bloomberg -Kushner's 666 fifth ave is depreciating record setting tower

Kushner’s 666 Fifth Avenue Is Depreciating Record-Setting Tower By Sarah Mulholland and David M. Levitt Jan. 15 (Bloomberg) -- When Jared Kushner closed on 666 Fifth Avenue , the Manhattan trophy property, for a record $1.8 billion two years ago, little did he know it was the peak for an investment that shows no signs of bottoming. Since Kushner bought the building, its occupancy rate has dropped... [more]

Kushner’s 666 Fifth Avenue Is Depreciating Record-Setting Tower By Sarah Mulholland and David M. Levitt Jan. 15 (Bloomberg) -- When Jared Kushner closed on 666 Fifth Avenue , the Manhattan trophy property, for a record $1.8 billion two years ago, little did he know it was the peak for an investment that shows no signs of bottoming. Since Kushner bought the building, its occupancy rate has dropped 10 percent and rental income has declined. Citigroup Inc. , Kushner’s biggest tenant, vacated about 80,000 square feet of space in August and the skyscraper had about 69 cents in rental income available for every $1 owed in the third quarter, down from 80 cents in the second quarter, according to loan servicing documents examined by Bloomberg. Even in the best neighborhoods of Manhattan, buyers who expected revenue to rise are struggling as vacancies increase across the U.S. While Kushner isn’t in danger of default because he has a fund to meet declining income, the January 2007 purchase shows the challenges facing investors who borrowed heavily to make acquisitions in the property boom. Loans more than 60 days late climbed to 0.91 percent in December from 0.32 percent a year earlier, data compiled by Barclays Capital in New York show. “Cheap and plentiful financing made these deals possible,” said Jeffrey Lacilla , an instructor at New York University’s Schack Real Estate Institute who has almost two decades of experience in Manhattan commercial property. “The question now is whether they can live long enough for the building to be able to sustain itself when the reserves run out.” Reserve Fund Kushner, who also owns the weekly New York Observer newspaper, said new leases at the 41-story building will help bolster cash flow. The reserve fund had $98.2 million as of Nov. 24 to cover debt payments and other expenses, according to a servicer report. Kushner sold a 49 percent stake in the building’s retail space in July for $525 million. Part of the proceeds were used to increase the fund, which had fallen to about $32 million as of the end of May, records show. The fund started at $100 million when the loan was originated. “There’s eight years left on the debt, and we have $100 million in reserve so any inference that this building is in trouble or distressed is ridiculous, even in this crappy real estate market,” Kushner, 28, said in an interview. So-called pro forma loans allowed borrowers to take on more debt on the assumption that higher income in the future would cover the interest and principal. Taking Control About 14 percent of commercial real estate loans that were bundled and sold as bonds in 2007 are not generating enough income to cover debt payments, JPMorgan Chase & Co. analysts, led by Alan Todd , said in a Jan. 6 report. There was a record $237 billion of commercial mortgage-backed bonds sold in 2007, according to JPMorgan estimates. Kushner is a principal at Kushner Cos., the Florham Park, New Jersey-based real estate company founded by his father, Charles. Jared Kushner took on increased responsibilities for managing the company in 2004, the year his father stepped down as chairman after he pleaded guilty to tax evasion and lying about political donations. When Jared Kushner stepped in, the company had more than 24,000 apartments in New Jersey, Pennsylvania, Delaware and Maryland, said Steven Solomon, Kushner’s spokesman. He made his largest purchase in January 2007, when he bought 666 Fifth Avenue at 52nd Street in New York for what at the time was the most paid for a single office building in the U.S. Later in 2007, Kushner sold almost 17,000 apartments for about $1 billion in cash and $920 million in assumed debt. Rent Estimates When Kushner bought 666 Fifth Avenue, he got $1.215 billion from Barclays Capital. The loan was divided and sold as part of three commercial mortgage bond offerings, according to data compiled by Bloomberg. The purchase was financed with another $535 million in debt, which has since been paid off. Kushner estimated the building would have average revenue of roughly $110 a square foot per year, according to loan documents. That’s more than double the average of $48.99 per- square-foot tenants were paying in rent at the time of the sale, the documents show. Office rents in the neighborhood, which includes the landmark Plaza Hotel, averaged $86.26 a square feet in the fourth quarter, about 25 percent less than the peak of $115.66 in May, according to Colliers ABR data. Kushner said the average rent in the building is now almost $50 a square foot. ‘Well Capitalized’ The building’s debt-service coverage ratio fell to 0.69 during the third quarter from 0.80 in the prior quarter, loan documents show. Income at 666 Fifth Avenue had been rising until the third quarter. The debt-service ratio was 0.65 when Kushner bought the property and was 0.73 on Dec. 31, 2007. “Our cost issues aren’t debt payments, they’re tenant improvements and leasing commissions, which are fully funded for,” Kushner said. “We are well capitalized and conservative and feel confident that we will do well with this over time.” Victor Calanog , director of research at property data service Reis Inc,, estimates that 666 Fifth Avenue is worth no more than $1.25 billion when taking into account “prevailing data from recent transactions.” Kushner now is seeking to retain current tenants at higher rents. Citigroup has more than 482,000 square feet, according to a report by CoStar Group Inc. One of its units is being offered a 28,248 square-foot lease renewal for $91.50 starting in September 2009, according to the servicer. The second-largest tenant, law firm Orrick, Herrington & Sutcliffe, is being offered a lease on 300,000 square-feet at $91.50 per-square- foot, records show. Its lease expires in 2010. ‘Top of the Sixes’ Built in 1957, the 1.5 million-square-foot building was known for its “Top of the Sixes” penthouse restaurant until it closed in the 1990s. The building is prized by tenants for its central location at Fifth Avenue and East 53rd Street, adjacent to Rockefeller Center, the Museum of Modern Art, St. Patrick’s Cathedral and the Cartier jewelry boutique. “It’s one of the true trophy buildings in New York, one of the first great postwar buildings,” said Lawrence Longua , director of the REIT Center at NYU’s Schack institute. Kushner said he has no plans to sell the building. “We’re a family company,” he said. “We didn’t buy it to flip it. Right now as long as you don’t have to refinance today, you’re all right. There are buildings all over town with potential refinancing problems. 666 isn’t in any trouble.” To contact the reporters on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net ; David M. Levitt in New York at dlevitt@bloomberg.net . Last Updated: January 15, 2009 00:01 EST Feedback | Terms of Service | Privacy Policy | Trademarks [less]