Abu Dhabi’s albatross

Two months after the Chrysler Building was put up for sale in January, Aby Rosen, the flashy developer and co-founder of RFR Realty, emerged as the buyer behind a $151 million deal that surprised many seasoned real estate professionals.

The building’s seller, a secretive sovereign wealth fund known as the Abu Dhabi Investment Council (the Council), took an 80 percent discount on the $800 million investment it had made more than a decade earlier. The deal also marked the latest in a long history of losses by foreign buyers in New York commercial real estate, where a lack of local market knowledge can undermine even the wealthiest of investors.

“It certainly raised my eyebrows, that’s for sure,” said Michael Berretta, vice president of network development at workplace provider IWG, whose co-working business Spaces signed a lease for 111,000-square-feet at the Chrysler last September.

At just over 1,000 feet tall, the 77-story Chrysler, known for its signature spire, has stood like a silent sentry on the New York City skyline for nine decades. The Chrysler has lived several lives, from its high point as the headquarters for its developer, automobile magnate Walter Chrysler, to disrepair during the late 1970s and 1980s.

The Art Deco office tower, rescued at the time by the Massachusetts Mutual Life Insurance Company, was again brought back to life when Tishman Speyer partnered with the Travelers Group to buy the Chrysler and an adjoining building for $220 million in 1997. Tishman embarked on a three-year $100 million redevelopment of the site that added a retail pavilion to the Chrysler.

A decade later, in the prelude to the global financial crisis and with the price of oil surging, the Council swept in with an offer to buy a 90 percent stake in the Chrysler from Tishman and Prudential Financial (which owned Travelers’ former stake) in a deal that valued the building at $800 million. Tishman retained a 10 percent stake in the Chrysler as part of that transaction.

Related: The sovereign wealth shift

Compared to other recent deals involving New York landmarks, the Chrysler’s sale is microscopic. The Empire State Building sold for $1.89 billion in 2013. The Waldorf Astoria, just seven blocks north of the Chrysler, went for $1.95 billion in 2014. The Olayan Group, a Saudi conglomerate, and asset manager Chelsfield teamed up to buy the Sony Building for $1.4 billion in 2016. And Google paid $2.4 billion last year to acquire the Chelsea Market building.

But at the Chrysler, which will turn 90 in May 2020, several red flags went unnoticed. Ground lease payments to Manhattan’s private Cooper Union college jumped to $32 million in 2018 — up from $7 million the year before — and a low occupancy rate and the need for another major makeover changed the financial calculus for the Council.

“If you add all that up, it’s not worth $800 million, which is what Abu Dhabi paid for it,” said Eric Anton, an investment sales broker at Marcus & Millichap. “It’s worth what Aby paid for it. It’s simple math.”

Chrysler crunch

By Abu Dhabi’s standards, its loss at the Chrysler is a mere rounding error. The Persian Gulf emirate, one of the seven that make up the United Arab Emirates and known for its vast oil reserves, has emerged as a global financial powerhouse. Abu Dhabi is believed to manage almost $1 trillion across three sovereign investment vehicles: the Abu Dhabi Investment Authority, the Mubadala Investment Company and the Council.

In recent years the Council and ADIA have changed their investment focus toward minority investments and a less risk-taking approach, according to a 2015 analysis from financial services firm Jefferies. To double down on that approach, Mubadala and the Council merged last year, creating a superfund with an estimated $225 billion investment portfolio. As part of that merger, the two funds said they planned to streamline operations and offload assets, which could explain the Chrysler’s sudden fire sale.

“That could have been one of the stimulants to increase the sale of real estate holdings,” said Michael Maduell, co-founder and chairman of the Seattle-based Sovereign Wealth Fund Institute. He said that the Chrysler is “something they probably wanted to get off their hands.”

Another potential explanation is the ability to write off the property at 405 Lexington Avenue as a capital loss against the Council’s other U.S. holdings.

“They could use that to offset any other capital gains,” said Jay Blaivas, a real estate and tax partner at the global law firm Morrison & Foerster in New York, where he has worked with foreign sovereign investors. “They are still losing money. It’s not like it doesn’t affect them.”

Representatives for ADIA, the Council and Mubadala declined to comment for this story, as did Tishman, which is led by president and CEO Rob Speyer.

The ‘kid brother’ fund

Glitzy landmarks in the U.S. have long served as trophies for international buyers often unfamiliar with local market conditions. Such deals ramped up in the 1990s following the $2 billion that Japanese conglomerate Mitsubishi invested into Rockefeller Center after acquiring the complex in 1989 and the $440 million bet that a Dubai-based fund made in 2005 on the Essex House.

Like the Chrysler, each property racked up losses for its foreign investors.

During the height of the commodities boom a decade ago, Abu Dhabi enjoyed a $170 billion surplus thanks to its oil reserves, and the emirate could not spend cash fast enough. Under the direction of Sheikh Ahmed bin Zayed Al Nahyan, Abu Dhabi’s top sovereign investment vehicle, ADIA, was overflowing with capital, spurring the need for a new junior fund that became the Council. (Nahyan died in a 2010 plane crash.)

The “kid brother” fund, as it was dubbed by Michele Sison, the then-U.S. ambassador to the United Arab Emirates in a confidential diplomatic cable published by WikiLeaks, was initially established to make regional investments close to home. It would have no liability to Abu Dhabi’s government, thereby allowing it to invest in illiquid assets, unlike the more globally oriented ADIA.

But the Council’s domestic focus was quickly abandoned. In July 2008, it made headlines with its acquisition of a majority stake in the Chrysler, a longtime favorite of New York architectural critics and still a gleaming gem in the city’s increasingly crowded skyline. The $800 million price tag came as a pleasant surprise to Newark-based Prudential, which owned a 75 percent stake in the building on behalf of a group of German pension funds.

“They made a lot of money on that deal,” Maduell said about Prudential. “I remember talking to the gentleman who sold it, and he was really happy.”

Tishman held on to a 10 percent stake in the Chrysler and continued to manage the property. In 2017, as a reset in the ground lease approached that would more than quadruple the Chrysler’s rent, the Council refinanced the building with a $300 million loan from an entity it controlled, the National Bank of Abu Dhabi. In essence, the Council relied upon an Emirati in-house deal.

“It’s very unlikely that any other lender on the planet would have made that loan,” said David Eyzenberg, the eponymous head of New York-based investment bank Eyzenberg & Company.

Property records show the debt was paid off the day before the Chrysler was transferred to Rosen and RFR at the start of April for its $151 million purchase price.

As in any sibling relationship, the Council’s recent losses are perhaps offset by its older sovereign sister fund, ADIA, which is the world’s largest real estate investor, with reportedly more than $800 billion in assets under management.

ADIA has made some bold investments in New York real estate. It currently holds stakes in at least five buildings, including the Time Warner Center and the New York Edition Hotel. Together, those holdings are worth more than $1.4 billion, according to data from Real Capital Analytics, which noted that ADIA still ranks behind sovereign wealth funds from Qatar, Norway and China as the largest investors in New York real estate (see related story on page 34). With the Council’s recent merger with Mubadala, Abu Dhabi has reorganized both its domestic and foreign investment decision-making process.

“At the end of the day, they are reporting to the same shareholder, that being the [Abu Dhabi] government,” said William Reichert, a Dubai-based corporate and M&A partner with the global law firm K&L Gates who has been involved in deals with the Council.

A new future

As Abu Dhabi counts the costs of its investment, a new overseas firm has come in to claim the Chrysler throne. Signa Holding, one of Austria’s largest investment firms with $14 billion in real estate assets and led by 41-year-old tycoon René Benko, partnered with the German-born Rosen on the acquisition of the building, which closed in early April.

“We are thrilled that the Chrysler Building, one of the most iconic structures in the New York skyline, represents our first real estate acquisition in the U.S.,” Signa said in a statement.

While some New York developers told The Real Deal that they barely considered buying the Chrysler, there were some bids from institutional investors. Sources familiar with the matter said that the privately held Alchemy Properties sought to purchase the property, while Scott Rechler’s RXR Realty reportedly offered $150 million — $1 million less than Rosen’s bid with Signa. (Alchemy and RXR declined to comment.)

“Aby Rosen is very smart and creative. He was the first guy to mix art and real estate in the city properly and successfully,” said Anton, the Marcus & Millichap broker. “If I’m a betting man, he’s going to make this thing art, not real estate.”

 After reports suggested Rosen was considering a hotel conversion for the Chrysler, RFR’s head of marketing and design development, Sheldon Werdiger, told TRD that doing so has since been ruled out as an option. But he declined to disclose any other plans RFR might have for the building, which have reportedly included bringing back the Cloud Club, a long-defunct restaurant and private club that once filled out the Chrysler’s top floors.

“We are not there yet; we’ve only owned it for a couple of weeks,” Werdiger said. “I’ll tell you that Aby and the firm are not very patient. We are going to move on this as quickly as possible.”

But the expensive ground lease held by Cooper Union could again spoil the site’s long-term profitability — a potential outcome familiar to Rosen. In 2015, RFR defaulted on loan repayments at the glass-box Lever House when the firm was unable to refinance.

At Lever House, a ground lease whose payments are set to jump from $6 million to $20 million by 2023 spooked potential lenders. Occupancy in the building also dropped to 50 percent, per Trepp data. In February, the Lever House debt was sold to Ramsfield Hospitality Finance at a $68 million loss.

“He’s the Abu Dhabi of Lever House,” one source involved in the Lever House affair said about Rosen.

Abu Dhabi’s exit

Whether Rosen can chart a different path at the Chrysler remains to be seen. Cooper Union’s ground lease payment will again rise in 2028, to $41 million, and some reports suggest the building’s new owners will need up to $200 million to adequately refurbish the building. Property records show Rosen has started to chip away at the ground lease with a $30 million loan from Richard Mack’s Mack Real Estate Group, obtained in April.

  “You’ve got to be very careful of the ground lease, because what might look attractive today may not be in five years,” said Bernard Goldberg, a prominent art collector who in 1997 lost out to Tishman and Prudential with a bid for the Chrysler from his now-defunct hotel company, Gotham Hospitality Group. “But the price of today’s dollars can be so tempting.”

Those matters are of no concern to the Chrysler’s current tenants, who believe the property is large enough for a variety of uses. Berretta, of IWG, has had his eyes on the building for two decades, ever since IWG’s co-working company Regus moved into the office tower. Regus affiliate Spaces is now set to roll out on four floors at the Chrysler this summer.

“You speak to anyone globally, it’s known by name,” Berretta said of the building. “To have a recognizable address in New York City is of obvious importance.”

In the meantime, Abu Dhabi could reportedly find itself out of another prominent New York skyscraper it owns at 330 Madison Avenue. Vornado Realty Trust recently tapped HFF, which is poised to be absorbed by JLL, to line up a new partner for it at the 43-story building. (ADIA has a controlling 75 percent stake in 330 Madison, while Vornado owns the remaining 25 percent.) HFF and Vornado declined to discuss the matter, as did representatives for ADIA.

The sovereign wealth fund’s potential withdrawal from its investment at 330 Madison, one it has held for decades, could see the property valued at roughly $900 million, according to a report from Real Estate Alert. TRD noted in January that CBRE investment sales chief Darcy Stacom, who handled the Chrysler’s sale this year on behalf of the Council and Tishman, had also been retained to market 330 Madison. Stacom declined to comment.

With oil prices still slumping, Abu Dhabi has recently implemented some changes designed to jump-start its economy. In April, perhaps taking a lesson learned from its experience abroad, the emirate granted foreigners the right to own property for the first time in its history.