would not be hurting,” Mr. Bryant said. “It’s a nightmare out there. We’ve increased our legal department to keep up with collections and liens.”
Much of Mr. Farrell’s approach to business has been informed by seven years he spent on Wall Street as an oil trader. He keeps his old badge in his office. “Most guys come up as carpenters. They did a spec house and made some money. My competition doesn’t have the background I have.”
He said the building bug bit him early. “It was a dream from when I was a little kid.” In 1995, he began with a house in Brookville that he sold by the time the first floor was framed. He took a month off to oversee the job site and never went back to trading.
In 1996, during a vacation in Montauk, he began looking at properties here. “I saw builders were making a much higher rate of return on their total investment than I was making in Huntington.”
He bought some lots in Water Mill and East Hampton and built three spec houses in 1996. “Then it mushroomed into 3, 8, 10, 12 spec houses. Then the custom work started.” Since then, he amassed clients such as Kelly Ripa, Rudolph Giuliani, and Kelsey Grammer.
Put off by the astronomical prices of land and property in the final months of the boom, he turned his attention to less expensive deals last year, developing four lots he purchased from Edward Burke Sr. in Noyac and two in Sagaponack. All were marketed for $2.5 million and all sold. “Those were the last of Joe Farrell and Farrell Building’s properties.”
Mr. Farrell is also building a Habitat for Humanity house on the Bridgehampton-Sag Harbor Turnpike for a family of Rwandan refugees.
He believes things are pretty bad in the marketplace. “There will be guys out here that go broke, people losing their jobs. It’s really not good.”
The Carlyle Group has invested in three projects to date. The first one at 799 Daniels Lane in Sagaponack sold for $17 million in May. The two other properties are about 75 percent completed and are in Water Mill at 34 Bay Lane and 48 Halsey Lane South. “The perception is that Carlyle funds Farrell and that is not the case at all.”
At a different time, he said he could have made 10 such deals, but Carlyle’s involvement came three to four years too late. “Nine months ago we made a deal to do something that would have cost $15 million and was approved by Carlyle Group, but I put the brakes on it, because of market conditions.” The property, on Highland Terrace, was a lot next to the former Hamptons Showhouse that is now in pre-foreclosure proceedings. “We’re currently holding back unless we can get properties at a strong discount.”
A property he built with outside investors at 493 Parsonage Lane was rented from Memorial Day to next May for $600,000. Another house at 195 Georgica Lane had two bidders recently and was listed for $11.5 million. “This week we are negotiating to sell it at a discount, but still at a profit. There’s a lot of pent-up money on the sidelines that’s been waiting. People are getting deals and you know what? They deserve them.” The last property is at 179 David’s Lane in Water Mill for $9.45 million.
Investors buy the property and put up the cost of building the house. Then Mr. Farrell builds it and markets it and they share in the profit. If a lot costs $1 million and the house the same, and the property sells for $3 million, each gets $500,000.
Mr. Farrell benefits both from his own Wall Street background and his hedge-fund manager clients. After shorting the stock market for the past year, he said he got out of it entirely four weeks ago.
He is now buying up “blue-chip distressed properties” when they become available and helping finance projects that are having difficulty getting credit from the usual sources. At his disposal for purchases is a $75 million fund he has assembled of his own money as well as other investors’. He bought 280 North Sea Road, a vacant lot he plans on developing into an office building.
His business partners are often clients. “They love the process with us and then ask to be our partner.” He is fast, taking an army of people on-site, and usually completing a house within one year of the purchase of the lot. He then backs up his houses for 10 years with his own service department.
New York State requires that new houses come with a one-year guarantee. Mr. Farrell said he looks at his service department, which costs him “hundreds of thousands of dollars a year,” as advertising dollars. “I just fixed a leak in a the roof in a house from ’97, and I did it for free. Those people sell for us because they’re so happy. Referral is everything.”
Adam Miller, an attorney in Bridgehampton, said he brings him clients like Peter Sabbeth of Modern Green Home, whose house on Sagg Main Street was used as the Hamptons Cottages and Gardens Idea House this year. Mr. Sabbeth needed $4 million to carry him over until he received long-term refinancing in the form of a mortgage. Mr. Farrell said he was repaid in full on Oct. 27.
In addition, Mr. Farrell said “we’re offering clients construction loans when they hire us. If they buy the land, we will lend them the money to build. It’s tough for even credit-worthy people to get financing. . . . loans are really expensive.”
Mr. Farrell would not divulge his terms on the record, but it is reasonable to say that despite published rates, real credit is quite expensive right now and those with access to capital can basically name their own terms.
Mr. Miller said one of his clients had financing from IndyMac, the failed bank that was seized by the federal government. “The loan got tied up with the IndyMac government entity. What Joe would do is take out the current loan and pay it off and lend whatever money is necessary.”
Mr. Farrell said he structures the loan like a regular mortgage using the property as the asset for collateral. But the loans are short-term, typically a year to 18 months. “There are not that many people with Joe’s kind of cash that are willing to lend,” Mr. Miller noted.
In the midst of all this market turmoil, the 12 acres at 612 Halsey Lane is a veritable beehive of activity as Farrell Building and its subcontractors work to finish Mr. Farrell’s own 18,000-square-foot fantasy house, outfitted with an indoor racquetball-basketball court, commercial quality spa, two-lane bowling alley, indoor half-pipe, screening room, dance floor, a catering kitchen, a living room with fireplaces on each end, a children’s bunk room for sleepovers, a separate guest house, and the expected pool and tennis court.
“I’m doing this because we believe the future is in these great, incredible masterpieces. I feel there will be fewer people with a lot of money, but the ones with a lot of money” will continue to be interested in coming to the South Fork.
“I’m building this house really as my model. I want to bring our company up a few notches because we certainly aren’t going to be building a lot of spec like we used to.”
He expects the house will be completed in May, just in time to begin hosting parties for potential clients who want the ultimate in options and luxury. He said someone has already offered him $35 million for it. Asked if the bells and whistles were things he personally coveted, Mr. Farrell responded, “Me? I’d be happy with 3,000 square feet.”