The Real Deal New York

Tallying who won at 666 Fifth Avenue

Ranking winners, losers in wake of Vornado $707 million purchase of the trophy tower's retail condo

August 01, 2012
By Adam Pincus

When Kushner Companies paid a record $1.8 billion for the aluminum-clad office building 666 Fifth Avenue in 2007, located between 52nd and 53rd streets, the market was still booming.

But less than two years later, Lehman Brothers had collapsed, and that 10-digit price tag seemed to be an outrageous reminder of a bygone era. Yet company CEO Jared Kushner continued to believe that the retail portion alone could be worth $1 billion.

Today — after a roller-coaster ride that’s included bringing in partners and selling various pieces of the building — he’s finally been proven right.

Indeed, last month Vornado Realty Trust agreed to pay $707 million for the last part of the retail condo in the building. That came a little over a year after Kushner — along with the joint venture retail partners he brought in, the Carlyle Group and Crown Acquisitions — sold the other retail condo to Spanish clothing company Inditex for $324 million.

(Click here for a timeline following all of the major developments at the building over the past five and a half years.)

In light of the latest sale to Vornado — which bought Carlyle and Crown out of the investment entirely — The Real Deal created a scorecard estimating how much in profits (or losses) all of the parties involved in 666 Fifth Avenue have walked away with.

TRD calculated profit figures based on purchase and sale price — and also factored in income and expense figures, estimates of mortgage payments, broker fees, lease buyouts, mortgage tax numbers, property taxes and other financial metrics, which were all provided either by sources or by reviewing public records. The figures were shared with the three investors, who each declined to comment. Several sources at the firms disputed the accuracy of the numbers, but would not provide their own figures.

We also created a time line of the record-setting purchases to give you a ticktock account of how the investment played out on the ground. Turn the page for that.

Jared Kushner

Kushner Companies
Retail: Estimated profits of about $100 to $120 million
Office: Estimated current loss (also described as new equity) of more than $200 million

The Kushner Companies, headed by 31-year-old CEO Jared Kushner, had the most to lose when it paid a record $1.8 billion for the 1.45 million-square-foot office-and-retail tower 666 Fifth Avenue at the height of the market. But the family-owned firm believed the retail could be worth $1 billion alone.

An analysis by The Real Deal estimated that the firm made a roughly $100 to $120 million profit on the sale of the retail condos (where it was a 51 percent owner). The profit would have been even higher, but sources said Carlyle lent Kushner as much as $60 million at a high interest rate.

And despite turning a profit on the retail, it appears the firm is not out of the woods yet at the building. That’s because the office portion of the tower has an operating loss of more than $200 million accrued over the past five years, according to a TRD analysis of financial data from special servicer LNR Partners and of city tax records (though sources also describe that $200 million as additional equity that Kushner put into the building).

Part of the problem stemmed from crushing debt payments that were once as high as $78 million annually. The building also struggled with a net cash flow, which records from LNR show declined from $57 million in 2007 to $28 million in 2011, as revenues plunged from $106 million to $78 million when the firm lost a few big office tenants (including law firm Orrick, Herrington & Sutcliffe), and vacancy in the building rose.

But after a December 2011 recapitalization with an $80 million cash infusion from Vornado, Kushner was able to cut its near-term debt payments by more than half to below $30 million per year. Although that will jump down the road, Kushner — whose stake in 666 Fifth now only consists of 51 percent of the office portion of the building — is on much more solid footing compared to last year at this time. Rather than bleeding cash, it appears to be breaking even and may be profitable if it can sign some new office tenants.

 

David Rubenstein

Carlyle Group
Retail: Estimated profits of $200 to $230 million

The Washington, D.C.–based global investment firm appears to be the biggest winner out of the three investors in 666 Fifth Avenue.

The firm took home the lion’s share of the profits through the ownership and sale of the two retail condos in the building. Sources say the firm — which partnered with Crown and Kushner in July 2008 to buy the retail portion of the building for $525 million — laid out the most cash of the three partners. While there’s no breakdown publicly available, Carlyle reportedly put in more than Kushner, which also contributed cash to the deal. Together, they spent $65 million for the initial retail condo acquisition and millions more for expenses such as mortgage payments and lease buyouts for tenants like Brooks Brothers and Hickey Freeman.

Sources say, all told, Carlyle may have kicked in somewhere around $200 million. According to TRD’s analysis, it appears that Carlyle made that back, and possibly another $200 million to boot. The firm earned money both as a percentage of the preferred equity it laid to cover ongoing expenses and received a return through a complex “waterfall” structure that allocates part of its sale profits to Crown, sources close to the deal said.

Haim Chera

Crown Acquisitions
Retail: Estimated profits of $25 to $50 million

Crown Acquisitions had the least to lose — at least financially speaking — of the three retail partners. The company didn’t put money into the purchase of the retail condo and, other than earning brokerage and other fees, could only make money if the investment cleared a certain profitability hurdle, sources said.

Still, it played a crucial role in making the deal happen and, according to TRD’s estimates, it walked away with $25 to $50 million (insiders vary on the exact amount). Plus, it won a big feather in its cap for bringing together the partners and retail tenants.

The company, owned by the Chera family, helped bring in the big money investor, Carlyle, and acted as a broker in landing megaretail tenants like Japanese fashion chain Uniqlo, which agreed in 2010 to a 89,000-square-foot lease.

“Our goal was to get the value over $1 billion. We paid $525 [million] plus costs, and we achieved our billion-dollar value, which is a successful business plan executed very well,” said Haim Chera, a principal with Crown.

Crown earned several million dollars in brokerage and other fees, but the bulk of its money was in the form of a “promote,” which gave it a share of the profits after Carlyle made a certain amount of money. It’s unclear what the terms of the promote were, but sources said that Crown’s percentage would have increased at a rate faster than the profit. Some sources said Crown’s interest was approximately 12 percent of Carlyle’s share, but Chera disputed that.

Lenders
Retail: Estimated interest payments of $113 million

Lending money on the 666 Fifth Avenue deal was a profitable pursuit for those who did it. SL Green Realty — which issued a $135 million mezzanine loan to the retail partners in 2008 — made $54 million on the deal through annual interest payments of about $20 million per year, according to sources. The mezzanine loan was paid off in March 2011 when the investors sold the larger of the two retail condos to Spanish company Inditex. Barclays, meanwhile, made an estimated $43 million on its $325 million loan, according to a TRD analysis of the amount of money borrowed and an average interest rate on a commercial investment of this scale. In addition, Morgan Stanley will net an estimated $16 million on its $300 million loan, which has not yet been paid off because the Vornado retail purchase has not closed.

Brokers
Retail: Estimated $7.5 million in commissions

The CBRE Group and Lansco may come out on top in relation to brokers’ fees on the building’s retail condos. The investment sales team — led by Darcy Stacom — earned a commission estimated to be as much as $3 million as the listing broker on the pending sale to Vornado, according to sources. Meanwhile, sources say the Uniqlo lease generated a total commission of between $6 and $9 million for all of the brokers involved. Under a standard commission split, Lansco’s Roger Eulau, who represented Uniqlo, would have earned half of that. Cushman & Wakefield — whose Bradley Mendelson represented the Kushner-Carlyle-Crown partnership — would have shared the other half with Crown.

In addition, Laura Pomerantz of PBS Real Estate earned a commission for representing Abercrombie & Fitch in its lease, and Savills earned a commission on the sale of the retail condo for Zara. Commission estimates were not available for either of those transactions.

Tenants through buyouts
Retail: Estimated $74.9 million for lease buyouts

The original tenants who occupied the retail space at 666 Fifth Avenue walked away with handsome payouts to vacate their stores. Indeed, Carlyle and Kushner paid Brooks Brothers $47.7 million and clothing store Hickey Freeman $12 million, while Zara paid the NBA Store $15.2 million.

MENU

Subscribe to our email newsletters

New York Real Estate News
South Florida Real Estate News