Sales of $100M+ adding up.

With a rash of sales hitting and topping $100 million and approaching $300 a foot, real estate executives are scrutinizing the market to ensure this momentum can be sustained.

These mega-sales have included office buildings and hotels, and the brokers agree such pricing would have been inconceivable just a year ago.

Because the prices per foot have grown and the buildings are bigger, the city is starting to see more $100 million deals, said Darcy Stacom, executive director in the financial services group of Cushman & Wakefield. "But a number of them are of such a size, it just took them longer to go through the bankruptcy court."

The trend began developing over the summer, when some big deals were contracted that closed in the fall of 1996.

First, a Mexican family bought 500 Fifth for $95.4 million, or $155 a foot for a property that had traded in December of 1985 for $129 million, in a sale brokered by Newmark. Soon after, Steven Witkoff and his partners in Stellar Management purchased the Daily News Building for about $103 million, or $95 a foot, from LaSalle Partners.

At the end of 1996, John Hancock Mutual Life sold a 51 percent interest in 607-9 Fifth Avenue to DG Bank for $25.25 million, which brought it into the $340 a foot range. Around the same time, a traunch of the mortgage at 589 Fifth, a specialty jewelry property, was sold with a preferred return that kicked that over the $300 a foot mark.

Most recently, 685 Third Avenue, the 31-story American Home Building that was purchased last for about $50 million is being sold to Black Acre Group and Amroc for $100 million; the ground lease on 135 East 57th is expected to be sold for over $113 million or $275 a foot; and the debt on 90 Park was sold to The Mendik Company for the Vornado REIT for $185 million, or $210 a foot, in another deal brokered by LaSalle Partners.

On the hotel side. the Hotel Pennsylvania is about to be traded for $170 million or about $99,000 a room through Sonnenblick Goldman, while the City of New York has sold the UN Plaza Hotel to Regal Hotels for $102 million or $238,000 a room through JP Morgan.

When Cornerstone picked up the 210,000 square-foot 527 Madison at the end of February, the private real estate investment trust (REIT) paid $67 million, but it translated to about $311 a foot.

In 1995, there were less than a handful of these kinds of transactions: the sale of Financial square, a million square-foot Downtown building, for $134 million in a deal brokered by Julien J. Studley; the sale of the IBM building at 590 Madison for $140 million; and the sale of One Times square for $240 a foot for essentially an outdoor billboard that will now become the Warner Bros. store as well, for $27.5 million.

So now what gives? The experts say it's a combination of very large buildings often working themselves out of bankruptcies, and lender takeovers, together with a tightening rental market for large blocks of space, and a lot of fresh money sources in partnerships chasing the same deals.

'Selling a building in Manhattan is not like trading a small suburban office complex," said Jonathan L. Mechanic, senior partner at Fried Frank Hams Shriver & Jacobson, who has represented Witkoff on some purchases. "So when the market moves up, it's easy to meet that $100 million mark."

Attorney Meredith J. Kane of Paul Weiss Rifkind Wharton Garrison, who is representing the pension funds in the sale of the leasehold at 135 East 57th Street, says "I don't see another crash and burn on the horizon. I see a shortage of space in the near- and mid-term, and a shortage of development sites which puts pressure on the development sites that exist. I see a number of tenants entering the market for expansion space and all of that causing a demand for both Midtown and Downtown space."

In Midtown, even the 15,000 square-foot tenants are aware of what the numbers are, says Mike Zaleski of CB Commercial. "All the tenants are frightened because they are being told rents are in the $40 to $50 range," he said. "There are pockets of opportunity and we ought to tell the tenants the truth."

Certainly, the brokers agree there are tenants paying in that range, but for targeted Class A buildings and spaces. Great space can still be had for the $30's Uptown and $20's Downtown. Still, the bigger income projections are fueling the sales prices.

While Downtown pricing is still way below the 1989 highs, the Mayor's Downtown plan has provided the spark to ignite that market, which is slowly creeping up.

The recent leasing transactions for Standard & Peers and Chubb at 55 Water Street, a long-sleeping 3.6 million square-foot beauty that previously had over a million vacant feet, woke up the other large tenants in the market that were being lackadaisical about completing their deals.

"That is a watershed deal because it just made Downtown a much more attractive alternative," said Mechanic, who repped Standard & Peers.

Because space is being absorbed, Mechanic says the capital value of the buildings is going up.

Witkoff, who closed April 3rd on 100 Wall for $72 a foot at $34 million, has already received offers to flip the building, added Mechanic.

Ten Hanover, once the grand home of Kidder Peabody, which Witkoff purchased in November for $15.200 million to turn into a residential and hotel property, is expected to remain an office property, as Goldman Sachs cuts a deal to lease the entire 522,804 square feet.

So as space is absorbed by expanding large tenants who are reacting to the booming economy, the few development sites are getting haggled over by big players, and the Class A properties are being bought and sold for prices not seen since the 1980s.

When the numbers get to the $100 million mark, even the title risks get shared, said Jeffrey S. Mitzner, vice president of First American Title Insurance. "What we do is reinsurance with other title companies, to share some of the risk, and we also accept some of the risk. You see that a lot in New York."

He said even many of the lenders and Wall Street shops have their own guidelines as to how much they will take to one title insurer, so the risk is shared by a couple of the firms. "It's also a way for more insurers to be at the table and be in the transaction, and also lets the lawyers and developers spread the business around."

Richard Baxter, senior managing director of Insignia/ESG, who is the sales broker together with Yoron Cohen on 685 Third and 527 Madison, recalls the prices per square foot in the mid-1980s hit $400 and $500 a foot.

"Pricing is now based more in reality than in projections that had unlimited growth rates," he said. "So we're no longer seeing $65 and $70 per square-foot rents [as part of the projections]."

Instead, the buyer's work-ups are relying on $30 to $35 a foot rents in Midtown and about a four percent a year growth rate.

'Everything will be fine if it does, and not if it doesn't," warned Peter Hauspurg, chairman of Eastern Consolidated Properties, one of the largest sales brokerage firms in the country. "One view is that there better be a sharp rise in rents when some of the debt that financed these buildings needs to be repaid."

Newmark's James D. Kuhn agrees that in most of these high leverage transactions, the investors are betting on the spike in the rent, which is reflected in the 25 percent premium being paid above true operating market value.

"And if they don't get it, there will be a lot of equity wiped out," Kuhn said. "Most of these lenders are in the money, and providing there is not a major correction, they will be okay, but most of the equity will be wiped out."

Kuhn says he sees the real danger at a time when a majority of the marketplace achieves the rent spike.

"But not every part from river to river will have that - buildings in the Garment Center and the older buildings - they don't necessarily follow the New York economy," he noted.

There is a lot of money available for acquisition financing from REITs such as Vornado, venture capital funds such as those run by CS First Boston, Lehman Brothers and Goldman Sachs, and private players like Black Acre and Amroc.

Mechanic says this availability is enabling people to pay higher prices.

"If there is 95 percent of financing available, the equity player doesn't have to put up as much," he said. "These lenders are doing deals with mezzanine pieces, and they will give you more money, but they want to be your partners." And the borrowers are paying much higher rates of return, he added.

Cap rates going in vary from 8 percent to 11 percent. Baxter says there are buyers taking a lower cap rate where there is an upside. One property was only 50 to 60 percent leased, so the cap rates on purchase were 5 to 6 percent. "Once leased up, it will be il percent or 12 percent cap rate," he said.

Yet foreign buyers expect even less, says Aby Rosen, a partner with RFR Holdings who has most recently purchased several residential development pieces and is now heading towards office buys.

If a property is purchased for its appreciation value and the investors are going to use that properly for a vehicle like a REIT or for a syndication brochure or a foreign closed end fund, a $100 million price would still be attractive, believes Rosen.

"And they don't care if they get a 7 percent yield," he said. "At home the foreigners get 4 percent. They do it to put the picture in the paper and to get an 'A' building."

He used the Cornerstone purchase at 527 Madison as an example, since the buyers paid about $311 a foot, and while they may have a short-term 7.5 percent to 8 percent return, it will be going into a REIT. "The majority of buyers looking at $300 a foot can't afford to pay it," he explained.

Hauspurg is comfortable with $100 and $200 a foot pricings, and advises "If you bought at $100 or less on the side street, you're okay, and you're okay at $150 to $200 a foot on the avenues. But above those numbers, I hope you attend religious services of your choice regularly."

Some of his pessimism is shared by Stacom, who is also concerned that what New York City giveth, it taketh away.

Property Tax Issues

"I wouldn't be surprised if property taxes don't start to move up," Stacom said, adding that the rise in valuation by the assessors usually doesn't just fall to the subject property, "It falls on the property next door."

That was certainly true in Long Island City when Citibank developed its prominent tower, and adjoining industrial owners saw taxes rise dramatically without experiencing a rise in their own property incomes.

Many owners still blame the Dinkins administration for not recognizing that by 1990 values and property incomes had tumbled dramatically as part of the fallout from the 1987 stock market crash. These taxes became too high a percentage of the costs of operating the building, particularly as tenants renegotiated leases and escalations downward to remain in business.

"Is the Dept. of Finance, in the face of a reviving sales market, going to put a damper on the sales market, or are they going to look at the basic economics of a property and not become infatuated with the sizzle of a high sticker price paid by people looking for a long appreciation," wondered Robert A. Kandel, a land use and tax certiorari attorney who is of counsel to Kaye Scholer Fierman Hayes & Handler.

"Are they going to stay with an analysis of the underlying economics until the rent rolls fulfill the purchaser's expectations, and nurture the companies that are expanding and pay escalations, or are they going to put a kibosh on this?," he said, concerned. "If they choose the sizzle, they will put a damper on sales and make retention more difficult."

Agrees Mechanic, "You'll have a lot of fights with the Finance Department. People are buying futures. Finance should be assessing on income and expenses and not on futures, so there will be more of a fight over what is appropriate."

Beginning or End?

While prices can still rise on properties in various areas of the city, particularly Downtown, Hauspurg also worries the stock market will nosedive stud create a downward turn and pessimism.

"Remember that (the leasehold on) 40 Wall sold for $77 million in the mid-1980's and then [to Kinson] for $7 million in 1993," he recalled. Current

leaseholder Donald Trump says he paid about $1 million for the moro than a million square-foot building to those Chinese owners - and he's still fighting with the city over the back years of real estate taxes.

"That's what happens when optimism turns to pessimism," Hauspurg explained.

But Hauspurg still thinks people will proceed with optimism until the New Year's Eve of the Millennium. Then, agreeing with Stacom, he says "The party will continue until the end of the century, but we're all hoping the hangover is not of millennium proportions."