Selling property takes realistic approach.

Selling property takes realistic approach

Owners and lenders are quietly and publicly trying to sell some of their portfolios. Some buildings, such as 99 Park Avenue, are rented and a sale will generate cash as well as a profit for its owner, the Equitable Life Assurance Society of the United States. Other buildings, like 1540 Broadway, are empty. Negotiations are breaking down because of lender pressure and mortgages may never see a sales price that will come close to their construction or other investment. In coming times, investors may be approached to purchase luxury condominium towers.

New York real estate marketers explained what owners and lenders must now do to sell these properties and also what prospective purchasers should be looking for.

Warren M. "Woody" Heller, director-investment services of Jones Lang Wootton, said the first step is to value the building. If you want to sell at an overvalued price, he said, it will be a long, hard struggle. So the owner and the marketer must agree on a valuation that represents the true work of the building.

In some cases, he said, a property may be offered with no price. "The agent will tell you the building can be purchased in the following price range, that is his sense of the owner." Some owners, he noted, are reluctant to suggest the price because they hope someone will come up with a higher price. "We either have no price, a stated price or offers in excess of a certain number," he said. "Then we feel free we can get that and we really mean we want a number in excess of that number."

Heller said a lot of properties are being offered through auctions and then the rules of the auction will state that an offer must be at or above a certain price.

Steven Birbach, president of Carlton Property Auctions, Inc. predicts that more office and commercial space will be auctioned in the near future and is aggressively looking to bring to auction office buildings, office condominiums and medical condominium space.

Birbach said they would first assess the property and conduct in-house appraisals and then would provide a schedule of fees and expenses to be incurred by the auction. A conclusive proposal would include either a suggestion for a minimum bid or a reserve bid. "We would taper the auction," Birbach explained. "Each piece of real estate is unique in its own way."

"On an absolute basis it is more definite and your prices are definitely going to be higher," Birbach explained. "It shows the seller's interest in selling the property and it brings out the buyers. You are going to sell it, you are going to close and you are going to get qualified buyers because they are coming in with a certified check as well as meeting our pre-qualification procedure."

An office building with a substantial mortgage could not be auctioned on an absolute basis and, Birbach said, he might then recommend selling with a minimum bid or subject to the seller's confirmation or reserve. A reserve gives the seller the right to reject or accept the bid within 48 hours. The reserve could also be subject to the suggested opening bid.

If the building was overpriced or over financed, Birbach would not recommend selling it at that time. "The owner should renegotiate the underlying mortgage or buy down the mortgage," he suggested. "I'm sure he's tried to sell it traditionally but an auction will freeze the market for a similar kind of product and will generate interest. There is no question in my mind that selling the proper property on an absolute basis with the proper advertising campaign will sell for the highest amount through competitive bidding."

James D. Kuhn, president of J.D. Kuhn Properties, an owner of large office and residential properties, was recently hired as a workout consultant on 1540 Broadway. According to Kuhn, the way to market a large office building is to narrow your focus to the large users. He said the seller also needs to determine the advantages of that particular building.

"When selling to a tenant, it's going to be their home for awhile," he said. "While you can sell to developers, in today's market in New York, if tenants out there have a desire to own a building, you will get a slight premium."

A developer, he noted will have to build into his costs the time it takes to lease up the building, which could take from 18 to 24 months. "If you can zero in on tenants that need larger blocks and have a location that appeals to an industry, then you can offer, in some cases, a new building and the tenant can control their own destiny." Otherwise, he said, the tenants do not control the rest of the space in the building, and over time, as they expand, contract, merge or whatever, they do not know what they might need in the future. That, he said, is the single biggest reason to purchase.

Another way to market an office building, Kuhn said, would be to condominumize the building, such as 1166 Sixth Avenue did in the 70's, or what Silverstein Properties is doing with 120 Wall Street. "Then you can find two or three tenants who want to buy it," Kuhn said, adding that the owner should probably not try to sell it one floor at a time.

Kuhn, formerly executive vice president of the Mendik Company, pointed to Bernard Mendik's philosophy of buying buildings with large floor plates to give tenants an opportunity to grow. He said tenants who need 200,000 square feet would rather be on four floors of 50,000 square fee than 10 floors of 20,000 square feet.

A third possibility, he said, is to find an industry that wants to consolidate. For years, Kuhn said, people have wanted the mens wear industry to be together. "It's easier for buyers," Kuhn said. "Market it as an entertainment building, or to the toy industry, or the mens wear industry. If you're in the wrong location in a bad market there is nothing you can do."

Marketing is specific to the individual buildings, Heller said. A building could be institutionally oriented, or entrepreneurial, and in some cases can be converted from one to the other. "A major institutional building is a different exercise than a smaller property without curb appeal. Small buildings tend to be bought by local operators at higher cap rates, and will always trade to that audience at that pricing." Sometimes, he noted, the seller might have to offer financing.

A larger building, Heller said, might have an international audience and can be sold without seller financing.

In New York City many properties are held in strong hands so there is a tendency to have a high asking price, Heller said. "But the spread between bid and asked is rather dramatic. The question is when that gap is beginning to close."

A property being put up for sale will be valued by various methods. These include the return per square foot; the "going in" and the return, i.e. the cap rate; and the yield or the internal rate of return (IRR) which measures the returns in every year over the course of the investment and includes the appreciation when sold.

Another variable which comes into play in today's market, Heller said, is based upon the historic rents the older building is earning. While old net rents of $18 to $20 going in could have a high net return or cap rate, the new owner would have to re-rent a building at today's lower rents.

Approaching interested buyers is not hard because contacts have been previously made by Jones Lang Wootton. "Based on our knowledge of the buyers of the world," Heller said, "we would approach them either directly or through foreign offices." If the buyer is interested after reviewing the property, then an offer is made. The buyer and seller would then negotiate the price and enter into a letter of intent. At that point, the buyer begins a formal review called "due diligence" and legal documentation is prepared.

Buyers are represented by investment advisors, brokers and counsel at different times. Some purchasers, Heller noted, prefer to negotiate directly. "Most groups that are not local have some kind of local representation so they are fully aware of what is involved," Heller added.

For a small property, advertising may level arcade rises from one story at the corner to four stories at the center.

In addition, the owners are planning various large scale art exhibits in the lobby to welcome visitors to the Tower.

The low rise TCO covers the first through 16th floors of the building.

Issued by the city, it signifies that the low rise portion of the building conforms to approved plans and specifications, and satisfy all applicable laws, rules and regulations for use and occupancy. After tenant fit out work is completed, formal occupancy can begin. a major property.

Robert L. Billingsley, a partner in Abrams Benisch Riker, Inc., which is a brokerage and commercial consulting firm that handles over 6 million square feet for buildings such as 730 Third Avenue, 485 Lexington Avenue and 750 Third Avenue, said when going after tenants to make your building more attractive to sell, or for yourself, the most important thing is to segment the market. "You can't compete against every building," he observed. "You have to cut the enemy down to size."

Billingsley said to identify the five or 10 most competitive buildings and "by virtue of your marketing and making intelligent decisions as to where your tenants are, you add to your building's stature."

In this market, he said, to go after big deals would be fruitless. "Most guys are much too general," Billingsley said, "you have to be a behaviorist and almost be Margaret Meade to find what tenants will come to the building."

At 250 Park, his firm played up the historical, classical image of the building to appeal to Sullivan Cromwell, a current tenant.

Smaller tenants are concerned with time and detail, he said, and so for one such property they used a short form lease and built out the walls "because the small tenants can't decide where to put them." Billingsley said you have to understand the tenants and become a social scientist. "Then you reinforce the image of the building with service."