One Park Avenue
“‘We are going to have a gun to our head,'” one real estate insider recalled top Vornado Realty Trust executive Glen Weiss saying, once the office giant decided to go ahead with its acquisition of One Park Avenue.
In order to buy and recapitalize the building, Vornado had only weeks to nail down a large lease expansion with NYU Langone Medical Center, pay off mezzanine lenders, secure the first mortgage lender, and work out a deal with Murray Hill Properties and Cerberus Capital Management, the property’s owners.
It was sometime in January of this year, according to sources, that Vornado got serious about acquiring the building, which was underwater, as many Midtown properties were. One Park had been purchased at the peak of the market in 2007 by Murray Hill and Cerberus for $550 million.
In December, opportunistic real estate operator Scott Rechler — chairman and CEO of RXR Realty, which controlled the senior mezzanine debt and had been using that to position for a foreclosure of the equity interest to take control of the property — agreed to back off his foreclosure proceedings until the end of February.
The move, which was hammered out between Rechler and Murray Hill (which was represented by the Carlton Group’s Howard Michaels), was designed to give the parties breathing room and time to work out a sale.
But in exchange for that breathing room Rechler wanted to be paid handsomely for his mezz piece. And he didn’t want negotiations on a sale to drag on. He held a stick over the parties: Complete the deal by the end of February, or he’d move to take control of the 932,000-square-foot office building.
“We would have taken title to the building, recapitalized it, and re-leased it,”
Rechler said.
The newly imposed timeline was menacing and looming.
Yet the challenges to stabilize the 86-year-old building, located on Park Avenue between 32nd and 33rd streets, did not begin with Rechler. He entered halfway through Norman Sturner’s odyssey.
On March 1, 2007, during that optimistic period, Sturner, president and CEO of Murray Hill, and partner Cerberus closed on the $550 million purchase, loading the building up with $375 million in a first mortgage and an additional $100 million in mezzanine debt, and ultimately putting in $120 million in equity. At the time the building had tenants such as publisher American Media, NYU Langone and beauty giant Coty.
Sturner expected he would lease space that was being given up by expiring tenants for higher rents. But then the downturn hit, and by June 2009, Fitch Ratings reported Murray Hill had burned through most of an $18 million reserve to cover interest payments.
By early 2010, sharks were circling the property.
Around that time, NYU Langone Medical Center, which housed its administrative offices in the building and was one of the property’s biggest tenants, was reassessing its 187,000 square feet in leases, which were due to expire in 2013 and 2015. The medical center — represented on the leasing side by Cushman & Wakefield brokers Bruce Mosler, chairman of global brokerage; Josh Kuriloff, vice chairman; and Mark Mandell, executive director — was in the midst of a $2 billion expansion. Increasing its administrative footprint was one tiny piece of that puzzle. The question was how to expand — in One Park, or at a new location?
In April of 2010, Cushman’s Michael Rotchford, head of the firm’s investment banking group, was providing strategic advice to NYU, laying out a series of options for the school to consider.
One was to buy the senior piece of mezzanine debt and foreclose.
A second was to buy another location, either a commercial condominium or another building. Sources said the school looked on the West Side on 33rd Street, and at the 560,000-square-foot Pfizer Building at 685 Third Avenue.
But as NYU was sifting through its options, before it finalized the deal, the ground underneath the capital markets was shifting.
To hold on to the property, Murray Hill and Cerberus needed a partner to inject more capital into the building. In August 2010, RXR stepped in and paid REIT Winthrop Realty Trust about $2.2 million for the senior mezzanine note on the building with a face value of $25 million. By late November, Helios AMC, the special servicer for the $375 million first mortgage, had declared the building’s mortgage in default and demanded the loan be repaid.
Sturner reached out to Michaels, Carlton’s CEO and chairman, the day before Thanksgiving. By December they had convinced Rechler to hold off on foreclosing. And in January, Vornado, which had gotten wind of the fact that the property was looking for a buyer, got serious about the building.
“In a sense it was a good asset with a broken financial structure,” said a source familiar with Vornado’s thinking.
Cushman got two calls in quick succession in early 2011 saying Vornado and Murray Hill had struck a deal.
“[Sturner] called, it’s my recollection, and said, ‘We have good news. Vornado wants to do this deal.’ And within minutes [Weiss, senior vice president at Vornado] called,” Cushman’s Kuriloff said.
The multiple parties involved — Kuriloff pegged the number at 27 –had to act quickly, and were given just 30 days.
In the end, as has now been reported, Vornado put in $137 million in cash and got a 95 percent interest of the building. In a 21-year deal, NYU nearly doubled the size of its space to 367,584 square feet. And, in choosing to lease, NYU became a linchpin in Vornado’s recapitalization of the building.
Indeed, NYU’s participation helped Vornado obtain debt from Morgan Stanley. And, the medical center’s strong credit rating allowed Vornado to pay up to 1 percentage point less for its financing. As a result, Vornado cut NYU’s rent by several dollars per foot, a source close to the deal said.
“The most fascinating part was we did the deal three times,” Kuriloff said. He noted that they first tried negotiating with Murray Hill alone, then with Rechler and Murray Hill, and finally found success with Vornado and Murray Hill.
Mosler called the deal a “win-win” for both parties. “We knew we were at the bottom of the [economic] cycle. We knew [NYU Langone] had some economic constraints. We had a window in which to do a deal or not,” he said.
As NYU’s lease deal was closing in February, “there were black cars delivering lease drafts overnight to all of us,” Kuriloff said. That’s in addition to the late-night meetings and conference calls. Weiss interrupted a Disney family vacation to join a Sunday video conference.
Base rents start in the mid-$40s per square foot for NYU and rise to the mid-$50s over the 21-year term, another source noted.
While a few of the mezzanine lenders took major haircuts, others made out well. The $375 million first mortgage was paid out at par, and RXR was paid about
$22 million for the mezz piece it bought for $2.2 million.
Sturner and Cerberus, who lost millions in equity, were paid “something” and given nominal ownership interests. The overall capital stack was cut from about $595 million to about $430 million.
And for Sturner, the day of the closing held a particular irony. The deed transferred on March 1, four years to the day from when he bought the property.