Big, Juicy Stake
Tom Acitelli Sept. 21, 2009, 10:43 p.m.
Seven months into 2009, SL Green agreed to sell 49.5 percent of its stake in 485 Lexington Avenue for $504.2 million, in one of the biggest trades of a major Manhattan building in more than a year.
Once the deal is approved by SL Green’s mortgage lender, Wachovia, a joint venture between the Israeli technology firm Optibase and its Nigerian partner, Gilmor USA, will assume the company’s $450 million of outstanding debt and extend SL Green an additional $20 million loan, secured by SL Green’s pledge to sell all but 1 percent of its remaining interest in the building to the partnership within five years.
No one would have batted an eyelash at the deal two years ago, when low-interest financing, foreign investors and price tags upward of $500 per square foot in Manhattan were common. But, in August, it was greeted as the first sign of a thaw in what has been a glacial commercial market for more than a year.
In an Aug. 10 press release, SL Green’s chief executive, Marc Holliday, said, “If ultimately approved, the transaction would demonstrate that the midtown Manhattan office market continues to stand as one of the world’s top locations and that investor interest is once again on the rise.”
Though the proposed sale is certainly a welcome sign after a year of almost total paralysis, Isaac Zion, a managing director at SL Green, does not expect it to set a new bar just yet.
“In a market like this, where there are just a handful of trades, it’s hard to say what, if anything, is the new benchmark,” Mr. Zion told The Commercial Observer. “For any one particular transaction to set a benchmark in this climate is unlikely.”
THIS IS NOT THE This is not the first time observers have looked to 485 Lexington Avenue to gauge the future prospects of Manhattan’s commercial market. A little more than a half-century ago, Uris Brothers managed to quell mounting fear of a drop in demand for midtown office space with the news that 90 percent of the 921,370-square-foot tower then under construction at 485 Lexington had been leased.
Uris Brothers was among the pioneers of a decade-long commercial development boom following World War II, which saw Manhattan businesses migrate from single-tenant office buildings to the multi-tenant corporate towers common today.
By the time Uris Brothers broke ground on the 30-floor skyscraper designed by Emery Roth and Sons, 41 new “competitive”—Class A in modern commercial real estate parlance—office towers with a total of 10.5 million square feet had been completed since the war; another 14, including 485 Lexington, were under construction, and plans had been filed for 13 more, according to a February 1956 New York Times article.
The building was Uris Brothers’ sixth midtown project since 1949, when the 21-story Arabian American Oil Building was completed. The 351,000-square-foot “Look Building” at 488 Madison Avenue, the Colgate-Palmolive Building at 300 Park Avenue, and two others followed. By the middle of the decade, critics “were predicting that a point of over-building was being reached,” The Times reported. Luckily for Uris Brothers, their fears proved to be unfounded.
“The continued demand for office space in the competitive buildings was highlighted last week by the announcement that the [30-] story building under construction at 485 Lexington Avenue was 90 percent rented,” The Times wrote.
The firm also announced plans to build a seventh midtown property next door at 750 Third Avenue. SL Green acquired both properties—and 1.1 million square feet of vacant office space—from the teachers’ pension fund TIAA-CREF for $480 million in 2004, in what was also considered a risky investment. Two years and $90 million worth of capital improvements later, SL Green’s gamble on 485 Lexington appeared to be paying off, like the Uris Brothers’ had 50 years earlier. In 2006, Class A Manhattan office prices had jumped from the $282 a foot SL Green paid for 485 Lexington, and the building was 97 percent occupied. Its value to potential investors, barely two years after acquisition, was rising.
Its two biggest tenants, Citigroup N.A. and the Travelers Indemnity Corp., occupy half of the building under leases that expire in 2017, the same year SL Green’s $450 million mortgage matures.
Mr. Zion, the managing director, said these two leases were “the key” to the company’s deal with Optibase and Gilmore, but, according to another source, Citigroup is shopping for a tenant to sublet its offices on the 15th and 16th floors of 485 Lexington. Mr. Zion declined to discuss any specifics about the deal since it was still under contract, except to confirm that upon closing, Optibase and Gilmor will “have the ability to control management and leasing.”
Cushman & Wakefield, who brokered the stake sale for SL Green, and the Carlton Group, who represented the buyers, declined to comment for this article.