(666 Fifth Avenue) - Financial Ground Has Shifted Under a Record Deal

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Questions - Lore 1, Lore 2.

J. (Book of Mozilla - Wikipedia)

"Don't exploit the poor, because he is poor; And don't crush the needy in court."
-- Proverbs 22:22

"For Yahweh will plead their case, And plunder the life of those who plunder them."
-- Proverbs 22:23


"But a footnote pointed out that the cash flow from existing rents would actually cover only 0.65 percent of the debt service. ... the building’s shortfall amounts to $5 million a month. A $100 million reserve fund was included in the debt package to cover the shortfall.

Financial Ground Has Shifted Under a Record Deal

November 7, 2007

The record price paid in January for the 41-story aluminum-clad office tower at 666 Fifth Avenue — $1.8 billion — was breathtaking, even by the standards of the heady Midtown Manhattan commercial real estate market.

Making its first major foray into the Manhattan office market, the buyer, the Kushner Companies of Florham Park, N.J., paid more than three times what the building fetched in 2000.

Today, however, some real estate specialists regard the 666 Fifth Avenue transaction as a textbook example of the risky practices that were prevalent before the current credit squeeze, when many loans were based not on the actual cash flow of the building from existing rents but rather on optimistic projections of what the space might command once those leases expired.

The deal for 666 Fifth “was the poster child for what was not right in the underwriting,” said J. Larry Duggins, an executive managing director of the Centerline Capital Group, a New York company that buys high-yield bonds backed by commercial real estate. “The bond market reacted poorly to it.”

Although 666 Fifth Avenue commanded the highest price ever paid for a single building, it does not have quite the cachet of the top Midtown office towers like the Seagram Building. Still, it has a roster of brand-name tenants — one-quarter of the space is leased to Citigroup — and is in a desirable neighborhood, where rents were climbing steadily at the time of the sale.

What raised eyebrows was the financing of 666 Fifth and other buildings sold late last year and early this year, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm.

A group of lenders led by the real estate unit of Barclays Capital agreed to provide an interest-only first mortgage of $1.215 billion based on an annual cash flow of $114 million, or 1.5 times the debt service, according to a document filed with the Securities and Exchange Commission.

But a footnote pointed out that the cash flow from existing rents would actually cover only 0.65 percent of the debt service. Mr. White calculated that the building’s shortfall amounts to $5 million a month. A $100 million reserve fund was included in the debt package to cover the shortfall.

“This is one of the best examples of how excessive the lending market got,” Mr. White said. “Fortunately, before it got too far out of control, the market clamped down and put a stop to it all.” Barclays had no comment.

Underwriting standards have tightened considerably since the summer, and now investors like the Kushners who bought property early in the year are finding they have to invest more of their own money — and assume more of the risk — than they had expected.

Like many buyers, Kushner relied on high-cost short-term financing to make up most of the gap between the first mortgage and the purchase price for 666 Fifth. The 1957 tower fills the block between 52nd and 53rd Streets and is perhaps best known for its Isamu Noguchi sculpture with cascading water.

By the time the bridge loans had to be paid off, the theory went, the building would be refinanced or the 80,000-square-feet of glassy retail space, most of which faces Fifth Avenue, would be sold as a condominium.

It has not worked out that way. In the spring, the company hired the Carlton Group, a New York investment bank, to help it restructure the deal. But in recent weeks, the company used its own cash to pay back one $200 million bridge loan, said Jared Kushner, the publisher of The New York Observer and a principal in Kushner’s New York office. Another repayment deadline is coming up soon.

Mr. Kushner said the company had a variety of options, including “writing a big check ourselves.” The cash-rich Kushners recently sold 17,500 apartments in five Eastern states for about $2 billion, according to a spokesman.

Scott A. Singer, the executive vice president of the Singer & Bassuk Organization, a real estate finance and brokerage company, said investors with cash “are in a much better position to adapt to the current environment” than those with “overleveraged assets.”

The Kushners are thought to be much better off than Harry Macklowe, the New York real estate investor who also faces a deadline for repaying a bridge loan. Many real estate professionals say Mr. Macklowe could lose control of the seven Midtown Manhattan office buildings he bought this year as part of the Blackstone Group’s purchase of Equity Office Properties as well as his prized General Motors Building on Fifth Avenue between 58th and 59th Streets.

Kushner’s quest for new sources of capital has not been helped by the criminal record of the company’s chairman, Charles Kushner, some real estate finance specialists said. Mr. Kushner, Jared’s father, spent time in federal prison recently after pleading guilty to witness tampering, tax evasion and filing false campaign reports. Prosecutors accused him of hiring a prostitute to lure his brother-in-law, a potential witness against him, into a compromising situation and having the encounter taped.

Charles Kushner’s name is not listed on the deed for 666 Fifth, which was signed by his son and George Gellert, the chief executive of the Atalanta Corporation, a food importer based in Elizabeth, N.J.

Their broker, Howard L. Michaels, chief executive of the Carlton Group, said the building had generated a lot of interest from investors because of the prospects for rent growth over the next few years. Leases for more than 800,000 square feet of space (out of a total of 1.45 million — with rents far below today’s market rates — are scheduled to expire before 2011.

Annual asking rents for spaces that are currently available range from $92 to $118 a square foot, according to the CoStar Group, a research company in Bethesda, Md.

Mitchell Konsker, a vice chairman at Cushman & Wakefield, described 666 Fifth as “a sleeper” that offers tenants a wide variety of floor sizes in a location with the same cachet as Park Avenue.

Many people in real estate worry that the subprime mortgage debacle could lead to sizable layoffs in the financial services industry, emptying a lot of office space in Manhattan and causing rents to fall. But Mr. Konsker said a number of tenants outside that industry are currently looking for space. And so far, although the pace of leasing has slowed, there is no evidence that asking rents have declined.

Marketing the retail space at 666 Fifth Avenue as a condo has posed a major challenge for Mr. Michaels. The space is leased to Brooks Brothers; Hickey-Freeman, a men’s clothing retailer; and the National Basketball Association. Though the annual rents are $600 to $700 a square foot, well below the market rate, the leases have another seven years or so left.

Faith Hope Consolo, the chairwoman of retail sales and leasing for Prudential Douglas Elliman, said annual rents in some nearby stores are $1,700 a square foot or more. But those levels cannot be reached unless the current tenants can be induced to move.

Still, Mr. Michaels said, “I’m confident that we have some very good proposals and that something is going to happen.”