The best and worst deals

The 15 biggest winners and losers since the crunch

Next month will mark the one-year anniversary of the fall of Lehman Brothers — a date often referred to in “pre-” and “post-” terms in the New York City real estate market. With that in mind, The Real Deal zeroed in on the 15 best and worst deals since Wall Street’s collapse and the earlier onset of the credit crunch.

The deals were selected based on interviews with real estate professionals, published reports from the past year, research and an informal survey.

While the list includes some high-profile examples, it was not designed to revisit all of the soured deals that have been staples in the headlines. Instead, it’s a cross-section of not only big-ticket but also lesser-known significant deals, which might otherwise have gone down as footnotes.

The very public sale of Worldwide Plaza to an investment group led by George Comfort & Sons for $375 per square foot — down 65 percent from what developer Harry Macklowe paid for it in early 2007 — was flagged as one of the smartest purchases. Like many of the other deals on the list, it involved a seller unloading a distressed asset.

Lesser-known deals included the British fashion house Burberry, which leased 71,000 square feet for its Madison Avenue headquarters with the bonus rights to erect a glowing sign on top of the building, an extremely rare find outside of Times Square, and a group of former East Village squatters who acquired an Alphabet City building from the city.

“Worst deals” included record-breaking purchases like the GM Building, although Mort Zuckerman, chairman of Boston Properties, told The Real Deal he still considers it “the best purchase we’ve ever made” when viewed as a long-term investment. Also singled out as a not-so-savvy investment were individual apartment sales like one at Julian Schnabel’s Palazzo Chupi, where a Wall Street buyer paid $15.5 million only to see the value plummet by 55 percent, doubling the declines seen in the overall market.

Best: George Comfort & Sons and RCG Longview’s purchase of Worldwide Plaza for roughly $600 million

Even though the purchase of Midtown’s Worldwide Plaza was the most expensive real estate deal done so far this year, it could very well be one of the smartest.

Late last month, an investment group led by George Comfort & Sons and RCG Longview reached a contentious agreement to purchase the distressed building at 825 Eighth Avenue from Deutsche Bank for $600 million-plus — 65 percent less than Harry Macklowe paid for it in 2007.

“I think the partnership that purchased Worldwide Plaza is going to have to work hard to lose money,” quipped Dan Fasulo, managing director of Real Capital Analytics.

Even though the 1.8 million-square-foot building is half vacant, Fasulo said that at $365 per rentable square foot, “They’re going to be able to offer the office space for lease at some of the most competitive rental rates in Midtown, so they’re going to basically be able to buy tenants.”

Best: Youngwoo & Associates and Kumho Investment Bank’s purchase of 70 Pine Street and 72 Wall Street from AIG for under $140 million

In the most inexpensive, yet visible sale of a Manhattan skyscraper this past year, creative powerhouse Youngwoo & Associates, in partnership with Kumho Investment Bank, snagged two Financial District towers from embattled insurer AIG for under $140 million in June. The deals set a new benchmark of $100 per square foot.

AIG’s headquarters at 70 Pine Street is the more coveted of the two buildings, and is being considered for city landmark status. Given the likelihood of this designation, many in the industry will be watching to see what Youngwoo, known for the type of futuristic vision that brought Manhattan the SkyGarage — the Annabelle Selldorf-designed condo in Chelsea where residents have individual elevators for their cars — decides to do with the building.

David Schechtman, senior director for Eastern Consolidated, said the sale of the AIG buildings, Worldwide Plaza and 1540 Broadway (another distressed Macklowe building, which CB Richard Ellis Investors bought for $355 million) are among the first in the next paradigm shift in pricing. “Today’s $100 to $400 per square foot is 2007’s $400 to $1,000 per square foot,” he said.

Best: Purchase of Marc Dreier’s apartment at One Beacon Court for $8.2 million, or $2,733 per square foot

In one of the highest-profile sales of the year, Ajit Jain, who reportedly works with billionaire investor Warren Buffett, beat out 45 others in five heated minutes at a bankruptcy auction to purchase disgraced attorney Marc Dreier’s apartment at 151 East 58th Street, otherwise known as One Beacon Court. The apartment came fully furnished and with most of Dreier’s possessions, including a hand-knotted Tibetan carpet, a flat-screen television and a pricey bottle of Champagne.

While the $8.2 million, or $2,733 per square foot, sale price of unit 34C (not including the 738-square-foot terrace) seems high in these belt-tightening days, it’s still a good deal when compared to other sales at the tony building. Four apartments there have sold since February 2008 for between $3,882 and $4,986 per square foot, according to PropertyShark, the real estate data Web site.

The Cesar Pelli-designed tower houses offices for Bloomberg L.P. on the lower floors, and the famed restaurant Le Cirque is on the ground level. The upper portion contains luxury condos.

Oren Alexander of Prudential Douglas Elliman said the water-cooler bet on the auction was $6.5 million to $7 million. Still, while “there’s a stigma to that apartment that takes away from the value … if you look at it per square foot, it’s probably one of the lowest per square foot [prices],” he said.

Dreier, sentenced to 20 years for defrauding investors of $700 million, paid $10.4 million for the apartment in 2007.

Best: Bruce Ratner’s pending purchase of the Vanderbilt Yards site in Brooklyn from the MTA for $100 million

Instead of charging developer Bruce Ratner $100 million in one lump sum for the right to build over Brooklyn’s 8.5-acre Vanderbilt (Atlantic) Yards site, as originally agreed, the MTA announced in June that Ratner could pay just $20 million upfront to close on the portion of the rail yards beneath his planned arena for the Nets. Payments for the rest of the property, if he continues building, could be spread over 20 years, starting at $2 million a year in 2012 and jumping to $11 million in 2016 at an implied 6.5 percent interest rate, according to financial services firm Keefe, Bruyette & Woods.

The original $100 million purchase price was already far below the yard’s appraised value, which the MTA justified by the additional $345 million Ratner promised he would make in infrastructure improvements. Under the new agreement, however, Ratner is not obligated to spend as much on those upgrades.

Schechtman said that while the purchase price of the land may be high in today’s market, “the built-in financing over a 20-year period, at a time when there is an absolute absence of construction and land financing, makes this a real coup.”

Best: East Village squatters’ acquisition of “Bullet Space” in Alphabet City

It’s hard to put a monetary value on the “sweat equity” that a group of East Village squatters poured into fixing up the 11 abandoned tenements they illegally began occupying in the 1980s. But on paper, the deal that made these homes legit looks pretty good.

In 2002, the city agreed to legally transfer the buildings for $1, with a 40-year tax abatement, to the nonprofit Urban Homesteading Assistance Board under the condition that it bring the building up to code before the residents officially take ownership.

The squatters at 292 East Third Street, named “Bullet Space” for its ground-floor gallery, were the first to officially take ownership of their building, the New York Post reported. Two mortgages for building repairs totaling $668,759 put its price at $96 per square foot. A market-rate one-bedroom in a renovated building on the same block is in contract with the listing price of $299,000, or $854 per square foot, according to Street Easy.

A Bullet Space resident told the Post the squatters each contributed about $50 a month for jury-rigged repairs over the last three decades, but now their monthly payments are $614.

The catch: units can only be re-sold at below-market rate to low-income buyers, and a 10 percent “flip tax” on any profit made from the sale goes back into the building.

Best: Developer Avi Shriki’s 10-year contract to rent out his failed luxury project in Crown Heights as a shelter for the homeless

Sometimes, when developers turn their failed luxury condo projects into rentals, the transition isn’t smooth. Units can sit vacant and rents often have to be lowered. As the Daily News reported, developer Avi Shriki found a unique way to avoid that fate: tap into government largesse. Having failed to sell any of the 67 units at 1040 East New York Avenue, this spring Shriki inked a contract with the Bushwick Economic Development Corporation for homeless families to occupy the building for the next 10 years at what appear to be above-market rents for the area.

According to the News, the group will receive about $2,700 a month from the city for each apartment and for the services it provides to residents. (Median rents are $1,600 in Crown Heights, according to StreetEasy.) Shriki’s cut wasn’t disclosed, but he told the newspaper: “At least we still own the building and we are paying our mortgage … the outcome is not as bad as some people I know who had to surrender the whole building to the bank.”

Best: Burberry’s lease of 71,000 square feet on Madison Avenue for its U.S. headquarters, which included the right to affix its glowing sign on top of the tower

Some things in New York real estate are priceless. Affixing an illuminated company logo atop a Manhattan tower, outlawed 20 years ago under a city zoning law, is one of them. Last October, as the world economy started its free fall, the British fashion house Burberry signed a 15-year lease for 71,000 square feet at 444 Madison Avenue.

The Burberry lease includes four floors of office space, two ground-floor retail spaces — one for the company’s Burberry London line and the other for its dressed-down Burberry Brit line — and, thanks to a grandfather clause, the right to light up the city skyline. Outside of Times Square, there are less than six towers in Manhattan permitted to have illuminated signs on their roofs, said Dan Horowitz of Studley, which represented Burberry in the deal.

Horowitz declined to disclose the price of the lease, but brokerage Optimal Spaces wrote in its market review that the asking rent was $85 per square foot.

“They got a major presence in New York City with their name on one of the most famous buildings in the world. So, if they did nothing else but get their name on the building, then it’s worth every penny. And the deal was cheap,” said Faith Hope Consolo, chairman of Prudential Douglas Elliman’s retail division. She added, “Any time you can buy a billboard, it’s worth millions, and maybe billions in advertising.”

Best: Paulson & Co. president John Paulson’s $150 million bet against sub-prime mortgages, making him an instant billionaire; now betting on CBRE

As the old adage goes, hindsight is 20/20. But some people actually have the gift of foresight: John Paulson, president of the hedge fund Paulson & Co., started a hedge fund with $150 million in mid-2006 solely to bet against risky mortgages. The following year, he reaped what could be the largest one-year paycheck in Wall Street history — $3.7 billion — for betting the housing market would crash. His recent investments, now closely watched, include $100 million in CB Richard Ellis Group Inc. (whose stock price dropped from $41 a share in July 2007 to $9 a share this past month) and gold mining companies.

Paulson, a Queens native, started making his bets in mid-2005 through two complex instruments created to repackage and insure risky mortgages, when the conventional wisdom held that, while loose lending standards might be reason for concern, they could never cause a major, national collapse of the housing market.

“Most people told us housing prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond,” Paulson told the Wall Street Journal last winter.

Sign Up for the undefined Newsletter

While Paulson wasn’t the only one who saw the storm coming, he bet on it at exactly the right time. In the fall of 2007, as the index used to measure the value of sub-prime mortgages crashed, his profits skyrocketed.

Best: Daffy’s shopper to win a one-year lease on a 1,380-square-foot loft at One Seventh Avenue South for $700 per month

In a lease rivaled only by the likes of Section 8 vouchers, the discount clothing store Daffy’s is awarding the contestant who submits the pluckiest video a $700-per-month lease for a two-bedroom, floor-through loft in Greenwich Village. The sleek, triangular black building by REcappartners failed to sell any of its four units after more than two years on the market, so the developer turned them into rentals.

The New York Times reported that Daffy’s, one of the oldest discount clothiers in the region, announced the sweepstakes last month. The apartment was first listed in 2007 at $1.95 million, and the Times put its current asking rent at $7,000, ten times more than what the contest winner will pay.

A winner will be chosen next month.

Worst: The purchase of unit #22N at Olympic Tower for $1.5 million, or $2,189 per square foot, double its purchase price 16 months earlier

If a “bad deal” is defined by a property’s purchase price versus its income-generating value, whether by resale or lease, there are countless boom-year deals turned bad to choose from.

However, the worst apartment purchase, at least from an investment standpoint, may have been that of a one-bedroom at Midtown’s Olympic Tower. StreetEasy determined that unit #22N had that largest recent price appreciation between purchases, at a time when the real estate market had already begun to sour. The apartment was purchased in November 2008 for $1.5 million, double what the previous buyer paid for it in July 2007. Meanwhile, the median sales price in the area has decreased by 24.8 percent since the end of the second quarter in 2007, said Sofia Kim, vice president of research for StreetEasy.

“It was crazy. We were really trying to rent it and [the buyer] came by and gave me an offer,” said the seller’s broker, Ariel Cohen, executive vice president of the Cohen Group at Prudential Douglas Elliman. “It was an all-cash buyer from Italy and they were just itching to buy it.”

Worst: Boston Properties’ purchase of the GM Building for $2.8 billion, or $1,473 per square foot

When it comes to the worst deals, Boston Properties’ $2.8 billion purchase of the GM Building from Harry Macklowe stands out as the elephant in the skyline, mostly because it was the most expensive price paid in the country for a building at a time when the office market was already beginning to slide.

“They jumped in a little too early, and I’m sure they’re regretting it right now,” one analyst remarked.

While Boston Properties’ chairman, Mort Zuckerman, acknowledges that the building would sell for less today, he defends the buy.

“Not in the slightest do I regret the purchase of the building,” Zuckerman told The Real Deal. “I don’t regret the price of the building because it’s lower than what it would have been in the previous year,” which would have been around $3.5 billion.

“Over 60 percent of the building has leases at 10 years or longer that we’ve inherited, and it’s all at fairly low rents,” Zuckerman said. “The real value of the building in relation to our purchase price will show up only when those leases roll over.”

Between the time Boston Properties bought the GM Building in May 2008 to May of this year, average asking rents in Midtown dropped 28 percent from $86.52 to $62.16, according to data from CB Richard Ellis. And they have only continued to drop since.

The building’s best bet to raise the rental income in the short-term might be its retail space. According to the Post, the toy store FAO Schwarz, which occupies 66,465 square feet of space in the building, pays around $70 a foot for part of its space — 20 times less than what ground-floor retail rents were going for in the area last year, according to a REBNY market report. Zuckerman noted that Boston Properties would be getting a much higher return on its retail space when the current lease is up.

Worst: William Brady’s purchase of a four-bedroom apartment in the Palazzo Chupi, for $15.5 million

Maybe the Palazzo Chupi wouldn’t be such a standout in a crowded room of bad deals if it weren’t painted bright pink. But it is, and its two remaining condos — marketed as a combined duplex and triplex penthouse for $27.9 million, or $3,633 per square foot — have suffered among the deepest price cuts in the city at 47 percent of their original asking price, according to StreetEasy.

Actor Richard Gere and Credit Suisse managing director William Brady each bought apartments at the five-unit Palazzo Chupi, which is located at 360 West 11th Street, in September 2007. And the building’s creator, bad-boy artist Julian Schnabel, lives in the fifth apartment. Brady paid the highest price in the building for unit #1, at $15.5 million, or $4,434 per square foot.

The closest, most recent comparable sale is a similarly sized fourth-floor loft at the Meier South Tower around the corner, which was sold for $7.5 million, or $1,981 per square foot, in December. Ignoring the premium for art-chitecture versus starchitecture, that sale would seem to indicate that Brady’s investment has plunged in value around 55 percent.

On the plus side, brokers have been quick to point out that people like Brady probably still have more left on their investment than if the millions were parked in the stock market or, even worse, with Bernard Madoff.

Worst: SJP Properties’ speculative construction of 11 Times Square

On speculation, SJP Properties broke ground on a $1.2 billion, 1 million-plus-square-foot office tower at 11 Times Square in the summer of 2007, right at the start of the credit crunch. At the time, the city’s office market was at its tightest and SJP Chairman Steven Pozycki predicted $110-per-square-foot rents. Now, the citywide vacancy rate has nearly doubled to 10.5 percent, asking rents have plummeted and the tower remains completely unleased.

Pozycki told a crowd at a recent real estate luncheon, “We would like a $100 [per square foot] rent but we would be real happy with a high $70 rent.”

So far, the tower’s chief backer, Prudential Financial, has written the building’s value down 20 percent below its original cost, and is predicting further write-downs of up to 20 percent this year, the Wall Street Journal reported.

Investors have lined up to take $1.5 billion out of the $12.4 billion fund backing the building, but Prudential has stopped funding redemption requests, the paper reported.

The newspaper profiled one of Prudential’s investors, a police and firefighter pension fund in Missouri. As a result of the Times Square deal, “[a] referendum in Springfield [Missouri] for a sales-tax increase to keep the pension fund afloat failed in February, forcing cuts in the city budget. A proposed budget would reduce how often park lawns are mowed and roads are maintained. It would eliminate the city’s summer concert series, its multifamily housing inspections and a service to trap skunks and feral cats,” the Journal noted.

Worst: Africa Israel Investments and Mann Realty’s purchase of the Apthorp on the Upper West Side for $426 million

Lev Leviev and Maurice Mann’s purchase of the historic Apthorp at 2211 Broadway for $426 million was the most expensive purchase of a single residential building in U.S. history, based on the $2.6 million cost per unit. Originally, the developers thought they’d make a killing, with lofty goals of selling the Apthorp out at up to $3,000 per square foot, or $1 billion total. But, like many rental-to-condo schemes initiated during the boom years, such as the Sheffield57 and Manhattan House, the tenants haven’t been easy to remove, and court battles have pushed sales into the bust years.

The sponsors must now sell at least 25 apartments by September in order to declare the condo offering plan effective. Roughly 15 contracts are in the works, Howard Lorber, chairman of Prudential Douglas Elliman, the firm marketing the project, said. To put that sales goal in perspective, the condo that signed the most contracts citywide during the spring quarter was the Kalahari in Harlem with just 10, according to StreetEasy.

Lorber said apartments have now been discounted up to 50 percent and that lenders have approved initial prices for between $1,200 and $1,700 per foot.

He said the litigation that held up sales for so long, pitting the sponsors against a ticking clock, “is exactly what creates this great opportunity” for buyers to get such a low price at one of the city’s most storied and elegantly laid out apartment buildings. After the condo plan becomes effective, he said prices would increase, making the early purchasers shoo-in candidates for the “best deals” come next year.

Although there have been accounts of celebrities like Bruce Willis and Alec Baldwin touring the building, so far there haven’t been reports of any high-profile takers. Still, recent renters have, including Conan O’Brien, Nora Ephron and a host of other celebrities.

Roughly 60 of the 163 apartments have been vacated, awaiting sale, Lorber said.

Worst: Tishman Speyer’s purchase of Peter Cooper Village and Stuyvesant Town from MetLife for $5.4 billion

Tishman Speyer’s landmark purchase of the middle-income housing complex Peter Cooper Village and Stuyvesant Town for an eye-popping $5.4 billion was made back in 2006, but the chickens are coming home to roost these days.

A current court case -— centered on whether Tishman and the complex’s previous owner, MetLife, illegally deregulated apartments while receiving a tax abatement intended for regulated buildings — could impact thousands of city landlords. If Tishman loses, the company estimated investors could be forced to refund $200 million in rents to market-rate tenants. Another $10 million class action lawsuit was filed in May, accusing Tishman of using illegal tactics to evict regulated tenants.

Unfortunately for Tishman, its ability to make money on the complex depended on rents continuing to increase (they have fallen 17.5 percent in Manhattan in the past year, according to appraiser Jonathan Miller), and on evicting a higher number of regulated tenants than has been possible, despite hiring three law firms to ferret out tenants breaking stabilization laws.

To put it nicely, “They may have over-estimated the amount of people who occupied the complex illegally,” Real Capital Analytics’ Fasulo said.

In April, Fitch Ratings ranked the loan one of its 10 largest of concern nationally. The agency calculated that the 11,227-unit complex’s reserve fund would be wiped out in six months. Portions of rents collected from deregulated units — 36 percent of the complex as of last summer — are being held in an escrow account pending litigation and cannot be used to pay off debt service, according to Fitch.

Now, according to one estimate, the complex is worth “maybe 60 percent of the original purchase price.” Rumor is, Tishman is now asking equity investors to pitch in 15 percent in cash.

The company, headed by Jerry Speyer, isn’t the only one struggling after purchasing a major complex: Stellar Management purchased Riverton Houses in Harlem under the aggressive assumption that it could turn 53 percent of units there market rate by 2011.