Sutton’s Place: The Behind-the-Scenes Negotiations That Led to Jeff Sutton’s Blockbuster 1552 Broadway Acquisition
Daniel Geiger July 24, 2012, 7 a.m.
Before Jeff Sutton and SL Green formed a partnership to acquire 1552 Broadway last summer, the diminutive landmark was best known for the four female Broadway stars on its facade.
Theater buffs trolling the neighborhood often visited the two-story building for the stone figurines of Ethel Barrymore, Marilyn Miller, Rosa Ponselle and Mary Pickford mounted on its second level in the 1920s. But with a T.G.I. Friday’s restaurant as its tenant, the building had otherwise become virtually indistinguishable from the bonanza of big-ticket retailers that have come to dominate Times Square.
Nonetheless, SL Green and Mr. Sutton, widely considered one of the city’s most savvy retail investors, saw greater potential for the 15,000-square-foot asset—a fact indicated by the price they agreed to pay its owner, the Riese Organization. Indeed, at more than $136.5 million, the sale last year amounted to a shocking $9,100 per square foot, more than a dozen analysts and real estate executives told The Commercial Observer in a series of interviews last week.
But because ground floor retail in the city is vastly more valuable than below grade or mezzanine levels, Mr. Sutton and SL Green could be said to have essentially paid well over $100 million for 7,500 square feet, a price that works out to a phenomenal $18,200 per square foot—dizzyingly higher than the $1,000 per square foot figure top-quality office buildings trade for, real estate insiders acknowledged.
“If Times Square is a 10-chapter book, we’re on chapter four right now,” said Patrick Smith, a retail executive and principal with the firm SRS Real Estate Partners who has followed the neighborhood’s evolution. “There’s no place that has more eyes on it and more consistent footsteps and TV coverage. Jeff gets that, and a deal like 1552 Broadway shows how he keeps pushing the area forward.”
Mr. Sutton’s Past
1552 Broadway was hardly Mr. Sutton’s first foray into high-wire real estate investments. In 2008, he purchased the retail component at the Soho building 599 Broadway for a hefty price. Mr. Sutton ended up reconfiguring the building, which has frontage on both Mercer Street and the much more valuable Broadway retail corridor. By knocking down walls and moving other impediments that had segregated the building’s retail space into a double-sided layout, he connected all the space to Broadway and the much higher rents that thoroughfare commands. Mr. Sutton eventually leased the space to American Eagle Outfitters in a deal valued at a whopping $120 million over several years, according to reports.
“He rented them Mercer Street space at Broadway rents,” one source familiar with that deal told The Commercial Observer last week.
But Mr. Sutton also understood the Times Square market, an area of the city that has seen rapid rental increases in recent years as it has evolved into a larger-than-life tourist attraction that brings loads of foot traffic and high store sales—and also into a central hub for media and entertainment conglomerates that retailers have seen as an increasingly attractive stage for branding.
“Rents have increased in Times Square by about 20 percent over the last year, which is very impressive—I don’t think there’s anywhere else in the city where you’re seeing those kinds of year-over-year gains,”said Mr. Smith. “Ground floor space in the bow tie comes with an asking price probably on average of between $2,000 to $2,500 a foot. You’re talking about space that five years ago was $500 a foot.”
Mr. Sutton was one of the first investors to grasp the new dimensions of income unique to the Times Square market that would push rents—and building values—mercilessly upward.
“It has to do with branding and eyeballs,” said Richard Hodos, a top retail dealmaker at CBRE. “It has to do with the ability to sell advertising on signs to help subsidize the rent. Jeff Sutton in particular makes a compelling case as to how a brand, with the right signage, can make the overall economics more affordable.”
According to retail brokers, Mr. Sutton helped establish the new paradigm of dealmaking in the area when he brought American Eagle Outfitters to 1515 Broadway, a lease believed to be worth $20 million a year and which brokers have said works out to one of the highest rents ever paid on a per-square-foot basis.
One critical element of the transaction was that American Eagle would receive about 14,500 square feet of total electronic signage in various locations on the building—billboards it could use not only to display its own brand but on which it could sell airtime to other advertisers in order to generate proceeds that would help lower the cost of its exorbitant rent.
“American Eagle might sell 10 to 15 minutes of every hour through a third-party manager,” Mr. Smith said. “We can’t know the specific offset, but it’s significant—it can be 20 to as much as 50 percent of your rent. But the sign business is also so fickle. One day you’re selling ad space like crazy, and the next it’s like you can’t get anything.”
To complete the deal at 1552 Broadway, Mr. Sutton drew on components from both his American Eagle leases.
He didn’t have any tenants in hand when he purchased the property last summer. It was safe to assume, however, that no deal for the building’s space or signage alone could be valuable enough to justify its eventual price. So as he and SL Green negotiated with the brokers who were selling 1552 Broadway, a team from the services firm Jones Lang LaSalle, Mr. Sutton also began talks with the owners of 1552 Broadway’s neighbor, 1560 Broadway. 1560 Broadway is a 225,000-square-foot office building that wraps around 1552 Broadway, which is on the corner of 46th Street, a high level of adjacency that Mr. Sutton could see offered ample options to reconfigure and expand 1552 Broadway’s space.
“He saw he could create a huge piece of retail space in the heart of Times Square,” said Jeff Gural, a top executive at Newmark Grubb Knight Frank, which owns a leasehold interest in 1560 Broadway.
Mr. Gural said Mr. Sutton was the only bidder on 1552 Broadway who approached him to strike a deal to reach into 1560 Broadway’s retail, which is likely one of the reasons Mr. Sutton and SL Green were able to find a way to pay a higher price for it than any other potential buyer.
Taking 1560 Broadway’s space allowed Mr. Sutton to execute an increasingly common retail investment strategy in the city: lease out 1552 Broadway’s ground floor at exorbitant rents by partitioning it into several storefronts that act as entrances to the bulk of the retail space upstairs, a formula used to milk value out of other high-profile retail locations in the city, such as 666 Fifth Avenue. [Jared Kushner, president of Kushner Companies, which owns 666 Fifth Avenue, also owns The Commercial Observer.]
“He unlocked a ton of value in the 1552 Broadway space by connecting it with our building,” said Brian Steinwurtzel, an executive at Newmark who was involved in negotiating the deal on behalf of Mr. Gural. “And he will benefit from the upside of taking that risk.”
As Mr. Sutton and SL Green arranged to buy 1552 Broadway, they simultaneously struck a deal to lease about 40,000 square feet in 1560 Broadway, the bulk of the building’s retail space and the second- and third-story office floors, which Mr. Sutton would convert into retail space. Part of the retail space in 1560 Broadway is leased by McDonald’s, but the deal allowed at least 30,000 square feet to be tacked onto 1552 Broadway’s footprint.
According to city records, the partnership took out $94.4 million in financing to pay for the purchase of 1552 Broadway and a pair of loans—one $12.1 million, the other $18.5 million—to help cover the leasehold of 1560 Broadway’s retail as well as construction costs. The mortgage for 1552 Broadway indicates that Mr. Sutton and SL Green were borrowing at about 70 percent the value of the property. If they were using similar leverage levels in the other loans, it would suggest the group paid about $44 million in total to lease 1560 Broadway’s retail space and integrate the two structures as well as other capital expenses, such as updating the large signs above 1552 Broadway and converting them into digital displays.
Having invested at least $180.5 million, the partnership began to focus on the delicate task of locating a tenant willing to do a deal that would make their huge investment worth all the risk so far.
Mr. Sutton is credited with having deep relationships with major retail tenants and a track record of wooing them into big deals.
“Jeff is very connected to the tenants and understands the market for a space and what retailers want,” Mr. Steinwurtzel said.
Few doubted he would be able to start conversations with stores, especially considering how many household names—retailers such as Forever 21, Walgreens, Swatch and Mac—have made their way into the heart of Times Square in recent years.
For almost a year, however, the space at 1552 Broadway sat quiet. But like other retail experts in the city, Mr. Sutton noticed that Express, a clothing and apparel store seeking to regain a foothold in the ultra-competitive discount fashion category, began to stall in negotiations involving a deal at 4 Times Square. According to people who declined to be identified for fear of betraying confidences, Mr. Sutton swooped in with a simple pitch: 4 Times Square was on the outer edge of Times Square, while 1552 Broadway was in the heart of the bow tie, a location impossible for passersby to miss and smack in the center of an area that billions of television viewers see each year during coverage of New Years Eve.
Express was quickly convinced and in May announced it was in the process of a major deal in Times Square. By June, a 30,000-square-foot lease was hammered out and signed at 1552 Broadway in what will likely be a front runner for next year’s REBNY retail deal of the year. The transaction is one of the richest retail deals ever done in the city, according to brokers with knowledge of its terms. Express will pay about $23 million a year for the space as well as rights to digital signs that will be installed above the building. The deal means that Mr. Sutton and SL Green could earn between eight percent to as much as 14 percent on their investment, depending on the structure, which is not public, of the Express lease alone.
The Express deal likely won’t be the only revenue-producing lease that gets done at 1552 Broadway and 1560 Broadway.
In June, Mr. Sutton and SL Green entered into an agreement to buy 155 West 46th Street, a small building that abuts 1560 Broadway on the side street, for a little more than $8 million.
The plan, according to sources, is to relocate lobby space in 1560 Broadway that services its office floors above to 155 West 46th Street, allowing more of the building’s valuable Broadway frontage to be converted to retail. Mr. Sutton may also have plans to buy out McDonald’s to try to clear more room for another blockbuster deal.