Real Estate Record Hits Hurdle

The New York Sun reports:

When the private equity firm Somerset Partners announced last month it was acquiring 450 Park Ave. for $1,589 a square foot, a record for a Manhattan office building, it was hailed nationwide as a sign of the historic strength and high demand in the city's commercial real estate market. Now, just weeks later, the firm is struggling to close the $510 million deal, beset by the rising cost of debt.

The purchase of the 321,000-square-foot office building, at the corner of East 57th Street, is only the latest of several high-profile deals that are in turmoil. Metropolitan Real Estate Investors, an Israeli investment group, only just closed on its acquisition of the Lipstick Building at 885 Third Ave. and 292 Madison Ave. after struggling to secure permanent financing, and Harry Macklowe is reportedly in trouble with his $7 billion acquisition of several Manhattan skyscrapers from the Blackstone Group.

At the time these blockbuster deals were struck, they were touted as signs of an escalating real estate boom. Now that they are in trouble, real estate insiders say it portends a potentially severe downturn.

"At the outset, I didn't fully appreciate the depth of the problem," a commercial broker at Eastern Consolidated, Stuart Gross, said. "I had suspected that it would be a handful of guys driving Ferraris in Greenwich who would be unhappy, but as it turned out, it is having a much deeper impact."

Somerset Partners struck its deal with sellers Taconic Investment Partners and the New York State Common Retirement Fund in July, just when initial cracks in the credit market were appearing. The deal, which some say is the highest price ever paid for an American office tower on a square-foot basis, is scheduled to close in early September.

As part of the deal, Somerset Partners is taking ownership of an existing mortgage on the building. Sellers Taconic Investment Partners and the New York State Common Retirement Fund took out a 10-year fixed-rate mortgage for $175 million, which was securitized by Credit Suisse First Boston and cannot be paid off until February. While it works to take ownership of the loan, Somerset Partners is also in the market for additional mezzanine financing. But to get the mezzanine loan, the mortgage lenders must grant the mezzanine lenders certain rights, which they are refusing to do, according to a real estate professional familiar with the deal. At the same time that it is contending with stubborn mortgage lenders, Somerset Partners is also trying to fix mezzanine financing, or preferred equity or debt in a very difficult and pricey market.

There are many cheaper places to operate than $1589 a square foot.This is a very difficult concept for people who live in New York City to understand.