Can Vornado find a buyer at 666 Fifth?

Vornado Realty Trust made it official this week: the REIT wants to sell its 49.5-percent stake in Kushner Companies’ office tower 666 Fifth Avenue.

“We do not intend to hold this asset on a long-term basis,” the company said.

In theory, the timing couldn’t be better. “The market had been red hot for minority shares,” said Robert White, president of Real Capital Analytics, who noted that the Manhattan market saw north of $11 billion in stake sales over the past two years.

But Vornado [TRDataCustom] still faces two big hurdles specific to selling the property: Firstly, typical buyers of minority stakes in trophy towers tend to go for more or less fully leased office buildings, and 666 Fifth has a relatively high vacancy rate. Minority-stake investors also often come from overseas, which could create complications for a company with family ties to the White House as well as unwanted public scrutiny for the buyer.

As a result of Jared Kushner’s rise to the White House, a Midtown office building has become a central character in dozens of national news stories, including a front-page article in the New York Times and two major investigations by Bloomberg, where two reporters have been focused on Kushner Companies and 666 Fifth Avenue for more than a year.

Kushner Companies bought the tower in 2007 for a then-record $1.8 billion and sold a 49.5 percent share to Vornado in 2011. In January of last year, Jared, who helped manage President Trump’s campaign and serves as a White House senior adviser, sold his personal stake in the tower to a family trust.

Ronald Dickerman, who heads the real estate fund manager Madison International Realty, called a sale of Vornado’s stake “a little challenging.” According to him, the obstacles facing the 41-story tower, which has about 1.45 million square feet of office space, include deep, dark floor plates, weak rent growth and a general migration of tenants to Manhattan’s West Side. The building’s political issues “could work for or against” a deal, he added.

One investment-sales broker, speaking on condition of anonymity, said Kushner Companies‘ long search for an investor further complicates a deal. A building that’s on the market for a while can get stigmatized.

“There is some fatigue about deals that have been shown around for two years,” the broker said. The Kushners have reportedly been in partnership talks with everyone from Chinese firm Anbang Insurance Group to Korea Investment Corporation to Qatari royal Hamad bin Jassim, known as HBJ, to France’s richest man, Bernard Arnault.

Kushner Companies declined to comment for this story.

Stake in the ground

The Real Deal compiled a list of all sales of 40-49 percent stake deals in Manhattan office towers over the past two years in which the building was valued at $1 billion or more, using Real Capital Analytics data (see below). Demand for partial interests was clearly strong, and observers expect it to stay that way.

“Most deals that you see in the market right now are for partial, passive, LP, minority-interest capital,” SL Green Realty’s CEO Marc Holliday said during the company’s fourth-quarter earnings call last month. “We’ve done some of those deals, and you’ll see more getting done in 2018.”

But eight of the nine $1 billion-plus deals recorded by RCA were for office towers that were almost fully leased at the time of the sale. 666 Fifth Avenue, in contrast, is just 70-percent leased, lending documents show, and is losing money after interest payments. The tower’s majority owner, Kushner Companies, has reportedly declined to put new tenants into the tower as it has been looking to add a residential condominium component to the tower and revamp its retail.

“It forces you to try to understand the vision,” said Eric Anton, an investment sales broker at Marcus & Millichap. “If you believe the future of New York is only rainbows then you might buy into the redevelopment project over the next 10 years. If you think, ‘I want to buy this and keep it an office building,’ then you’re going to cut a different kind of deal.”

Vornado was reportedly never very interested in that redevelopment vision. Last fall, CEO Steve Roth, a close associate of President Trump, called the plan “likely not feasible.”

Foreign affairs

Investors who could be drawn to a project like 666 Fifth, Anton speculated, are sovereign wealth funds or private investors from Israel. That would be in keeping with recent market trends. Of the nine $1 billion-plus partial-interest sales, six went to overseas investors.

“The typical buyer of a 49 percent share is foreign,” said White, “This one is very different for a number of reasons given the imminent loan maturity. And also, given the majority owner, any buyer, particularly if foreign, is inviting a lot of public scrutiny.”

That maturing loan comes due just a year from now, which led REIT analyst Alexander Goldfarb to speculate that Vornado’s sale tease was actually a hardball play to bring lenders to the table for refinancing negotiations, as Bloomberg reported Tuesday. If no refinancing happens, and a sale is the plan, there’s a whole new set of complications for prospective partners with the Kushners.

Anbang was reportedly in advanced talks to make an investment as recently as March of 2017, negotiations that began before Jared joined the White House. But the Chinese conglomerate backed out soon after it was first publicly reported that a final deal was imminent.

The reasons for the negotiations with several potential partners not resulting in a deal remain unclear. A $500 million investment from HBJ was contingent on a multibillion dollar commitment from another investor, the Intercept reported.

The Kushners have already said they will not pursue another source of foreign money, the EB-5 visa program, for their One Journal Square project in Jersey City, as TRD reported last month.  The regional center handling the EB-5 raise for that project cited the wave of negative publicity surrounding the project’s Beijing presentation, where Jared’s sister Nicole Kushner Meyer made a reference to Jared’s White House role, as a complicating factor.

The Senate Intelligence Committee has further asked questions about whether Jared’s contacts with foreign nationals during the Trump campaign have any connections with his real estate business and with 666 Fifth in particular.

Roth, too, is well known for his connections to the president. A longtime friend and substantial campaign contributor, he co-owns two buildings with the Trump Organization and was briefly the co-head of a White House advisory group on infrastructure.