$1.3B sale of 650 Madison hinges on dramatic increase in retail value, sources say

Crown Acquisitions and Highgate Holdings signed contract Friday

Just before sundown Friday, Crown Acquisitions and Highgate Holdings inked a contract to pay private equity firm the Carlyle Group $1.29 billion for the 27-story office and retail tower 650 Madison Avenue located between 59th and 60th streets.

The venture’s commitment to wire a $50 million non-refundable deposit into escrow on the signing of the contract helped seal the deal to buy the 600,427-square-foot building following a week of “fluid” negotiations, a person familiar with the deal said.

The winning bidders plan to increase rents for tenants beyond the eye-popping $20 million per year Crate & Barrel currently pays and drive the value of the 75,000-square feet of retail alone to $1 billion.

The midtown-based Crown, controlled by the Chera family, and the Texas-based Highgate, beat out rivals reported to be Vornado Realty Trust, Brookfield Office Properties, General Growth Properties and Ziel Feldman’s HFZ Capital Group. It was not immediately known when the deal would close.

The sale is the most expensive in Manhattan Since Google Purchased 111 Eighth Avenue for $1.8 billion in December 2010. The sale is also a record price per foot of approximately $2,150 for an office building, and that was in large part driven by the retail, which has had a growing impact on real estate values in recent years as rental rates have soared in Manhattan’s prime shopping corridors of Fifth Avenue, Times Square and Soho. The sale was first reported by Bloomberg News.

The new owners expect to increase the value of the retail within five years dramatically, Haim Chera, a principal with Crown, told The Real Deal.

“We think the retail will be valued at $1 billion when we are done with our work,” Chera said.

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Other bidders in the process run by Eastdil Secured brokers Doug Harmon and Adam Spies, looked to unlock the value of the retail, including Chicago-based GGP, which is one of the largest real estate investment trusts in the country focused on shopping centers.

Real estate insiders considered the growth in value an achievable goal, considering Crown’s success (in a joint venture with Carlyle Group and Kushner Companies) which sold the retail at 666 Fifth Avenue in two deals for more than $1 billion, and at the St. Regis hotel retail, which Crown along with Lloyd Goldman, the Feil Organization and others, sold for $380 million.

Howard Michaels, CEO of the Carlton Group who represented a rival bidder, said Crown was, “In a league by itself when it comes to maximizing the value of prime retail.” He continued, adding, “I would suspect that when they get done with resetting Crate & Barrel in 2019 or earlier, [the net operating income] should exceed $40 [million] which will have a value in excess of $1 billion alone just for the retail.”

Representatives from Crown, Highgate and Carlyle met at the offices of the seller’s attorney, Simpson Thacher & Bartlett, where they signed the contract on Friday just before sundown, and wired the deposit, the source said. Carlyle declined to comment beyond a widely distributed statement announcing the sale.

Housewares retailer Crate & Barrel occupies much of the total 75,000 square feet of retail. The long-time tenant, which moved in to the building in 1995, recently exercised a five-year extension at a fair market rent, and is now paying $20 million per year, sources familiar with the process said. The other tenant is the Italian luxury shoemaker Tod’s, which has about eight years remaining on its lease, a source said. Carlyle will pay Crate & Barrel $55 million in exchange for paying a higher rent, Bloomberg reported.

Carlyle purchased the building in April 2008 for $680 million, city property records show. The tower is now 92 percent leased to tenants including the Ralph Lauren Group, which has its headquarters there in 276,829 square feet.

Crown and Highgate have partnered in deals before. In 2010, the two firms along with Midtown-based Ashkenazy Acquisition and Walton Street Capital of Chicago, Purchased 1466 Broadway, in Times Square.

CORRECTION: A previous version of this article identified the Wall Street Journal as having broken the news of the sale. In fact, it was Bloomberg News that first reported it.