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Big partnerships: ingenuity of the deal's intermediary.

With cap rates as low as they are today, maximizing a building's potential returns via a creative strategy of ownership has become the obvious credo of many successful investors in real estate.

And while it has been largely up to the owner or buyer to formulate a winning game plan for improving cap rates and building value, often it is the level of ingeniousness displayed by the intermediary in identifying hidden value or more attractive debt structuring that can make or break a deal.

Ben Lambert, chairman and CEO of Eastdil, who has played the role of star dealmaker for a long while now, credits the current extremely competitive market with allowing him more ample chance to exercise his creative chops.

Brokering recently (for the second time in almost as many years) the sale of 717 Fifth Avenue, Lambert played a hand in marketing the handsome 26-story tower--whose high price compressed the cap rate significantly--as an office unit with valuable ground floor retail that could be pawned off by the buyer to a separate entity so as to facilitate increased overall returns. His somewhat unusual vision came to fruition when Equity Office, the nation's largest REIT, purchased the tower and quickly sold off its interest in the ground level retail space.

Marketing the building as having two separate units proved to be a key element in attracting a buyer like Equity Office, considering that REITs are considered especially sensitive to return rates.

"You have to be more creative to get deals done," Lambert said. "Because different groups have different investment objectives, I think that they're now coming together and taking the piece of the investment that is most attractive to them and fits in most closely with their expertise."

Finding diamonds in the rough, or some form of untapped value in a building, has become Lambert's strong suit and fuels high price transactions that otherwise might not happen if not for the insight into a property's upside.

Although not as glamorous superficially as some of his past deals, like say the GM Building, Lambert brokered the sale recently of 980 Madison Avenue, which, via his unique approach, sold at an astronomical figure. Using the 5-story building's air rights as a fulcrum to convert potential value into a considerable payoff for the seller, Lambert executed his plan by attracting buyers intrigued by a building rife with opportunity for future development.

"I thought it was a pretty unbelievable deal," Lambert said. "We showed what we thought would happen to the numbers in terms of the bottom line if you were able to do creative things with the retail and air rights and the people buying in believed in that strategy."

Often, the key to securing a deal is to forge a winning partnership between the right kinds of buyers. Perhaps one of the most well-known joint venture matchmakers in the city, Steve Cohen, of Sonnenblick Goldman, flaunted his deal making muscle last summer by hooking up L&L Acquisitions with GE Asset Management. The pair went on to vault stiff competition last summer in their winning bid for 600 Third Avenue.

The dynamism of the duo was the result of Cohen's foresight. L&L is known for its savvy building management and ability to expand cap rates. The trick was to add the weight and resources of GE.

Knowing that the pension fund would be sensitive to returns, Cohen got the deal done by securing fixed rate interest-only loans, which widened the spread between returns and the cost of financing enough to accommodate institutional investment.

The intermediary playing the role of investor assuager is sometimes all that's necessary in completing some of the most profitable deals.

Brian Corcoran, one of the city's leading appraisers and the head of Cushman & Wakefield's valuation services department, demonstrated this when he flew to Australia last year to demonstrate the value of 900 Third Avenue to Australian investors.

Paramount, which owns the 36-story tower, was seeking to sell a partnership interest in the building in order to settle outstanding debt. The group teamed with ING Real Estate Investment Management, which in turn was investing the Australian money.

The only thing that threatened to scuttle the partnership was hesitancy on the Aussie's part.

"They hadn't invested in New York property before," Corcoran said. "It was a matter of getting them to feel comfortable committing to what was almost a 50% interest in the building. 900 Third had a lot of law firms as tenants, which is a great thing here. But in Australia, law firms are actually viewed as less desirable tenants to have. Getting them to understand how things work here was the key because law firms are one of the best groups of tenants here."

The building currently yields around a 10 cap.
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Article Details
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Author:Geiger, Daniel
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Nov 17, 2004
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