Goldman Team Quietly Shops 417 Fifth Ave.

In what could be the first of a wave of offerings by squeezed office owners, a Goldman Sachs partnership is selectively shopping the building at 417 Fifth Avenue in Midtown Manhattan.

A Goldman fund and operating partner Joseph Moinian, who jointly acquired the 412,000-square-foot property two years ago for $250 million, are willing to move it at a loss to get out of the investment, according to people familiar with the matter. The partnership is quietly talking to a coterie of potential buyers via Cushman & Wakefield, which declined to comment.

Brokers say similar decisions loom for the owners of about 30 Class-A properties in Midtown Manhattan that were acquired as the market was peaking in 2006 or 2007. Though most of the investors don't have mortgages that mature before 2011, they "can see the writing on the wall," said one veteran broker. In other words: Owners, worried that values may fall further, would rather walk away with some of their equity - if possible.

Goldman, operating via one of its Whitehall Street Real Estate funds, teamed up with Moinian to buy 417 Fifth from GE Pension Trust and local fund shop Murray Hill Properties in July 2007, near the peak of the market. The team put down $95 million of equity and assumed a $125 million mortgage from Barclays Bank that matures in September 2010. Credit Suisse provided a $30 million mezzanine loan.

The building's value is now estimated at no more than $200 million, indicating that the Goldman team has lost more than half of its equity.

Goldman has made it known that at a $200 million price tag, it would supply the buyer with a 5-year loan of about $110 million, pegged to Libor plus 400-500 bp (currently indicating an interest rate of 4.5-5.5%). Assuming that the mezzanine loan remains in place, the buyer would have to put up 30% of the purchase price in cash, or $60 million.

The building, which was constructed in 1912 and renovated in 2003, is at the northeast corner of East 38th Street, within walking distance of Grand Central Terminal and Penn Station. It is nearly fully occupied, but leases on about one-third of the space expire by 2012. It's unclear whether a buyer would be able to increase all rents. Tenants include CIBC, which subleases its 95,000 sf and is unlikely to renew when its lease expires in 2011.

The combined impact of the credit crisis and an economic slump is taking a heavy toll on real estate fundamentals in New York. Midtown Manhattan's occupancy rate fell to 91.7% in February, from 95.3% a year earlier, according to CB Richard Ellis. Factoring in space available for sublease, the occupancy rate was 86.8% in February, down from 92% a year earlier. Asking rents plunged to an average of $68.77/sf in February, from $84.27/sf a year earlier. Moreover, property owners have to offer more than six months of free rent to lure new tenants - a concession unheard of before the market slide began.

Against that backdrop, property values have fallen, although the exact amount is difficult to gauge because actual trades are scarce. Recent deals have involved distressed sellers and therefore may not be indicative of the broader market. For example, a Deutsche Bank syndicate that seized the 906,000-sf tower at 1540 Broadway from Macklowe Properties sold it this month for $355 million - less than half of the $830 million allocated price that Macklowe paid in 2007. The buyer was a separate-account client of CB Richard Ellis Investors.

Another Macklowe holding - the 535,000-sf building at 1330 Sixth Avenue - is expected to change hands soon. Market players suggest the building's value is now about half of the $498 million that New York-based Macklowe paid in late 2006. Macklowe defaulted on some $440 million of debt in January. Cadim, which holds the senior mezzanine tranche of the debt package, is seeking to take control of the property. Cadim is the real estate arm of Canadian pension fund manager Caisse de Depot et Placement du Quebec.

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