Grantland: Will Nonagenarian Eugene Grant Sell 550 Washington Street?
Daniel Geiger Sept. 18, 2012, 7:15 a.m.
Every real estate investor dreams of the moment when, through diligence, smarts or luck, he or she finds a building whose potential is at once dazzling and wholly unrealized. Such discoveries can lead to deals that make fortunes, even careers.
It is not a surprise, then, that a steady procession has taken place over the years to a slumbering behemoth located in a onetime hinterland that has recently resurfaced as a new frontier for development. 550 Washington Street, a building more commonly known in real estate circles as the St. John’s Terminal Building, is the archetype of a diamond in the rough.Sprawling more than three city blocks, the property, with its 1.3 million square feet spread between only four levels, has the notable distinction of having Manhattan’s largest floors, the kind of cavernous open space coveted in modern office layouts.
“It’s like you took the Empire State Building and laid it down on its side,” said one top investment sales broker in the city.
Even before the nearby commercial office neighborhood known as Hudson Square blossomed into a popular destination for tenants or a pocket of blocks just east of 550 Washington Street was recently rezoned to allow residential development, owners and developers have for years quietly come to the building in the hopes of trying their hand at unlocking its tantalizing possibility.
“Everybody has looked at it,” said one prominent owner who has invested in buildings in the neighborhood.
“There are literally 25 iterations of what this building could be—it’s a blank canvas,” a person with direct knowledge of the property said, describing a dizzying array of development possibilities that included everything from new office space to hotel, residential and retail development or a combination of all of the above.
Once a terminal where goods could be carted to and from Manhattan’s waterfront by rail, 550 Washington Street was converted for use as an office building decades ago and has been owned since the 1960s by a man named Eugene Grant. Those who have looked at the property insist that Mr. Grant, who is now in his 90s, fully grasps the property’s potential and has cultivated its legend. He welcomes, even encourages, suitors and has engaged many in negotiations.
Though Mr. Grant enjoys a sterling reputation in the real estate business as a gentleman and one of the last living members of an often-revered generation that included icons like Harry Helmsley, those who have dealt with Mr. Grant in such talks have come away feeling led along. Discussions on 550 Washington Street, these people say, follow a formulaic path that inevitably ends with Mr. Grant politely retreating.
“It’s the perpetual Gene Grant dance,” one investment sales broker who knows Mr. Grant said.
The Commercial Observer spoke with more than a dozen sources who either know or have worked with Mr. Grant, but in spite of his intractability on the property, none wanted to openly criticize him, for fear of offending him, and Mr. Grant himself declined to comment for this story.
“He constantly meets with prospective buyers. And why not? It’s exciting—all the top industry players have come to see him,” the broker said, adding that major successful real estate investors such as Taconic and RXR Realty have been among those who have at least glanced at the property.
To those who have felt thwarted by Mr. Grant’s deep-seated ambivalences it may be little consolation, but 550 Washington Street is clearly an asset Mr. Grant has clutched onto tightly in order to remain relevant in a city loaded with big personalities and prolific investors, these potential buyers have concluded.
After 50 years, however, Mr. Grant must now finally confront what for him has been unthinkable; losing control of the building he so clearly prizes.
Roughly five years ago, Mr. Grant entered into a partnership with Westbrook Partners, an institutional real estate company that has made several successful investments in the city in recent years. The pairing was arranged in a calculated manner. Mr. Grant made sure to retain the management rights in the venture, leaving him full control over the property and the leeway to continue to invite potential suitors to gaze at his prize in recent years.
Yet knowing he is in the latter stages of his life, Mr. Grant sewed in a provision that would allow his family to force a sale of the building should he die, an event that would incur a hefty estate tax that could otherwise leave his family scrambling for cash.
The option, as it turns out, goes both ways. Westbrook, several sources familiar with the matter said, is entering a window in which it too can force a sale of the property.
“Gene never expected to live this long,” a source said.
Initially, Mr. Grant argued with Westbrook’s rights and motioned that he would contest them in court. But his opposition has waned.
A private arbitration was recently held to clarify the terms and rights contained within the structure of the partnership.
“Westbrook affirmed its right to force a sale of the property,” a person who was present at that meeting said.
Westbrook, long frustrated with Mr. Grant’s inertia, has let it be known the status quo will no longer be acceptable. It is unclear yet what will result, although it appears Westbrook and Mr. Grant, who several knowledgeable sources say are still on friendly terms, may be heading toward a restructuring that would keep the partnership intact but scuttle Mr. Grant’s control of the building and hand managing-partner status to Westbrook. Mr. Grant will perhaps emerge with the same percentage stake he has long owned in the property, but those who know him say that the tables will nonetheless be turned on Mr. Grant; he will no longer be in control of his building’s destiny.
A REAL GENTLEMAN
Like many successful real estate investors in the city, Mr. Grant had a father, Samuel, who was a real estate man before he. Mr. Grant began his career in the family business after serving as a fighter pilot during World War II and worked with his father for years.
Mr. Grant developed a strong reputation during an era in the real estate business when the city’s industry was dominated by family investors and deals were often done on the strength of someone’s word and a handshake.
“I’ve known Gene for at least 30 or 40 years,” Earl Altman, a landlord and a principal at the real estate firm ABS Partners, said. “He’s a class guy. I’ve never heard anyone say a bad thing about Gene.”
In the early 1960s, Mr. Grant and his father, along with a partner, the owner Lionel Bauman, purchased 550 Washington Street for just a few million dollars, a small fraction of what it is worth today.
Unlike investors today, who often buy Manhattan real estate with a time horizon and specific financial return targets in mind within that deadline (and who often rely on generating proceeds from a profitable sale), the Grants and Mr. Bauman had longer-term plans.
Real estate dynasties, after all, were built by accruing wealth over generations, and among these scions of yesteryear, relinquishing assets was a practice to be avoided all costs.
“Never ever sell—never,” said Andrew Roos, describing the mentality of investors of that period.
Mr. Roos is an executive at Colliers International who understands this thinking from firsthand experience. His father and grandfather built a large real estate portfolio to which he is one of the heirs, though Mr. Roos has also made a name for himself as a successful leasing broker in Manhattan.
“Unlike the current generation of Wall Street-minded investors, who have a proclivity to trade in and out of assets, old-school owners seem to have a natural aversion toward selling etched in their DNA, and in many cases their assets are ultimately left to be settled by their estates and heirs,” Mr. Roos said.
Mr. Altman, who built his own portfolio of buildings, also remembers the attitude firsthand.
“I was brought up on a farm in Massachusetts, and I didn’t have a nickel to my name,” Mr. Altman remembers. “I worked at Helmsley. The guys who never sell have something. That was the way we thought. Real estate in this city just gets better and better and better.”
But the span of Mr. Grant’s hold on 550 Washington Street, long outlasting Mr. Bauman and his dad and stretching to a point at which Mr. Grant has dragged it into a seeming dormancy, has also provoked mockery.
“I think Gene believes he can take it with him,” one executive joked.
FROM A WAREHOUSE TO OFFICES
By the 1980s, 550 Washington Street’s days as a warehouse facility were over, and Mr. Grant had smartly repositioned it as a low-cost office location, well-suited for financial firms that needed specialized facilities. Though the building didn’t have the traditional look and feel of an office building in, say Midtown, it had other characteristics that made it appealing. The building’s floors, for one thing, had been constructed to bear the tremendous load of freight trains that used to roll into the property, and this industrial-strength infrastructure drew takers. In the 1990s, Merrill Lynch installed massive mainframe computers in a portion of the space.
“They had worldwide data operations running in that building,” a person who toured the facility during that period recalled. “I remember going in through six layers of security into a hidden chamber that was running 24/7, giant data machines—the holy of holy processing center for Merrill.”
Bloomberg LP, the financial information, technology and media company, also took space and continues to have a presence in the building. Overall, however, vacancy has grown at the property through the years, to the point where it’s almost fully empty. The building is so big that its empty space ripples through the entire market in that area.
According to statistics kept by Cushman & Wakefield, the commercial office vacancy in Hudson Square is about 14 percent, one of the highest rates in Manhattan. The statistic is inflated heavily by the presence of 550 Washington Street in the data; without the building’s empty space, Cushman economist Ken McCarthy said, vacancy in the area would fall to a much more healthy rate of about 7 percent.
With the rise of areas like Midtown South, 550 Washington Street’s space is perhaps now more attractive than ever before. Deal-making, however, under Mr. Grant’s reign, has become increasingly difficult.
People who know the terms he sets on leasing space say he is unwilling to shell out capital to contribute to the cost of constructing office space for tenants, a concession that landlords market-wide understand is essential to signing a deal. He also frowns upon the cost of having to pay leasing commissions, meaning the brokerage industry, which largely controls where tenants go in Manhattan, have steered clear.
“Gene sees it as ‘why am I going to pay to build out a space or pay a broker if the tenant hasn’t even given me any rent yet?’” a source said.
Mr. Grant, according to those who have dealt personally with him, doesn’t mind if much of 550 Washington Street’s space sits fallow. He owns the property free and clear of any debt, these people say, and there may be tax benefits to owning an asset that throws off little or no income.
“Gene once said ‘there’s nothing wrong with having an empty building,’” a source said. “He’s a stubborn man.”
Westbrook, of course, has much more ambitious visions for the property than merely brightening up its internal spaces to make them more palatable to office tenants. Using once-industrial properties such as Chelsea Market that have been repositioned in successful mixed-use developments as inspiration, the company is exploring options to overhaul the property. One game plan that has been generally discussed is utilizing the building’s air rights and raising a hotel on its north end.
Because the building sits along an increasingly popular West Side waterfront, significant retail in the base could also be installed.
Residential development is also a possibility, although that type of space would require city approval, since the site is not zoned for housing.
Mr. Grant may no longer be able to proudly take suitors for tours of his office palace of yesteryear frozen in time, but a deal with Westbrook will offer him tax relief. If Mr. Grant was to sell his stake in 550 Washington Street today, he would have to pay capital gains taxes on the significant proceeds on that sale. His family would then have to pay taxes yet again on his estate upon his death—effectively being charge twice.
By staying in the deal with Westbrook, his family can avoid capital gains when Mr. Grant passes away, because tax law nullifies those charges if they are incurred while generating proceeds to pay an estate tax.