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Rock Center shake-out begins.

After years of speculation culminating in a week of rumors, the two partnerships that own Rockefeller Center filed for bankruptcy protection under Chapter 11 last Thursday to delay paying its lender, the mortgage REIT, Rockefeller Center Properties, Inc., (RCPI), whose sole asset is the Center's mortgage.

The move was bitterly opposed by the Rockefeller family, whose founder developed the Center in the Depression of the 1930s and still holds a 20 percent stake in the Rockefeller Group that owns the partnerships, among other entities. The other 80 percent is owned by the Japanese conglomerate, Mitsubishi Estates.

RCPI is a mortgage real estate investment trust whose principal asset is a $1.3 billion participating convertible mortgage loan to the two partnerships which jointly own Rockefeller Center and are 100 percent controlled by Rockefeller Group, Inc. (RGI).

The two partnerships - RCP Associates and Rockefeller Center Properties (RCP) are controlled by Mitsubishi Estate Co., Ltd. of Japan, and Rockefeller Family Interests.

The bankruptcy filing comes on the heels of the retention of Harrison Goldin by the partnerships and is a strategic move to force the parties to renegotiate the terms of the mortgage commitment and to stay payments to the REIT. Internally, the Rockefellers and Mitsubishi have been negotiating to have an investor take over the Japanese interests or to buy out the REIT.

It was also felt that Mitsubishi might literally have to pay any investor. Current family head David Rockefeller, whose father John D. Rockefeller Jr. developed the property, even flew to Tokyo to negotiate with Mitsubishi's president Takeshi Fukuzawa, who also flew to New York to continue negotiations. Those broke down last week when the Japanese decided to file for bankruptcy protection. The Rockefellers had argued against bankruptcy because of possible tax and leasing consequences, as well as the embarrassment.

The loan was made in 1985 when the publicly-owned real estate investment trust, RCPI, was formed to lend the partnerships money, eventually totalling $1.3 billion. The first $750 million was raised from 37.1 million shareholders in 1985.

On October 30th, 1989, the Japanese developer and property owner in Japan, Mitsubishi Estate Co., (MEC) agreed to pay $846 million to acquire a 51 percent stake in RGI. Over the following two years, even as the city real estate market ground to a halt, MEC made an additional investment of $527 million to increase its interest to 80 percent.

Market forces have driven the value of the property down since then, while the cash shortfall due to declining rental income has exceeded original projections and is up to $623 million. While an appraisal by Douglas Elliman completed earlier this year valued the property at $1.25 billion, other real estate prognosticators have declared its value to be much less, and it could not be determined for what purposes the earlier appraisal was made, nor for whose account.

"They are unique B buildings and are run spectacularly and I have to believe the value is right around $150 a foot," said Peter Hauspurg, chairman of Eastern Consolidated Properties, for a total of $900 million.

In fact, the properties pay taxes based on city assessments that total just under $450 million, for a total tax bill of $42.77 million. In 1989/90 when the Center was purchased, the city pegged its fair market value at $1.275 billion. It's now at $1.045 billion. A Finance spokesperson said they are protesting some back years.

According to Stephanie Leggett Young, vice president and secretary of the REIT, the property operates at a loss each year after payments to the REIT. The property had gross revenues in 1994 of $220.851 million. But operating expenses were $161.89 million and interest of $117.328 was paid to the REIT, so there was a loss just in that year of $58.367 million.

Unsuccessful negotiations have been ongoing since last year to both buy up shares and to renegotiate the loan. "David Rockefeller Sr., the chairman of the Rockefeller Group, has tried to avert bankruptcy," said a family spokesperson, Fraiser Seitel. "He felt this was the least good thing they could do. If they had been a little bit more intelligent about it, they could have bought the REIT for less money."

They were trying to find other alternatives and were talking about $300 million for the entire buyout, according to Seitel, who said the Rockefellers would have kicked in more than their 20 percent. "It appeared a deal was close," he added. Goldin, he said, was hired by Mitsubishi to look into; the effects of bankruptcy and to preside over any bankruptcy filing.

The family's most immediate concern is that the Japanese will still manage the property and keep its integrity and quality. "If they do that, everything in the situation will be resolved satisfactorily," Seitel said. Meanwhile, the Rockefeller Trusts that have the 20 percent ownership are examining their options.

If the partnerships bought out the REIT stockholders, it would have to also eliminate a provision that kicks in at the year 2000 by which shareholders could convert the shares into a 70 percent interest in the property. A $20 million payment was due to the REIT May 31, prompting the bankruptcy filing.

Richard M. Scarlata, the president and chief executive officer of RCPI, the REIT, called the move "unconscionable," in light of Mitsubishi Estate's considerable assets, including short-term liquid assets of more than $2 billion and its announcement earlier this month that it expects to have profits of $300 million this fiscal year.

"While Mitsubishi Estate and the Rockefeller Family Interests have ample financial resources at their disposal, the filing indicates they are unwilling to allow the Borrowers whom they control to meet their commercial obligations to RCPI, thereby affecting more than 40,000 stockholders," he said in a statement. RCPI expects "to do everything in its power" to ensure continuation of efficient operations and to safeguard the interests of its stockholders.

When the property was sold to the partnerships comprising the original Rockefeller family members and Mitsubishi, the Japanese were slurping-up trophy properties, the real estate market was booming, and market-makers were projecting leases in the $70 a foot range for the 1990s.

Today, while $70 a foot rents are the average in Singapore and effective rents in Tokyo, Hong Kong and London are even higher, New York's still range in the high 20s to high 30s.

Leases that are being renewed at Rockefeller Center are being written at the market, said Alan L. Stein, senior vice president of sales and marketing of Rockefeller Center Management Corp., and are often lower than the rents with escalations previously being obtained for the same space.

"In many instances the rents in the expiring terms including escalations were above market value and we couldn't conclude leases written at any more than market," he said. "You can't expect a tenant to pay greater than market."

The Center had between 2 million and 3 million square feet in leases coming due last year of its total 6.2 million square feet and concluded transactions for a significant part of it, he said, but noted that while they are "pretty much on track," they still need to lease more this year.

"The nominal rents and the concession packages are up from a year ago by roughly eight to ten percent," he added. "The object is to stay rented at the best available rents that the market will permit."

Because of a $300 million capital improvement program and an aggressive leasing strategy, the leases concluded last year represent almost ten percent of all of the Class A Midtown Manhattan leasing activity, Stein noted.

Nevertheless, the discrepancy between the income projected for this time period some ten years ago and today's real numbers has led to the accumulated shortfall of $623 million. That was expected to rise another $400 million between now and 2007, when the mortgage comes due.

The day before the filing, Young said there was also additional collateral. "Not only do we have the claim on the property," she said, "but a $50 million letter of credit. We could draw upon the letter of credit if there is a default."

The REIT had finally recorded the mortgage last September at a cost of $35 million and helped to boost the city's coffers with the one-time revenue.

Since the initial offering in 1985, more stock was issued, along with current coupon bonds with a face value of $335 million and $215 million in zero coupon bonds that have both since been retired.

A refinancing gave the company $225 million and they used the proceeds to retire commercial paper, including a $200 million letter of credit that was going to expire in June 1995.

"Now the REIT is hacked by two letters of credit facilities," Young explained. They reached an agreement with the first and wanted to extend the maturity of the second and so concluded a deal with Goldman Sachs and the Whitehall Group and raised enough to pay off the commercial facility and now have two maturities in the 2000s.

The REIT's debt will be paid for by the interest payments that are supposed to come from the borrowers that just declared bankruptcy. Two-thirds of the bondholders have to approve any change in that loan.

According to Young, the property operates at a loss each year after payments to the REIT. The property had gross revenues in 1994 of $220.851 million. But operating expenses were $161.89 million and interest of $117.328 was paid to the REIT, so there was a loss of $58.367 million.

The mortgage is held on only a dozen of the Canter's original buildings and none of the buildings on the westerly side of Sixth Avenue are affected. The properties involved include the GE Building, the NBC Studio Building, the GE Building West, 1270 Avenue of the Americas, the Associated Press Building, the International Building, the British Building, La Maison Francaise, One Rockefeller Plaza, Ten Rockefeller Plaza, the Simon & Shuster Building, 600 Fifth Avenue, the lower Plaza and other parcels.

Interests not affected by last week's filing include the Rockefeller Center Management Corporation, Rockefeller Center Development Corporation, Rockefeller Group Tele-communications Services, Inc., Cushman & Wakefield, Inc., Radio City Music Hall Productions, Inc. and other properties, including 100 percent of the Time-Life Building and a 55 percent interest in the McGraw-Hill Building.

Rockefeller Center occupies 22 acres of land between 47 and 52 Street and Fifth Avenue and the Avenue of the Americas in Midtown Manhattan. The entire Center is comprised of 19 buildings and has 15 million square feet of commercial space.

For many years, the land under the old part of the Center was leased by the Rockefeller Family from Columbia University with a renewal cycle of 21 years. At the time of the last renewal, a legal theory led to generating tenant leases that co-terminated with the ground lease option, which was Sept. 30, 1994.

So 300 leases, some 40 percent of the total and close to 3 million square feet, came due on what internally was called "D-Day." Of course, that legal theory is no longer in favor and in 1985 the land was purchased for $400 million. Later that year, the REIT was established which holds the mortgage on that portion of the Center.

Mark O. Decker, president of the National Association of Real Estate Investment Trusts, said there may be a better ending to this story but meantime, "they have a tiger by the tail to sort out."

Rockefeller Center is a wonderful asset, he said, and couldn't be replaced for what it cost. "But it was sold at the worst time for investors to buy office and a lot of assumptions were made about leases that aren't true. The IPO [initial public offering] timing wasn't great and the Japanese got caught holding the bag, but it is a valuable, one-of-a-kind asset. There is play left in that asset and that REIT, and the final chapter hasn't been written there for sure."
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Title Annotation:part-owners of Rockefeller Center file for bankruptcy
Publication:Real Estate Weekly
Date:May 17, 1995
Previous Article:Promenade leads turnaround to five Midtown properties.
Next Article:REIT or trophy: what's WTC worth?

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