RXR Realty announced that it has completed its acquisition of a stake in 340 Madison Avenue.
The company bought a 49 percent interest in the 660,000 square foot midtown skyscraper for about $280 million, purchasing the share from the hedge fund D.E. Shaw, which owned the tower in partnership with the real estate investment firm Broadway Partners. Broadway Partners will remain a landlord in the tower, holding the majority 51 percent share.
340 Madison was one of three office buildings brought to market in recent months by a CB Richard Ellis investment sales team led by company executives Darcy Stacom and Bill Shanahan.
The deals, which also included the office buildings 600 Lexington Avenue and 125 Park Avenue, were notable because they were among the only significant commercial property sales in Manhattan this year and part of a short list of buildings brought to market since the credit crunch took hold with the onset of the recession.
Real estate experts familiar with the deals pointed out that, although problems continue to impact the real estate market in a way that could stymie sales, Stacom and Shanahan employed a clever strategy by bringing the properties to auction at a time when there has been few sales and growing pent up demand among a wide field of eager investors.
The sales drew wide competition and ended up achieving prices that appeared to reset commercial real estate values well above where they appeared to fall during the depths of the recession.
RXR’s acquisition valued 340 Madison Avenue at around $687 per square foot according to a press release issued by the company, among the highest prices per square to get paid since the downturn pushed down real estate values.
Scott Rechler, RXR’s chief executive, said that his company was able to achieve a competitive advantage in the bidding by agreeing to buy a stake in the existing partnership entity that holds ownership of the building, a structure that allowed the existing mortgage on the property to remain in place. The availability of capital for real estate financing has improved significantly since last year, but Rechler said that the terms of the debt on 340 Madison, which was arranged years ago, would be hard to match. Pegged to short term floating rates, the mortgage carries an ultra low interest rate in the range of 2.5 percent Rechler said.
Taking on the existing mortgage as RXR did might not have been as compelling to other buyers, even though it allowed access to cheaper capital, because the loan matures in about 18 months Rechler said. The relatively close expiration creates its own set of risks. While it seems as though financing is available for an owner with sufficient equity, there are a number of potentially destabilizing forces that could impact the cost and availability of capital in the coming months, including a European debt crisis that some fear could spread to the U.S.
“You can’t look at Europe and say that doesn’t create uncertainty,” Rechler said. “Could there be a double dip in the economy or could it throw off the debt markets? One thing is we didn’t take on vacancy risk at 340 Madison. That gives us comfort and New York fundamentals are strong enough that when we ride through all of this, the supply has been so constrained here, we could see a huge spike in rents.”
340 Madison is nearly fully leased to a stable of high credit tenants including McDermott Will & Emery, Mass Mutual, PNC, SunGard and The Office of the Comptroller of Currency.
Stacom and Shanahan originally had marketed a total ownership interest in the property, but Rechler said that the arrangement changed as he negotiated the purchase.
“When we came in we structured something more compelling for us, that allowed us to create opportunistic returns through the structure,” Rechler said. He said that the deal “created value for Broadway Partners” by allowing the company to stay involved and benefit from future upside.