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It's a kinda magic: how the new owners of the $1.7b Met building can reap top returns.

After capturing the imagination of the investment sales community two weeks ago, the landmark $1.725 billion sale of the MetLife building now has some wondering just how new owners Tishman Speyer Properties, the New York City Employees' Retirement System (NYCERS), the Teachers' Retirement System (TRS), and Lehman Brothers will reap meaningful returns from the property that an insider to the deal says yields a sub-4 cap rate.

Whatever the plan is, it will have to focus on smaller facets of potential income rather than the kind of broad, sweeping changes that served master operator Tishman Speyer so well in its repositioning of ailing properties Rockefeller Center and the Chrysler Building.

The MetLife building is 100% leased with long-term tenants, a factor that actually may be limiting to the building's cash flow.

"MetLife did a lot of leasing and renewals in the months leading up to the sale," said the insider, who spoke on condition of anonymity. "They signed a lot of tenants at what are now below market rents. How are the new owners going to get a good return in a situation like this?"

Benjamin V. Lambert, president and founder of Eastdil and broker of the $1.4 billion sale of the GM building in 2003, suggested that the most obvious course for improving income was to renovate the retail space in the building for efficiency and also convert some of the public space to retail.

Steven Wechsler, a senior managing director at Tishman Speyer, confirmed that this type of renovation is part of the firm's plans for levering added value. Declining to comment on what form those plans will take and how they will be executed, Wechsler hinted that the property's income might not be the only channel through which the owners produce returns.

"This is an irreplaceable piece of real estate," Wechsler said. "It's a situation where we think that over time, this property will continue to appreciate in value."

In the meantime however, the insider to the deal said the property could be achieving much-improved cash flow if space could be freed and if an aggressive leasing campaign was undertaken. "What they should do is get those metal detectors and heavy security out of there," he said. "Renegotiate the leases and start going for $100 psf rents. This building is in the same class as 9 West and the GM building and should be getting premium rents."

Wechsler declined to comment on potential changes in the building's security but said, "We're banking on competing with 9 West and the GM building," Wechsler said.

Just how they will do that isn't clear, considering the building's near complete occupancy, but Wechsler did add that Tishman Speyer is "a strong operator that will work with all the tenants, and will help them both expand or lessen their space."
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Author:Geiger, Daniel
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Apr 13, 2005
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