Deal That Was Supposed To Mark Renaissance Of New York Commercial Real Estate Market Collapses

Remember the deal which to much fanfare, lots of subsequent Merrill upgrades, and endless boasting by SL Green CEO Marc Holliday was supposed to usher in the second golden age for New York Commercial Real Estate? The deal that was the alleged steal of 485 Lex by a bunch of shady investors which we wrote about first 4 months ago. The deal that SL Green CEO, Marc Holliday said "is a first, but significant step towards the sale of interests in 485 Lexington Avenue. If ultimately approved, the transaction would demonstrate that the Midtown Manhattan office market continues to stand as one of the world's top locations and that investor interest is once again on the rise." Remember now? Ok. That deal just died. And with it died any hope that the "Midtown Manhattan office market continues to stand as one of the world's top locations," that REITs fairly priced, and that Bill Ackman's recent REIT book talking tour is anything but.

Crain's New York reports: "SL Green Realty Corp.'s deal to sell 49.5% of 485 Lexington Ave. has fallen through, the company's chief executive, Marc Holliday, said at an investment meeting Monday. Mr. Holliday didn't detail the reasons that led to the transaction, which was announced over the summer, falling apart. Instead, he noted there could be litigation involved in the unraveling of the deal, which valued the 32-story tower at $504 million. Sources said CW Capital, the special servicer that controlled the building's mortgage, refused to sign off on the transaction."

On August 10th we said "Zero Hedge is waiting with baited breath for the Holliday mirage to dissipate, while in the meantime Class A office space in 767 Fifth Avenue can be sublet for $60/sq foot." It just dissipated. We are happy to have been completely correct in our continuing assessment of the amount of Kool Aid consumed by various book talkers.

More from Crains:

Last August, Gilmore USA and Israel-based technology company Optibase—agreed to pay $20.8 million and assume $450 million of outstanding debt on the 921,000-square-foot building between East 46th and East 47th streets. Under the terms of the complex deal, the buyers were to lend SL Green $20 million on top of the agreed-upon purchase price. SL Green secured the loan from the buyer by promising it another 49.5% interest in the building.

The sales market for large Manhattan office buildings has been all but dead for almost two years as the recession and credit crisis stifled deals. Prices have dropped anywhere from 50% to 60% since they peaked in early 2007.

The deal for 485 Lexington would put a value of $547 per square foot on the tower. That is well above the $392 a square foot fetched by 1540 Broadway—a far newer building—earlier this year. However, 1540 Broadway is about 21% vacant, which 485 Lexington is about 3% vacant. SL Green, Manhattan's largest publicly traded landowner, purchased the building nearly five years ago from TIAA-CREF.

The CRE collapse is not over. It is just starting. We urge all of you who own IYR to call Mr. Holliday and get his revised thoughts. Then again litigation trumps valuation any day. Especially when you are dealing with a ticking timebomb and you are just looking for the biggest idiot out there with deep pockets to take it off your hands post haste.

Speaking of book talkers, here is Mr. Ackman's Mall REIT presentation. Perhaps he should just Fedex it direct to Optibase - hopefully they can be tempted to buy something from Bill.



And for those just a tad more skeptical, we refer you to Part One of our recent analysis on where the CRE dirty bomb will strike next.


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