The king of contrarians

Behind George Comfort's $590 million buy, the biggest since Wall Street's fall
By David Jones | September 01, 2009 01:02PM

 

Peter Duncan, top, CEO of George Comfort & Sons, led his firm in buying Worldwide Plaza, the last of Harry Macklowe’s distressed buildings.

Peter Duncan, the president of George Comfort & Sons, would probably not be faulted by many in the real estate community for whooping it up with a big “I told you so” to all those who predicted he would never seal the deal on the purchase of Worldwide Plaza.

But unlike many of his contemporaries, Duncan refuses to take a victory lap to celebrate the deal, or boast about his prowess in timing the market.

“It’s like any acquisition. Buyer’s remorse kicked in immediately,” Duncan told The Real Deal, in a half-joking sort of way.

His Madison Avenue-based firm, which previously owned more than 7 million square feet of office space, had until recently been a rather low-profile operation in New York.

But after nearly 10 months of intense negotiations, the firm pulled off a rather stunning feat in late July, leading an investment group that included RCG Longview, the Feil Organization and DRA Advisors into the biggest real estate deal since the collapse of Lehman Brothers. The group paid $590 million for the last of the commercial buildings from Harry Macklowe’s distressed portfolio.

Although many other firms are waiting for market conditions to improve, in the last year, George Comfort & Sons has captivated the New York real estate world by bursting onto the scene during the worst market since the Great Depression.

“They’ve been at the game for a long time,” said Howard Dolch, executive vice president of commercial office broker Lansco Corp. “However, they’ve never had a building of this magnitude.”

While the group may have shelled out hundreds of millions of dollars for the deal, they still got the building for nearly two-thirds off, some 65 percent less than what Macklowe paid at the height of the market, when he bought the building for $1.74 billion. As one market analyst told The Real Deal last month, they are “going to have to work hard to lose money.”

Still, Worldwide Plaza, which is at 825 Eighth Avenue and 50th Street, does come with some enormous challenges — not the least of which is that the 1.8 million-square-foot building has more than 700,000 square feet of unleased office space, as long-time tenant Ogilvy & Mather makes its long-awaited relocation to 636 11th Avenue.

“It’s a terrific building, but it’s also a deal that has some challenges,” said Scott Singer, executive vice president at the Singer & Bassuk Organization, a Manhattan-based real estate finance brokerage. “It has a lot of space to lease up. Eighth Avenue is clearly a fully accepted location at this point, but Eighth Avenue is not Park Avenue.”

It’s still unclear whether history will deem the acquisition a stroke of genius or whether it will become a huge financial albatross for Duncan’s company. If it’s successful, the deal will move George Comfort into the upper echelon of commercial landlords in New York.

Tracking the deal

Sealing the deal for Worldwide Plaza wasn’t easy for George Comfort; indeed, it was the product of a number of on-and-off-again negotiations and almost-reached agreements.

Sources say the firm was helped by its strong network of institutional investors and a track record in generating returns in deals it has made in other markets around the country.

That ultimately encouraged the most skeptical parties to come back to the table when the deal appeared to be falling apart.

“The one thing that has kept them in great stead, is they’ve been able to attract institutional and high-net-worth dollars to invest with them and to make repeat investments,” said Martin Luskin, a partner at Blank Rome, who represented the firm in the Worldwide Plaza deal. “They deliver what they promise, so the people that invest with them invest again.”

Sources familiar with the negotiations said that Worldwide was originally supposed to sell as part of a four-building set of distressed Macklowe properties that included 1540 Broadway, 527 Madison Avenue and the so-called Tower 56 on East 56th Street. Once the latter two properties sold last year, however, a $2 billion deal was pending with George Comfort for the remaining two — contingent on a major lease agreement for NBC Universal at Worldwide Plaza.

But the collapse of Lehman Brothers a year ago this month killed the deal, sources said.

A few months later, in January, another round of talks started up, only to crumble weeks later after a tentative agreement was reached. “When that deal did not go through, they sold 1540,” Duncan said during an interview in his Midtown office last month, referring to the deal with CB Richard Ellis Investors.

With Worldwide Plaza the only distressed Macklowe building still on the auction block, the George Comfort team was one of few remaining bidders (Larry Silverstein and Douglas Durst were among the others).

By early June, Duncan finally reached what he and everyone else thought was a final agreement to buy Worldwide Plaza for $175 million in equity and assumption of a $450 million mortgage, with Deutsche Bank as an equity partner. But Deutsche Bank mysteriously backed out, leading Duncan to publicly call the bank out for allegedly sabotaging what he considered a contractually bound deal.

Duncan would not comment specifically on why the June agreement fell apart, but sources familiar with the discussions said there were 11th-hour concerns about the financial terms. Instead of Deutsche Bank holding an equity stake in Worldwide Plaza, there is now some convertible debt built into the agreement.

By July 21, Duncan, who personally led the negotiations on behalf of his firm, reached a deal to buy the property for $590 million. That deal includes plans to spend millions of dollars in renovations to attract new retail and commercial tenants, addressing concerns by investors that no tenant would be found to replace advertising firm Ogilvy & Mather, which is vacating before the end of the year.

“We were always most interested in Worldwide Plaza,” Duncan noted.

“The pace was intense and the negotiations were very broad, meaning the fact that there was a short period of time did not mean that we skipped over everything that was important,” added Luskin.

Building on basics

George Comfort executives realize the company has just acquired a very prestigious piece of New York real estate, easily the crown jewel of its growing portfolio of commercial buildings. (The company manages more than 11 million square feet of real estate, and owns a stake in 70 percent of that portfolio.)

But they insist the deal is not going to change the way they do business.

“We haven’t been publicity seekers, we just put our heads down and try to get the business done,” said Dana Comfort, executive vice president of the firm and the grandson of founder George Comfort.

That’s essentially been the motto since his grandfather founded George Comfort Co. in 1919, following the end of World War I.

Comfort had graduated 12 years earlier with an engineering degree from Cornell University and launched his new firm as an engineering consulting business for building management. Over the next couple of decades, the firm expanded into a brokerage for commercial leases and sales, including the 1941 sale of 684 Broadway by Mutual Life Insurance Co.

Comfort’s son, George V. Comfort, was being groomed to enter the family business. He had attended Harvard College, before joining the company during the Great Depression. He then grew the company into a commercial property owner, building manager and leasing broker.

He also established investment partnerships with some of the leading figures in New York real estate, including Harry Helmsley and Loeb Partners Realty.

Duncan, a Westchester native and graduate of Trinity College, first joined the company in 1982 — about two years after Dana Comfort began working there.

In 1993, Duncan led an alliance that included Loeb Partners to buy 200 Madison, the 600,000-square-foot office tower, for $25 million. The building would become the company’s new headquarters.

After becoming president in 1995, succeeding Lyn Comfort (one of Dana’s brothers), Duncan steered the company in a new direction as an active buyer of commercial office buildings in the Garment District, Lower Manhattan and other parts of the city.

The firm also entered into even more deals with Loeb, including 63 Madison, a sale-leaseback acquisition from New York Life Insurance in 1993, and 498 Seventh Avenue, a $42 million acquisition in 1997. In fact, during the late 1990s — back when real estate investment trusts were considered a hot commodity — the Loeb partnership grew to the point where the two flirted with the idea of launching a REIT in 1998. The dot-com crash ended that idea.

Comforting tenants

Manhattan-area brokers say that George Comfort, which before buying the Worldwide Plaza owned or operated eight office towers in Manhattan, has a reputation for treating its tenants with respect and maintaining long-term relationships.

The majority of its buildings in Manhattan are more than 90 percent occupied, with several operating at full capacity.

“I think these people are very competent operators,” said a real estate investor that has worked with Duncan, who asked not to be identified. “Whether [the building] is 400,000 square feet or 1 million square feet, I think these people can manage it well.”

Dana Comfort said working with its tenants through both boom and bust times has been crucial to the firm’s success.

“We try to focus on keeping the tenants that we have,” he said. “Sometimes when the market gets so good, and you have tenants that are about to face some really big rent increases, we’ve been able to keep them through those [periods] so they don’t get mad at us.”

While the company has been well off the radar in Manhattan until recently, they have established a somewhat higher profile in other markets.

In 2003, they teamed up with Angelo Gordon & Co.’s Core Plus Fund to acquire a nearly 500,000-square-foot Stamford, Conn., office complex called High Ridge Park, for about $86 million.

Paul Jacobs, executive vice president at CBRE, recalls that the deal caught a few people off guard because George Comfort was competing against a number of established investors from the area.

“It was a bit of a surprise to me given that they were entering the suburban market for the first time,” said Jacobs, who was impressed by the results. “I think they just brought a fresh new set of eyes from a different market and really renovated the park to bring it up to 2000 standards.”

Last September, the High Ridge was named the winner of the regional building of the year award by the Building Owners and Managers Association.

George Comfort also owns one of the premier office parks in Westchester, the 560,000-square-foot Centre at Purchase, which it bought in 2007 for $166 million.

It made the acquisition through a joint venture with Manhattan House developer O’Connor Capital Partners.

Brian Carcaterra, managing director at Newmark Knight Frank in Greenwich, said the firm invests heavily in their properties and are very hands on, ensuring that their tenants are satisfied.

“They inject a lot of capital into the properties they invest in. They are not buying to clip the coupon so to speak,” said Carcaterra, who represented OTA Management, a privately held broker-dealer that signed a five-year lease renewal for a 25,000-square-foot space at the Centre at Purchase.

Not all the company’s out-of-town deals have been in suburban markets.

The company has a fairly significant number of projects in Southern California, starting with a major expansion in Beverly Hills.

In 2005, under a partnership with Morgan Stanley Real Estate’s Prime Property Fund, it acquired the Wilshire Beverly Center, a 220,000-square-foot Beverly Hills office complex for $130 million.

Apple pickers

Duncan — a notorious stickler for details, who admittedly annoys his own employees by poking his nose into nearly every transaction — is by no means finished in Manhattan. The firm is actively looking for distressed assets in Midtown, Lower Manhattan and other submarkets, and is moving forward with plans to upgrade Worldwide Plaza in the hopes of finding a new tenant.

“We’re looking hard at the presentation of the building at street level,” Duncan said.

While he declined to give any specific dollar figures on the renovation, he indicated the building would be upgraded to make it a more attractive retail location and to explore the site as a “building within a building” location for a large tenant.

Duncan said a number of firms have inquired about space at Worldwide Plaza, where pre-crash asking rents went for more than $90 a square foot. The New York Post reported that the Depository Trust & Clearing Corp. is looking for a 750,000-square-foot space, which may be slightly larger than what Worldwide can lease right now.

What is clear, however, is that the reluctance of large tenants to move will push asking rents down by a significant amount, industry sources said.

“Any tenant that’s going to take several hundred thousand feet is going to drive a hard bargain,” said Dolch.

Duncan’s supporters, however, insist he is more than ready for prime time.

“I think Peter Duncan and George Comfort & Sons are proven resources in this city,” said Luskin. “Is this building from a stature point of view a little bit higher than other buildings? Yes. But is this biting off more than they can chew? Absolutely not.”