Green's $480M midtown buy.

SL Green Realty Corp. has entered into an agreement to buy an entire midtown block for $480 million.

The city's biggest publicly traded REIT is under contract to buy 1.7 million square feet at 750 Third Avenue and 485 Lexington from the teachers fund, TIAA-CREF.

Marc Holliday, SL Green's president and CEO, said the purchases were in line with the REIT's goal to upgrade its portfolio while investing in future earnings growth. "The acquisition of 750 Third Avenue allows us to convert certain of our non-core properties into a cote asset with embedded value and rental growth at an attractive price per square foot [$282 per s/f].

"Additionally, we believe this is the right time in New York City's economic cycle to acquire 485 Lexington and 750 Third Avenue, which will represent the largest blocks of contiguous vacant space in a prime Midtown location. This transaction also continues our successful partnership with The City Investment Fund."

Richard Baxter, executive director at Cushman and Wakefield--who handled the deal for the owners with, colleagues Yoron Cohen and Scott Latham--said four purchasers had initially vied for the buildings and, after two rounds of bidding, SL Green was selected.

Baxter said the teachers were swayed by SL Green's ability to close quickly and their track record running major office properties and doing other corporate transactions in the midtown market, namely McGraw-Hill and Viacom, for whom they are landlords.

"We're thrilled with the deal," added Baxter, who expects the sale to close July 30. "The properties will be master leased through December 31, 2005, at which time they [TIAA-CREF] will vacate [much of] their space."

That, according to Baxter, will give SL Green an opportunity to cash in on a rebounding market.

"Cushman and Wakefield is very bullish on rental growth for 2006-07 and the buyers sought out this opportunity to have a one-million-square-foot-block of space that will come onto the market in 2006-07."

The two buildings are bounded by 46th Street and 47th Street and Third Avenue and Lexington Avenue in the Grand Central submarket.

750 Third will be bought by SL Green as a wholly-owned asset for $255 million. The acquisition will initially be funded by proceeds from the company's unsecured line of credit, which currently has no outstanding balance.

SL Green expects to pay down a majority of the line of credit capacity used to acquire the property by year-end with the proceeds of identified asset sales that the company expects to consummate as part of its redeployment strategy. Those proceeds will be reinvested in 750 Third to effectuate a "reverse 1031 exchange" resulting in a deferral of the company's taxable gain on the asset sales.

At closing, TIAA-CREF, a AAA-rated company, will enter into an operating lease for the entire building. At the expiration of such operating lease, in December 2005, the building will be approximately 25% vacant, with average in-place escalated rents for all office tenants (exclusive of the operating lease) of $42 per square foot, which is approximately 15% below market value. The majority of such vacancy will be in the upper tower floors of the property. The balance of the property is currently leased to tenants including Fairchild Publications, Inc., Richard A. Eisner, LLP and TIAA-CREF on a longer-term basis.

485 Lexington will be acquired in a joint venture with The City Investment Fund, L.P. SL Green expects to own approximately 37.5% of the equity interests in the property.

The allocated price for 485 Lexington is $225 million. The joint venture has arranged for a loan facility to fund 75% of the acquisition and anticipated re-tenanting costs of 485 Lexington.

Consistent with its prior joint venture arrangements, SL Green will be the operating partner and day-to-day manager of the venture and will be entitled to management fees, leasing commissions and incentive fees.

At closing, TIAA-CREF will enter into an operating lease for the entire building. Upon expiration of the operating lease in December 2005, it is anticipated that TIAA-CREF will vacate all of the space it occupies in 485 Lexington (approximately 870,000 s/f).

TIAA-CREF will remain headquartered in New York City in its building located at 730 Third Avenue.

The going-in cash return for the acquisition of the properties is approximately 6.8% and SL Green projects it to increase substantially when the space being vacated by TIAA-CREF is released at higher market rents.