01/12/2011

Goldman, Moinian to Shop 245 Fifth Avenue

A joint venture between Goldman Sachs and developer Joseph Moinian is preparing to market an office building in the Madison Square section of Manhattan.

The 303,000-square-foot property, at 245 Fifth Avenue, is expected to attract bids of roughly $175 million, or $578/sf. At that price, the buyer's initial annual yield would be about 5.25%. Eastdil Secured, which has the listing, is expected to take bids in early February.

Goldman, acting via its $4.1 billion Whitehall Street Global Real Estate Fund 2007, teamed up with Moinian in 2007 to buy the property for $190 million from Michigan Retirement, which was advised by KBS Realty.

The Goldman partnership lined up a $193 million debt package from Credit Suisse — exemplifying the type of high leverage available near the peak of the market. The so-called “pro-forma” loan was written on the basis of projected increases in rents, rather than in-place cashflow. But the market later crashed, scuttling the projections and creating a debt squeeze.

Credit Suisse securitized the $140 million senior portion of the five-year package and initially retained the $53 million of mezzanine debt. Last year, the Goldman-Moinian team bought back the mezzanine debt at an unspecified discount, giving itself more breathing room.

When the partnership bought the property, it was 99% occupied and throwing off $7.2 million of net operating income. The loan was underwritten with the expectation that rents, which then averaged about $34/sf, would rise to market rates over five years. Leases on one-quarter of the space were scheduled to roll over within three years.

The building's occupancy has since hovered around 95%, and rents have risen, to $40/sf as of July 31. But that remained well below the submarket average of $52/sf, according to a servicer report.

So while the net income has risen — to $9.3 million in 2009 and an estimated $8.9 million last year — it remains well shy of the projected $11.2 million level. Rent concessions have contributed to the shortfall. Beth Israel Medical Center received one year of free rent in exchange for a 12-year lease renewal (15,135 sf through November 2021).

The senior loan was moved into special servicing in October as its debt-service-coverage ratio dipped to 1.05 to 1. Goldman and Moinian have largely burned through a $16.8 million reserve for debt service, which now stands at $1.9 million. To raise cash, the duo converted two letters of credit totaling $4.1 million into cash. The current balance of that line is $2.2 million, according to a servicer report.

Besides Beth Israel, other large tenants include Citibank (45,000 through December 2012), Datamonitor (28,000 sf through July 2012) and Wishbone (15,000 sf through May 2015).

The building, at the southeast corner of East 28th Street, was built in 1927. It underwent extensive renovations in 2000.

Goldman and New York-based Moinian joined forces on multiple purchases in the market's go-go days. Last June, the partnership sold the 412,000-sf office building at 417 Fifth Avenue in Manhattan to an entity controlled by Mexican billionaire Carlos Slim for $140 million, or $340/sf — far below the $250 million the partnership paid in July 2007.

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