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Bertelsmann deal 'Most Ingenious.' (Peter R. Friedman Ltd. wins Henry Hart Rice Most Ingenious Deal of the Year Award from Real Estate Board of New York for 1540 Broadway Street sale to German conglomerate)

The sale of 1540 Broadway to a German-based conglomerate and the leasing of 240,000 square feet to the Internal Revenue Service were selected as the top commercial brokerage deals of 1992 by the Real Estate Board of New York at its Annual Sales Brokers Cocktail Party held last week.

Peter R. Friedman and Jeffrey A. Lichtenberg of Peter R. Friedman, Ltd., the brokers who represented Bertelsmann AG on their 1.1 million-square-foot acquisition from a consortium of 17 lenders, won the coveted Henry Hart Rice Most Ingenious Deal of the Year Award. When the complex negotiations began building was in default and incomplete.

Carol Nelson, Mary Ann Tighe, Edward Goldman, and Maria Morris of Edward S. Gordon Company won the Robert T. Lawrence Award for placing the Internal Revenue Service in 240,000 square feet in the Durst Organization's 1133 Avenue of the Americas for 20 years and creating a "building within a building" for the tenant.

The coveted awards recognize "distinguished achievement in real estate brokerage."

Building in Default

Friedman and Lichtenberg were first charged with helping Bertelsmann decide what to do with two leases in separated buildings. One lease had a favorable rent and an option to renew and was set to expire near the purchase date. The other had an above-market rent and 10 years to go. The company was considering moving a significant number of employees out of the city.

(Coincidentally the deal that won the Robert T. Lawrence award took place in 1133 Avenue of the Americas, one of the buildings in which Bertelsmann housed its divisions.)

After investigating all lease opportunities, the brokers began to explore acquisition possibilities. The 44-story 1540 Broadway, in default and incomplete, was identified as an "appropriate signature" for the company." Total occupancy costs would be lower and the company would own valuable New York real estate.

The negotiation required working with the developer, Bruce Eichner and a consortium of lenders that included 16 Japanese banks and was led by Citibank. The result was a purchase price of $119 million and the first prepackaged bankruptcy for a major Manhattan office tower. The brokers also secured Industrial Development Agency concessions worth more than $10 million and managed base building modifications and completion of more than $60 million worth 9;f tenant installations that were made in just under five months. Bertelsmann will occupy some 750,000 square feet.

Friedman and Lichtenberg also had to arrange for the other two leases to end at the same time.

In announcing the award, REBNY noted: "The transaction enabled the purchaser to consolidate its New York staff in one building keeping several hundred jobs here, fortified the city's position as a capital of global communications enterprises, and resulted in a major commitment to increase Manhattan office facilities by a foreign investor/user."

In addition to securing a major tenant for the city, Lichtenberg reflected, the building's troubles and the number interested parties added to the deal's significance.

"None of the buildings that really have problems have been able to get anything done," said Lichtenberg.

The deal, he said, enables Bertelsmann to save money through consolidation and, he said, it will cost them less to own than it would to rent.

" and there are some pretty attractive terms out there for rentals," he said.

In effect, Lichtenberg said, after 20 years if the corporation decides to sell the building, they will have operated rent free for all that time.

But, Lichtenberg said, the idea of buying a building was the first thing that had to be sold to the Bertelsmann.

"They refused to look at something that involved equity initially," he said.

'Building within a Building'

When Carol Nelson, Mary Ann Tighe, Edward Goldman and Maria Morris of Edward S. Gordon Company saw the advertisement placed by the General Services Administration for 170,000 square feet in Midtown in a Class-A Building and 7,000 to 10,000 square feet of retail space, they immediately thought of The Durst Organization's 1133 Avenue of the Americas.

But there were two problems: Some floors in the building were the wrong size and the space was leased with tenants.

"At first glance it looked like a deal that couldn't be done," said Nelson, "yet we were able to look at the deal as a perfect fit."

Durst sponsored the brokers in the SFO and agreed to be represented by the team.

To satisfy the tenant's need for larger floors, the brokers devised to break through the walls of the building and expand into three floors in a connecting recording studio. To do this and prevent the Dursts from exceeding their FAR (floor-to-area-ratio), the brokers arranged for one floor of the building to be closed off.

When Bertelsmann began negotiations to buy 1540 Broadway the problem of occupied space was potentially solved, though the government would only proceed when they were assured the deal would close. The brokers had to negotiate incentives for early departure with other tenants.

The building-within-a-building concept was created when the Durst's became concerned that the IRS' presence would overwhelm the building and that the increased security the agency required would make other tenants uncomfortable. Thus, the brokers arranged for the creation of a separate side entrance for the IRS that would lead to a second floor sky lobby.

According to Nelson, the IRS gets a quality location owned and managed by a top-notch company and the Dursts get a triple-A tenant for 20 years.

REBNY in its announcement cited the "'building within a building' strategy conceived by the brokers gave the I.R.S. its own entrance, security clearance point and elevator bank, among other features, while enabling the rest of the property to retain its identity as a Midtown corporate office tower. The agency's presence and the traffic it will draw should also enhance public safety on 42nd Street."

The deal, according to Nelson, took two years of work and 3000 pages of documentation. Dealing with a government agency brought a number of challenges including: Not knowing who your competition was because the GSA would not divulge such information; the discrepancy between the GSA's definition of net usable space and the industry standard for gross rentable space; getting only one chance to submit a rent offer; and being able to guarantee the delivery of the space so the owner could avoid penalties of $13,000 per day.

In addition, the air pumped into the space had to be free of asbestos and the building had to be handicapped accessible.

According to Nelson the deal is significant to the brokerage community because it forced her team and firm to use a vast array of skills and disciplines, including management, architecture, engineering, design, zoning, law etc.

"It sort of reinforced the idea that a broker has to do much more than find space," she said.

The panel of judges consisted of James J. Houlihan, partner, Houlihan-Parnes and chair of the Sales Brokers Committee; Vincent Carrega, executive vice president, James Felt Realty Investment Services; John G. Malino, vice president, Loews Corporation; G. Austin Mooney, president, FGH Realty Credit Corporation; and Keith M. Pattiz, partner, Arnold & Porter.

The Henry Hart Rice Award was presented by REBNY Vice Chairperson Aaron Gural. The Robert T. Lawrence Award was given by REBNY President Steven Spinola.
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Author:Fitzgerald, Therese
Publication:Real Estate Weekly
Date:Mar 31, 1993
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