Boston Properties to Buy Macklowe’s Debt-Ridden 510 Madison Ave. in NYC for $280.5M

Lender issues, lawsuits, a vacant tenant roster and a fire. A boatload of problems have surrounded the brand-new office building at 510 Madison Ave. in Midtown Manhattan, but change is in the air now that Boston Properties has committed to acquiring the fee title to the 350,000-square-foot office building.

August 23, 2010
By Barbra Murray, Contributing Editor

Courtesy Flickr Creative Commons user laverrue

Lender issues, lawsuits, a vacant tenant roster and a fire. A boatload of problems have surrounded the brand-new office building at 510 Madison Ave. in Midtown Manhattan, but change is in the air now that Boston Properties has committed to acquiring the fee title to the 350,000-square-foot office building. The Boston-based REIT will fork over $280.5 million to an affiliate of the 30-story office structure’s developer, Harry Macklowe of New York City’s Macklowe Properties.

Originally conceived as a condo-hotel property, 510 Madison sits in Midtown’s Plaza District. SLCE Architects and Moed de Armas & Shannon Architects designed the boutique office building with assistance from Harry Macklowe. The price tag on 510 Madison represents the equivalent of the total principal and accrued interest on the premier property’s debt, which consists of a senior mortgage loan and a senior mezzanine. There had been a junior mezzanine loan attached to the asset, but Boston Properties acquired the debt at a discount from a third party for $22.5 million in an all cash deal on August 10.

Bad luck found 510 Madison before its completion. There was the fire that broke out at the building in February 2009 and then there was the lawsuit involving hedge fund Jay Goldman & Co., which had pre-leased space in late 2007 under a 10-year agreement.

Completion of the building brought no relief. Although it carries the distinction of being the Plaza District’s only new office facility, 510 Madison was erected at a time when the Manhattan office market–and every other major metropolitan office market across the country–had taken a plunge. And there’s more. SL Green Realty Corp., Manhattan’s largest office landlord, acquired some of 510 Madison’s debt late last year, and a few months ago, made a move to foreclose on the property.

The origination of the deal for Boston Properties to acquire 510 Madison had much to do with its history with Macklowe; in 2008, the REIT formed a joint venture to acquire Macklowe’s 2 million-square-foot General Motors Building in New York City for approximately $2.8 billion. “The relationship we have with Harry Macklowe did help us,” Arista Joyner, Investor Relations Manager with Boston Properties, told CPE. “It’s a great building with a great design and it will fit nicely in our portfolio.” That portfolio includes neighboring 540 Madison. “The properties are different, but we looked at the acquisition of 510 Madison with more of a comparative type analysis to 540 Madison.”

While a deal for Boston Properties to take full ownership of 510 Madison is in place, Harry Macklowe will not end his involvement with the property once the transaction reaches completion. When Boston Properties takes over the reins, Macklowe will maintain a connection as a project consultant/advisor and Co-Chairman of the Marketing and Leasing Advisory Committee for 510 Madison.

With nary a name on the tenant roster, Boston Properties will have its hands full in its attempt to lease up 510 Madison, but the REIT is not in the least intimidated by the building’s vacancy or the market. “It’s a premier building with a great location and great amenities, so we’re very excited about it,” Joyner said. “Once the transaction closes, we’re going to go out and market it and lease it up. It typically takes 12 to 18 months to lease up a project like this.”

If it can be done, Boston Properties, which will keep real estate services firm CB Richard Ellis Inc. onboard to handle marketing, may very well be the one that can do it, if history is any indication. Doug Linde, president of Boston Properties, spoke on the issue of the company’s track record during its second quarter earnings conference call on July 28. “Since 2005–and I use 2005 as our benchmark, because that’s really when we started seeing the last major recovery in the office business–Boston Properties has averaged about 4.3 million square feet of leasing per year, and about 1.6 million square feet in the first six months of any one of our calendar years,” he said. “So, to date in 2010, we’ve completed 2.5 million square feet of leasing, obviously, way above trend.”

Linde attributes Boston Properties’ leasing successes to, among other factors, its strategy of owning and operating premier assets designed to accommodate customers’ needs. But it’s more than its high quality portfolio that bolsters the REIT’s confidence. “Many of the companies that value the physical attributes of our buildings, our operating expertise, our financial strength and our stability, are also businesses that think about expansion or consolidation in our assets during challenging economic environments,” he noted.

The transaction is on track to close on September 1.