250,000 s/f opens at 1540 B'way as Bertelsmann exits the building.

Bertelsmann has terminated a lease for 250,000 s/f at 1540 Broadway, freeing a large block of vacancy that, given the strength of the midtown office market and its fierce demand for big contiguous blocks, could provide the building's landlord, Equity Office Properties, with an opportunity to fetch far higher rents for the space.

Like many of the large tenants in the building, most of which have long-term deals in place, Bertelsmann had been paying rents far below market value, especially for the building's top nine floors, which count for 175,000 s/f of the space it is giving up and that EOP believes it can now rent for $100 per s/f or even higher.

Although tenants typically will have to compensate a landlord in order to get out of a lease before its term has expired, the structure of Bertelsmann's termination isn't so clear.

Some brokers in fact have speculated that, given the level of potential upside the deal provides the landlord in this case, EOP may have actually paid the tenant to hand over the space, conjecture that representatives at neither Bertelsmann nor EOP would confirm however.

EOP purchased the roughly 900,000 s/f office portion of the building earlier this month for $525 million, a price that, after factoring in other expenses relating to the acquisition, the company's senior vice president Shobi Khan said equated to about $580 per s/f, a downright paltry sum compared to the $800-$1000 per s/f similar office properties have traded for in Manhattan.

"We can pull some levers and mark to market, because when you look at its price per s/f, we think rents are below market," Khan said. "I think we'll be able to increase the cap rate several hundred basis points, so you can see that this is a real value deal. We can buy something and then boost the income significantly."

Before it terminated the lease, Bertelsmann had tapped Colliers ABR chairman, Mark Boisi, and managing director, Mark Furst, to market the space for sublease. Bertelsmann encountered difficulty getting a deal done however, which some brokers attribute to its insistence on completing the sublease in one deal to a large tenant. That strategy was ill-advised, brokers say, because the tower floors have 17,000 s/f floor plates, too small to attract big space users. Bertelsmann's lack of success provides insight to the types of tenants and deal sizes that EOP may seek for the vacancy.

"I see it leasing in smaller tranches, the sweet spot there is going to be your 50,000 s/f tenants," said Equity Office senior vice president, Don Huffner, who is in charge of leasing for the company's Manhattan and Atlanta office portfolios. "Again, it's a different type of asset in terms of floor plate size and will allow us to attract a different type of tenant. I think you're going to see media companies here given that this is Times Square, and other creative tenants and law firms as well."

Sources say that Bertelsmann, which declined to comment for this story, may have shed its space because of regulatory trouble the company has encountered in Europe that has prevented a planned merger of its music units with Sony.

Khan, who along with Huffner confirmed a lease termination but would not confirm that it was with Bertelsmann, revealed the building may have even more vacancy coming up. "There's another tenant in the building that has not occupied their space yet, that tenant could either want to terminate or they'd want to grow, which is another potential value driver there for us," Khan said, indicating that the firm had undergone an internal reorganization that altered its space needs. "They could take more or less, if it's a contraction we could do the same angle again."

Khan would not reveal which tenant he was referring to, but it likely is law firm, Duane Morris, which leased floors 11, 12, and 14 in recent months and which completed a merger with Hancock Rothert & Bunshoft at the beginning of 2006.