GM building's recap adds $300m to value.

When the GM building handily blasted through what seemed like the stratosphere of pricing for Manhattan trophy properties in September 2003, who knew that a recent revaluation of the building would expand its price roughly $300 million over the $1.4 billion owner Harry Macklowe forked over for it just a year and a half ago.

The increased value, which resulted from 767 Fifth Avenue's tightening fundamentals and consequent increased NOI, has allowed Macklowe to usher in 2005 with a recapitalization for the significantly leveraged property. For the recapitalization, Macklowe Properties converted the $300 million addition in building value--which brought the building's value to a staggering $1.71 billion--into a minority ownership interest which it sold to German closed end fund Jamestown, a real estate powerhouse that has been quieted by the recent cap rate crunch.

Macklowe also paid off its $275 million mezzanine loan with Vornado, a move for which it was charged a $4.5 million prepayment penalty but saved having to continue to pay exorbitant mezzanine interest rates.

Aiming to shore up its exposure in the face of a rising interest rate environment, Macklowe Properties also converted a $1.1 billion floating rate loan with Deutsche Bank on the property to a roughly 5% fixed rate.

"This is a much more efficient capital structure for Macklowe," said Howard Michaels, chairman and CEO of the Carlton Group, and the chief architect for the recapitalization. "Jamestown saw this as a solid place to put their money based on the operational abilities of Macklowe." Stephen Zoukis, a partner at Jamestown, indicated that the closed end fund's sensitivity to tight cap rates was cured by a preferred equity arrangement with Macklowe--a structure that he indicated will be employed heavily by Jamestown for future acquisitions and investments. While Zoukis felt that building prices might recede slightly because of rising interest rates, cap rates on average, he thinks, will never expand back to where they once were a few years ago before real estate's pricing explosion.

"It's tough to make sense of this market and we had to consider carefully just how high up that capital stack we were willing to go," Zoukis said. "But we valued the building at the same price Macklowe did and that allowed our investment. I see us doing a lot more deals like this with the way cap rates have shrunk."

While Jamestown will benefit from the GM Building's seemingly ceaseless ascension in value, it's Macklowe who has sacrificed short-term returns for the strong potential for monumental long-term gain.

"With a preferred equity arrangement we bought into stability," Zoukis said. "Basically if this was a baseball game we just hit a double, but Harry is going to wind up hitting a homerun."

Benjamin Lambert, president of Eastdil, who arranged financing for Macklowe's purchase of the GM Building in 2003 indicated that the Plaza District is one of the strongest real estate markets in the city and commands very healthy rents. Macklowe's results in leasing space in the building reflect Lambert's assertion.

Macklowe has managed to bring in a number of high profile tenants like the Bank of America at the kind of premium rental rates many other bidders on the property in 2003 thought were highly speculative.

"There is always going to be a market for a building like this," Zoukis said. "This is really the top of the top buildings in Manhattan and there really isn't a lot of space like this so we think that there is always going to be healthy demand."

Michaels added that it won't be long before the building is valued as a "multibillion dollar property."