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Kmart lease not in jeopardy.

One of the most important retailing deals of the year is expected to be wrapped up this week as Peter E. Stangl, chairman of the MTA, and Peter L. Malkin, acting for the ownership of One Penn Plaza, meet for MTA sign-offs on Kmart's entry into the Manhattan marketplace.

While a lease for 140,000 square feet on four levels of the 57-story One Penn Plaza was signed, sealed and delivered on December 7th to great fanfare, the bottom floor of the store is located on the concourse level of the LIRR Station, and thus requires a final approval of certain easements by the MTA.

Since the MTA will receive 10 percent of any rental amount below grade, it is just as eager to have Kmart start its construction.

The ownership of One Penn Plaza is Mid-City Associates, a partnership of the Metropolitan Life Insurance Company, Harry B. Helmsley, and Malkin.

"We're happy to report the Kmart deal is alive and well," said Daniel E. North, vice president and director of management and leasing for Helmsley-Spear, Inc., that manages One Penn Plaza for Mid-City Associates. "The rumors circulating through the industry that the space is back on the market are false."

According to the parties, the giant retailer is highly coveted by New York City and will create about 500 jobs - most of them for neighborhood residents with few skills - and provide an estimated $125 million in taxes over the life of the initial term of the lease without any tax relief or other subsidy provided by strapped city coffers.

Neither the term nor rent has been disclosed. A space on the ground floor, however, could rent from $70 to $100 per foot and space underground $15 to $40 per foot, depending on the level. Even a blended rate of $30 a foot per month works out to a rental of around $5 million per year. Long - term leases generally mean deals of 15 to 20-year initial periods with several options to renew.

Glenn Insana, Manager of POB (Previously Occupied Buildings) Development in the Kmart Real Estate Department in Troy, Michigan said he was aware there was talk on the street. "I did this deal. I know what we're doing and where we're going and we are certainly committed to this deal," he said. "Dan and Peter Malkin are negotiating with the MTA to get the easement in the building. We have contractors that we've hired, we have our plans done, we have building permits and we are ready to go. As soon as that group says we can proceed we will be in there working."

Insana explained the MTA sign-offs on the easement are really between the building ownership and the MTA, and Kmart has not been privy to what is on the table.

Along with the MTA approval for the Kmart easements, Stangl and Malkin will be discussing other easements regarding an eight-foot setback of storefronts on the eastwest corridor that runs from Seventh to Eighth Avenue.

Right now, the parties are about five years apart, with the MTA feeling it needs to widen this passageway by the year 2004 and Mid-City's feeling it does not want to disturb tenants with leases in place to the year 2009. "From our point of view," said Malkin, "it's simply not possible to make available space that is leased to other people." K-mart is not affected by this setback question.

The MTA spokesperson, John Cunningham, said "The reason we are pushing that date very hard is that the projections - based on the capital improvements at LIRR and NJ transit and Amtrack - call for a volume of traffic coming through that corridor will reach unacceptable levels." The stores that are setback will be able to recapture even more space to the rear in another corridor.

Going along with the setbacks is a question about what form and how much financial security needs to be put up to ensure the work to complete such setbacks will occur. This goes back to a form real estate watchers are quite familiar with when it comes to the MTA: the "proverbial letter of credit" as a spokesperson put it.

A $33.3 million letter of credit held over some nine years, which changed to a $17 million non-refundable deposit, was one of the bargaining chips the MTA used when it came to the unraveling of the deal for the construction of Boston Properties Coliseum Center.

There are also some other "nagging issues" regarding the building and its underground neighbor and the MTA has been loathe to approve the Kmart provisions without wrapping up the other details.

"The deal is still in effect with Kmart and the change in senior management had no impact," noted Malkin, referring to recent Kmart corporate changes. "We are continuing to work with the MTA to conclude arrangements on One Penn Plaza. I'm personally meeting with Peter Stangl to see if we can move it along." That meeting was to have taken place on Tuesday, April 4th. "We contemplated it would take a substantial time to work that out and we specially provided for that in the lease," Malkin added.

Insana said he is looking at other space in New York City for even more Kmarts. "We're viewing a lot of options," he said. "It's difficult to get a big box in a densely populated area. We have to get the right place at the right price. Manhattan prices are substantially more than most," he added.
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Title Annotation:Kmart Corp.
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Apr 5, 1995
Previous Article:Expanding services key to profitability.
Next Article:Invasion of the tax consultants.

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