2012’s biggest money makers

Typically, investment sales deals are ranked by the sale price, but that emphasis hides the figure that real estate players truly care about most: how much money the deal made.

Indeed, the number that real estate investors brag about at the end of the day is their return on equity. That figure reveals how effectively an investor deployed his or her money.

So for the first time, this month The Real Deal ranked Manhattan’s top commercial building sales for 2012 by their estimated return on equity.

“These are numbers everybody wants to hear, but nobody wants to give up,” said Dan Fasulo, managing director at commercial data firm Real Capital Analytics.

Most institutional investors look for annual returns of about 10 to 20 percent; many of these deals, however, have netted much higher figures.

The TRD data included only full building sales above $100 million that closed and were available in city property records as of the middle of last month. Some deals did not make the cut because they have not yet closed. For example, the retail condo sale at 666 Fifth Avenue was not included, but is still expected to be a big moneymaker for its sellers.

In our analysis, we estimated the returns by dividing the net profit from the sale of the property, along with annual gains and losses, with the total cash invested and the number of years owned. We calculated the figures using city Department of Finance records of income and expense, taxes and mortgage debt on the properties, as well as similar data from mortgage tracking firm Trepp where available.

The deals were done by a remarkably small group of brokers. Eastdil Secured’s Doug Harmon and Adam Spies handled six of the deals, while the CBRE Group’s Darcy Stacom and William Shanahan represented the sellers on two. The final two did not have brokers.

While several of these sales generated outsized returns in just a few years, Fasulo noted that there will be more recovery-fueled deals next year.

“Some who purchased in 2010 or 2011 have hit their five-year return levels already in 18 or 24 months,” Fasulo added. “At some point, they will be tempted to sell.”

Read on for TRD’s ranking of the top 10 owners who saw the biggest returns on their property sales in 2012.

724 Fifth Avenue was Manhattan’s most profi table $100 million-plus sale of 2012.

Seller: David Frankel Realty

Address: 724 Fifth Avenue

Total profit: $279.9 million

Annual return on equity: 215 percent

Some deals are not enormous in absolute numbers, but are still seriously profitable for the sellers. The sale of David Frankel’s 724 Fifth Avenue, home to high-fashion retailer Prada since 1998, is one of those deals.

A partnership led by Frankel’s father acquired the 56,400-square-foot office-and-retail building located between 56th and 57th streets in 1947. Although the purchase price was not disclosed, Frankel’s father took out a mortgage of nearly $600,000 when he bought the building. Based on typical loan-to-value ratios at the time, that suggests the purchase price was likely between $1 million and $2 million.

The property got a shot in the arm when Prada recently extended its lease, which now expires in approximately five years.

Frankel sold the building for $223 million in late January to a partnership of Jeff Sutton and SL Green Realty, who together own the neighboring building at 720 Fifth Avenue. The deal was the most profitable $100 million-plus sale of the year.

According to TRD’s analysis, the building generated positive returns annually — the most debt it ever had was $9 million. Indeed, when factoring in the sale price and the money it threw off annually during the time that he owned it, the building generated an estimated $279.9 million for Frankel.

The retail at the St. Regis, top, sold for $380.6 million

Sellers: Crown Acquisitions, Lloyd Goldman, Feil Organization, others

Address: 2 East 55th Street, 697 Fifth Avenue

Total profit: $271.2 million

Annual return on equity: 167 percent

Haim Chera of Crown Acquisitions, Lloyd Goldman and Jeffrey Feil.

The New York investors who partnered to buy the retail at the St. Regis hotel barely had to lift a finger to increase the value of their investment, one insider said.

The cash outlays that increased the value of the 24,800 square feet (spread between a retail condo at the St. Regis and an adjacent five-story building) were minimal, the source said. He joked that the investors paid for a couple of airline tickets to Europe to woo tenants and potential buyers.

Beyond that, “not even a paint job,” he said.

Whatever the tactics, they worked. The investment group bought the property for $117 million in November 2009, with an in-place capitalization rate of about 5 percent, meaning the property had a net income of about $6 million annually. That barely budged over the three years they owned it. However, a steep increase in investment pricing along Fifth Avenue led Swiss luxury retailer Richemont to pay $380.6 million for the space.

The result? An annual return on equity of 167 percent.

Sellers: Sitt Asset Management, Carlton Associates

Address: 1370 Broadway

Total profit: $68.9 million

Annual return on equity: 158 percent

Sitt Asset Management got a 158 percent annual return on equity when it sold 1370 Broadway.

The third most profitable Manhattan building sale of the year was not a flashy Fifth Avenue deal. Instead, it involved a bread-and-butter investor simply buying a property ahead of the market’s curve.

In July 2003, Sitt Asset Management and Carlton Associates — the family that launched the Duane Reade drugstore chain — purchased the 275,055-square-foot office building 1370 Broadway at 37th Street for $57.2 million. That was just under the wire, before the boom in investment sales volume and value began the following year.

Getting in at such a low price point allowed the Sitt brothers (Eddie, Ralph and David), along with Carlton, to cash out when they took a $60 million mortgage in 2006, city records show. However, because they spent money on upgrades and build-outs for tenants as well as brokerage fees, and saw what appears to be a slim annual profit margin, TRD estimated that $5 million of equity remained tied up with the building.

With such little equity in the building, the sellers yielded the extremely high annual return on equity of 158 percent when they sold the property in April to Normandy Real Estate Partners for $123.8 million.

Seller: Harbor Group International

Address: 4 New York Plaza

Total profit: $155.9 million

Annual return on equity: 123 percent

Harbor Group International, a private real estate investment group headquartered in Norfolk, Va., took a risk in January 2010 when it paid JPMorgan Chase $107 million for the 1 million-square-foot Lower Manhattan office building.

The firm got in at a low price — just over $100 per square foot — as the economy was in the doldrums, investors were nervous and building sales were only just beginning to recover from the near-collapse of the market in 2009.

Harbor put $30 million of cash into the deal and received a loan for $77 million. The company outlaid another $25 million in tenant improvements, brokerage fees and upgrades (which includes the lobby), Harbor chairman and CEO Jordan Slone told TRD. Those improvements helped attract new tenants such as tabloid publisher American Media Inc. to fill the building’s yawning vacancies, said Slone, who declined to comment on the company’s estimated returns.

But Harbor’s purchase of the building — which counts JPMorgan, the Daily News as well as American Media Inc. as tenants — paid off.

By 2011, building prices began to surge. And after owning 4 New York Plaza for just 28 months, Harbor sold it for $270 million in May.

That yielded an annual return on equity of 123 percent — or $155.9 million in profit — on the $55 million of cash the firm invested in the deal.

Slone said Harbor’s expectations going into the deal in 2010 were much more modest. “We anticipated a holding period of about five years and anticipated an [annual return] in the high teens or low 20s,” he said.

And while the firm had done deals with higher return rates, he believed it was Harbor’s most profitable deal in pure dollars.

The sale’s timing was fortuitous in another way: In late October, just five months after that sale, 4 New York Plaza was heavily damaged by flooding from Superstorm Sandy (see related story, “Landlord losses”).

530 Fifth Avenue

Sellers: Moinian Group, Chetrit Group, David Werner

Address: 530 Fifth Avenue

Total profit: $183.1 million

Annual return on equity: 114 percent

While the Moinian Group has struggled — along with many other developers — because of purchases it made during the market’s run up, the company and its partners did well on the sale of 530 Fifth Avenue.

Moinian, the Chetrit Group and investor David Werner purchased the building in 2004 for $210 million and sold it in January for $390 million. That generated the fifth-highest return of the year at 114 percent.

So how’d the investment trio score such a ripe deal? When they bought the building, retail on lower Fifth Avenue (from 42nd to 49th streets) was going for just a few hundred dollars per square foot. Prices there have nearly doubled over the past several years, and asking rents now average $942 per square foot, Cushman & Wakefield reported in the third quarter.

Joe Moinian and Joe Chetrit

Still, the buyers — a group including Crown Acquisitions, Murray Hill Properties, Jamestown Properties and Rockwood Capital — are also betting that there’s more value to squeeze out of the tower’s retail.

About 26,000 square feet of the 50,000 square feet of retail space is available (much of the remaining space is leased to Chase). In addition, the new owners are asking $1,200 per square foot for the ground-floor retail.

Some observers say, however, that such an ask is too high for the market.

Sellers: Savanna and Monday Properties

Address: 386 Park Avenue South

Total profit: $39.4 million

Annual return on equity: 105 percent

386 Park Avenue South sold for $111.5 million in September.

The wily opportunistic investment fund Savanna, founded in 1992 and led by comanaging partners Christopher Schlank and Nicholas Bienstock, purchased 386 Park Avenue South in 2010, when many investors were too cautious to make a move.

They bought the debt on the 300,000-square-foot, 20-story office building for about $44.2 million and then poured in another estimated $30 million to rehabilitate and lease it up. Today, it’s home to tenants like the lifestyle and entertainment group Sugar Publishing and retail tenant JPMorgan Chase.

Yet through all that, Savanna quickly obtained a $58 million loan, limiting its equity in the deal to $17 million for most of the short 28 months it owned the property.

In September, Savanna sold the building to William Macklowe Company and Pacific Coast Capital Partners for $111.5 million, generating a profit of about $39.4 million.

Speaking on an industry panel in September, Schlank said that Macklowe thought he could achieve higher rents than Savanna was able to sign.

“The drivers are there. That’s the tightest market in the country. Billy thinks he can get 10 bucks a foot more than we were getting, and that’s great,” Schlank told the audience.

Schlank declined to comment for this article, citing a policy not to discuss rates of return.

Sellers: Walter & Samuels and individual investors

Address: 304 Park Avenue South

Total profit: $108.1 million

Annual return on equity: 72 percent

Another of 2012’s most profitable transactions was Walter & Samuels’ sale of 304 Park Avenue South.

Longtime Manhattan real estate player David Berley, chairman of the board at Walter & Samuels, was part of a group that purchased an interest in the 215,000-square-foot Midtown South office building in the 1980s in a partnership with General Electric Capital, a onetime active lender.

But in 2004, Berley and his partners bought out GE’s approximately 50 percent stake for an unspecified amount and took out a $32 million loan. Based on an analysis of public records, TRD estimated the value of the property to be about $50 million at the time, including $18 million in equity.

Three years later, the owners refinanced again with a $73.4 million loan, removing their remaining equity in the deal. But at the same time, the heavy debt load made the property cash negative or cash neutral for several years, TRD’s analysis showed.

The owners sold the building in June (although Berley is keeping a small stake for himself) to SL Green for $135 million. The sales price was boosted by rental rates in Midtown South, which have outperformed the rest of the city over the past year.

“We had a very low basis,” Berley said. “But it was the old story: They made an offer we could not refuse.”

While Berley declined to discuss the intricacies of the deal or comment on TRD’s figures, he said his co-investors, who bought into the deal in 2004, achieved returns of 50 to 1 on their equity.

Seller: Property Group Partners

Address: 148 Lafayette Street

Total profit: $41 million

Annual return on equity: 34 percent

Property Group Partners, formerly the Louis Dreyfus Property Fund, acquired the 150,314-square-foot Soho office-and-retail building during the peak of the real estate market, in February 2007, for $59 million and injected an estimated $21 million to rehabilitate it.

Despite buying at the then-peak, Soho values — unlike much of the city — continued to rise. In addition, after upgrading the building, they lured fashion tenant Dolce & Gabbana to locate its U.S headquarters there in 2009. Then, in May 2012, Epic UK, a London-based real estate investment company headed by Steven Elghanayan, paid $126.5 million for the building, yielding an annual return of 34 percent for Property Group Partners. A spokesperson for the firm declined to comment.

Elghanayan is a member of the well-known real estate family that owns residential-focused firms TF Cornerstone and Rockrose Development.

Seller: Cariplo Pension Fund

Address: 10 East 53rd Street

Total profit: $316.7 million

Annual return on equity: 29 percent

The Italian pension fund Cariplo purchased the 37-story office building in 1993 for $58.4 million, and in February sold the 388,000-square-foot building to SL Green Realty for $252.5 million. The fund made an eye-popping $198.6 gross profit on the sale, but the sale yielded an annual return of just 29 percent because the fund held the property for so long.

Cariplo had planned to buy a number of buildings in New York during the downturn of the early 1990s, but only acquired this one, home to publisher Harper Collins. The TRD analysis of city tax and income records for the building shows it generated a steady annual return, which in recent years was approximately $9 million.

Although Cariplo had no debt, one industry insider said the firm decided it was time to sell and reached out to Hines, a global real estate owner and operator, to manage the building toward a sale.

Hines, in turn, hired CBRE Group to market the property.

Cariplo also likely paid millions over the years in expenses such as tenant improvement and brokerage fees, which would further erode the rate of return, but those expenses could not be determined.

Sellers: Waterman Interests and JPMorgan Asset Management

Address: 130 Prince Street

Total profit: $33.1 million

Annual return on equity: 15 percent

Waterman Interests — headed by former Reckson Associates executive Philip “Tod” Waterman — and JPMorgan Asset Management together acquired the 73,950-square-foot Soho retail-and-office building in the midst of the frothy real estate market in June 2007 for $112 million.

While many investors swallowed losses or turned over the keys, this partnership managed to eke out a healthy 15 percent annual return, an analysis of sales information and data from mortgage tracking firm Trepp revealed.

In part, they were saved by a conservative loan-to-value ratio. In 2007, the purchasers took out a $70 million loan, borrowing just 63 percent of the purchase price.

Despite that, the $70 million mortgage secured by the building was the only one among the 10 top deals that was put on a distressed watchlist by the loan’s servicer in 2009, indicating the servicer was concerned that loan payments could be interrupted. Notes from the servicer, Capmark, blame the decline in financial health on money spent to secure a tenant.

But the finances were stabilized with a new lease signed by M.A.C, a division of the makeup giant Estée Lauder. M.A.C now occupies 86 percent of the building’s office space; retail tenants include apparel stores True Religion and Lacoste.

Waterman and JPMorgan sold the property for $140.5 million in late May to Atlanta-based institutional investor Invesco.