Lehman Lives: Zombie I-Bank Takes Manhattan
Tom Acitelli June 22, 2011, 7:29 a.m.
When real estate executive David Sigman first walked into 25 Broad Street, about a year after Lehman collapsed, it was a funhouse of pre-2008 distractions: the lobby unfolded with yards of purple carpeting ringed by red circles into a would-be night club with dozens of crystal chandeliers and a mauve-color spa/yoga room. Most striking of all were the matching royal portraits of developer Kent Swig and his soon-to-be ex-wife, Liz Macklowe.
The Observer recently reported that the first 10 apartment tenants had signed at 25 Broad, bringing the failed condo conversion back to life as a rental—and Lehman Brothers, twitching, back with it.
Not even three years after the bank’s collapse took the economy with it, Lehman, through its holding company, lives on, a rosy zombie quietly looking to make a small fortune off prime New York properties, and maybe—just maybe—pay off some creditors.
While many banks held fire sales, Lehman mostly waited on a recovery. “Looking back on it, it was a smart thing to do because of pricing,” said Bill Elder of RXR Realty, a big player in buying up distressed assets.
When Lehman collapsed, an independent firm was charged with managing more than $240 billion of real estate nationwide, the estimated value of which plummeted to $15 billion. Now that portfolio is expected to deliver a respectable $60 million return. Had the bank immediately flooded the U.S. real estate market with all of those distressed assets, the Great Recession as we have known it would have seemed tame.
Lehman is set to update a bankruptcy court on its plans in a week, but industry sources say they’ve already seen a marked shift in how the ghostly landlord is managing its holdings of late: moving to sell its share of such prime assets as the old International Toy Center at 200 Fifth Avenue and 1107 Broadway, and quietly mulling a new development at 235 West Broadway in Soho. While many of its assets around the country remain worthless, in New York Lehman is sitting on a small gold mine. The irony, of course, is that it came two years too late for the bank.
“They were a large mortgage player, so they saw the opportunities in residential and commercial real estate,” said Brad Hintz, a former Lehman C.F.O. who is now an analyst at Sanford C. Bernstein. “Lehman began to understand what opportunities existed and began to invest its own money—‘Oh, there’s a pretty attractive little hotel!’—and built up a portfolio.”
Public records show that Lehman had purchased 50 properties around the city between 2004 and 2008. It was also a major lender on more than 60 city properties, according to data from Real Capital Analytics, including 100 Wall, the Chrysler Building, Twitter’s new H.Q. at 340 Madison and the Nobu Hotel. Most of those deals closed between March 2005 and October 2007—the market’s peak, in other words. By the time Lehman was in trouble a year later and needed to liquidate some of its assets, property prices were already in the crapper and no one wanted them at anything like what the bank had paid. That turned out to be a twist of good fortune, given the real estate recovery that began in 2010.
Lehman is selling its 95 percent stake in the old International Toy Center at 200 Fifth, marketed by Eastdil’s Doug Harmon and Adam Spies. The eventual price could set a “new benchmark for midtown south,” according to Real Capital Analytics’ Dan Fasulo. The building has a $750 million valuation, according to a source (it sold for $480 million in May 2007). Lehman’s borrowers have also received approval from a bankruptcy court to sell the other part of the Toy Center, 1107 Broadway, for $161.5 million, and there will be an auction at the end of June.
In other cases, Lehman is poised to stick it out a few more years. The garish former condo at 25 Broad is currently in receivership, but Lehman Holdings could take control as early as the fall. In a little-known plan, Lehman is in the final stages of foreclosing on a failed condo conversion at 325 West Broadway that it may renovate.
In the end, Lehman hopes to liquidate its New York assets by September 2013, though the effort has proved to be a struggle as creditors are busy fighting over the last valuable vestiges of the once-great investment bank. Said one source familiar with the liquidation: “It’s a shit show.”