Google’s ‘search’ gets a hit

A nerve-racking break in active marketing helps get the Internet giant's record-setting building buy done

Jul.July 01, 2011 01:52 AM

111 Eighth Avenue
111 Eighth Avenue

As any theatergoer knows, there’s nothing like a pause in the action to build the dramatic tension.

And that’s exactly what happened when Google — the behemoth technology company based in Mountain View, Calif. — asked for (and quietly received) a several-week break in the active marketing of 111 Eighth Avenue during the second half of November, when it became serious about buying the building.

Google, which was represented by CB Richard Ellis, wanted to make sure that the $1.77 billion (plus millions in additional expenses) it was about to spend on the 2.9 million-square-foot Chelsea office building was a good price.

“That was a very nerve-racking time,” said one insider, about the late-fall marketing pause that came two months after the story broke that the building was for sale for about $2 billion.

Paul Pariser, co-CEO of Taconic Investment Partners, which was a co-owner of the building, said “no one liked [the break in marketing] because people can change their minds.” Taconic owned the property with investment firm Jamestown Properties, and the New York State Common Retirement Fund. Doug Harmon of Eastdil Secured — who had managed several trophy asset sales for Taconic and Jamestown in recent years — handled the sale.

Pariser, however, gave Google a year-end deadline to close, which put additional pressure on the search engine wizards to make a decision.

Of course, at the time nobody knew whether Google’s search would come up empty. But a few months later, as the world now knows, the record-breaking sale became the nation’s largest investment deal of the year, and the largest acquisition by a user ever.

Indeed, it was the exclamation point at the end of 2010, announcing to the world that large deals were possible again.

Still, just 12 months earlier, the owners weren’t seriously thinking about selling the building — which occupies an entire square block between Eighth and Ninth avenues and 15th and 16th streets, built in 1932 to be home to the Port Authority of New York and New Jersey.

The first inklings that a sale might make sense at the property, which insiders say had an annual net operating income of $90 million, came in early 2010. The prior year had been dismal for investment sales, with just $3.5 billion traded in Manhattan, compared to the peak in 2007 of $48.5 billion, data from commercial firm Cushman & Wakefield showed.

“[With] the combination of a lot of capital-chasing deals and limited true trophy core offerings, we felt it would be an ideal time to at least consider a sale of the asset,” Matt Bronfman, managing director at Jamestown, said.

Ownership was talking with a number of industry insiders, including Eastdil’s Harmon, to get a sense of what they could get if they sold an interest in the building, and kept an ownership stake.

They feared they couldn’t get a high enough price to justify the sale, and there was no reason to sell the cash-cow in a weak market.

Michael Phillips, a managing director for leasing and acquisitions at Jamestown, said it was about March 2010 when the firm began to seriously consider a sale. But for all intents and purposes, the property was really in the hands of Taconic, which bought it in 1998, and later brought on Jamestown and the retirement fund as partners.

Pariser, from Taconic, said the talks with Eastdil and others convinced him it was time to recapitalize or sell. “We decided after some level of research that maybe it can get done at levels that excite us,” he told The Real Deal.

The assignment went to Eastdil in May after a small competition in the industry known informally as a “beauty contest.” One source said that only one other firm was seriously considered.

But beyond the question of how much the building would fetch was another issue: Could anyone put together enough debt and equity to pay north of $1.7 billion?

Through the summer, Eastdil was telling big investors around the world to save their money, “something big is coming,” the insider said.

Once it formally came to market in September, sovereign wealth funds, Asian investors, Chilean groups and even billionaire investors like the LeFraks and Wilbur Ross, were prepared to make offers in an acceptable ballpark.

“We had half a dozen groups in a competitive range for the asset,” Bronfman said, but he would not name them.

From the outset, Google was always considered in the mix as a possible buyer. But their interest was kept top secret because of fears that their involvement would kill the interest of other buyers, who might be scared off by the cash-rich firm. They were the only one that could pay all cash.

Google was represented by leasing broker Stephen Siegel and investment sales brokers Darcy Stacom and William Shanahan — all at its long-time go-to brokerage, CBRE.

Sources said at the time the sellers even asked for more than the revised $2 billion target price. But through back channels, a source said Google representatives learned competing bidders were offering nowhere near that. Bids were coming in at about $1.7 billion, they were told. So Google put in an offer a bit higher than others to absorb some of the risk of taking it off the market. (That account could not be corroborated, and another source involved with the deal strongly disputed it, saying Google had no knowledge of other offers.)

But once the two-week marketing lull began, during which time Google presented its purchase plan to its own board, everyone held their breath.

Before the end of the two weeks, “We had a handshake,” Pariser said.

The contract was signed on Dec. 2, and the deal closed three weeks later on Dec. 22, for $1.77 billion. (Although with additional fees, Google’s total bill came to about $1.86 billion, Pariser said.)

“I am not sure it was a much better price than any others, but the best price and best player [combination] was Google,” Pariser said.


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