Q&A: Partial interest investor Dickerman on $1.4B GM deal

Ronald Dickerman knows about buying stakes of buildings in the United States — and around the globe. Dickerman’s Madison International Realty is a Midtown-based investment firm that focuses on buying partial interest shares in core urban real estate. While his firm was not one of those that recently bought a $1.4 billion stake in the General Motors Building, he did take a look at it.

In Manhattan, the firm owns interests in office towers, notably the 24-story 655 Madison Avenue and the 16-story 136 Madison Avenue, as well as several retail buildings controlled by Forest City Ratner. Worldwide, Madison owns properties in cities in Great Britain and on the continent.

Dickerman, president of Madison, spoke with The Real Deal about the 40 percent stake in the GM Building that sold Friday to the families of Zhang Xin, a Chinese real estate developer, and Moise Safra, a Brazilian banking magnate. (Madison was not involved in the sale.) The $1.4 billion that the partnership paid to Goldman Sach’s U.S. Real Estate Opportunities Fund and Dubai-based Meraas Capital puts the value of the building at $3.4 billion — the country’s most expensive office property.

Read on for Dickerman’s thoughts on who got the best end of the deal, and why partial interest shares are still trading despite a sharp rise here in land prices.

Owners seeking to recapitalize underwater investments drove sales in 2010 and 2011, as the economy started to come out of the financial crisis, but today prices are rising in Manhattan. What is driving minority partial interest sales now?

Even though it does not seem like it, transaction velocity is substantially reduced versus where it was in 2006 and 2007. The byproduct of this is that there are a lot of owners who are not selling their buildings right now. And you’ve got underlying partial owners who want to sell; they have been in for 10 years or more and always thought the buildings would be sold in 2011, 2012 or 2013. There are a lot of these underlying owners saying, ‘Well, find me an alternative exit.’ [That’s] exactly what happened with the General Motors Building.

What kind of returns do you expect for the Zhang family, owners of the mega development company Soho China?

I can tell you on any reasonable person’s pro forma, that its acquisition of that interest will yield well less than 10 percent — probably 6, 7 or 8 percent on a levered basis over a 10-year term. I would ask if that is a good return. But this is one of the finest office buildings in the world in one of the finest locations in the world so maybe that is not a bad return.

Did you put in an offer to buy this partial interest?

We didn’t bid, but we certainly worked on it, and underwrote it. We were very much aware that it was coming to the marketplace, [yet] we just did not feel the price, or rather the risk and the return, justified the price that [the Zhang family] paid. Its motivation was not economic return, it was preservation of capital.

Are you looking at additional partial interest acquisitions in New York City?

We are actively looking at probably $2 billion worth of New York City partial interests that sellers are looking to move, which are not being marketed actively.

Who got the better deal in the GM sale?

The seller did very, very well. [And] the buyer bought a piece of one of the best office buildings in the world. On the other hand, they paid a very high price and their go forward rate of return is questionable. But I keep saying that economics was not the main motivation.