Anyone have the inside scoop on what went wrong here? It seems the GL escalation was fixed so the ±25MM increase should have been predictable.
I've heard of massive loses but heads must be rolling for this...
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When I heard that it sold for $150MM, all I could think of was this article on bloomberg last month on valuing trophy assets. https://www.bloomberg.com/news/articles/2019-01-10/chrysler-building-sa…
Per the article, "Recent sales of other large office buildings nearby have gone for around $1,000 per square foot to $1,500 per square foot, according to Jim Costello, senior vice president of Real Capital Analytics. Applying that math to the 1.2 million-square-foot Chrysler Building would lead to a valuation of $1.2 billion to $1.8 billion, though it could be worth less since a deal probably wouldn’t include the land".
Yeah just a little "less"
"Buildings that enjoy this extraordinary level of notoriety will always enjoy a substantial emotional premium and therefore the arithmetic is only a portion of the valuation equation"
Substantial emotional premium lol.
So, moral of the story is real estate valuation is a lot more art than science.
Hah. The moral of the story is to always ask who is doing the valuation, and who is paying them for it
Agreed. Some firms may view it as a marketing play too. When they go to fundraise in the middle east they can say we own the best real estate in the united states. Do they? depends on how you define best I guess, but oil money might buy off on it.
I've seen a NYC Trophy building underwriting from 2007. Lets just say that even today in 2018 rents aren't even close to what the Year-2 Proforma predicted rents would be 2009.
And yeah when you have a GL under you and you never hit proforma ever you get wiped out.
Okay so that was my assumption. Like most, Tishman/ADIA did not foresee the GFC looming and underwrote aggressive rent growth in the near-term and 3% in perpetuity.
That being said, I just don't understand the risk assessment of this acquisition. You KNOW the GL payment increases to $32MM in 2018. A ~$25MM increase / reduction of NOI. Okay, so at a 4.75 cap (arbitrary but I bet not far off) the asset will decline in value by ~$525MM in 2018 should all else remain the same.
(this is the point where I figure out that their investment thesis probably wasn't THAT bad and I am an idiot for being over dramatic)
I can only assume rents were substantially below market when ADIA bought their interest. Market rent at the property was ~$93/SF in 2018. I guess if one were to be successful in marking-to-market the rent roll then the asset would be worth between $1.6-1.8B in 2018 even with the GL pmt increase (assuming 0% market rent growth).
However, that didn't happen and instead the world was hit with the worst financial crisis in history. Rents declined and never rebounded to previous cycle highs. Apparently rent is about $71/SF at the property today.
Great case study. Men / Women, understanding where we are in a cycle is very important.
Yep, and as soon as you resign tenants during the GFC at flat rents you miss the crazy proforma increases and 2% bumps off the crazy increase a few years later you end up in the situation they are in now, they knew it was coming but their hand wasn't forced until now.
If I were them I would've spent from the day you resigned tenants without those increase talking to all the parties with an interest loans/GL to try to restructure a deal to stay alive in the deal.
@ThatGuyBalls - just point of clarification, ADIA was not involved in the transaction. “ADIC” was involved and is a separate organization.
Good points in your post overall.
The moral of the story is not to understand the cycle and trying to time the market. That is exactly what the 'smart money' in this situation thought they were doing, and I think a fool's errand most of the time. The moral of the story is to ALWAYS underwrite to your worst case/base case scenario, because if you are able to do this, you control your destiny. Remember, money in RE is made on the buy. Once you buy, you have ultimate control on when to sell unless you've mis-calculated your ability to hold the real estate through a downturn (as was the case here).
Good lord
I bet the position RFR just bought is worth closer to 0 without restructuring the GL or Debt. Think about it, probably negative cash flows coming out of the building by paying that ground lease/DS, Tishman's 10% is probably Mezz/Pref Equity. That just ticking away making it impossible for the 90% position to ever see a dollar unless they turn it around. Then if you were to turn it around you need to fund 90% the CapEx and TIs required in office to not get diluted out for failure to post you pari-passu capital call.
That $800M has had that pref ticking away, the time bomb of GL reset, and deffered maintenance and TI requirements before they will see a penny. A $650M haircut to Purchase price is a good out for them to avoid bankruptcy on their records before they just gave the keys back to the bank I would be stoked to get out for 20 cents on the dollar and they probably already wrote it down to 0.
Hotel conversion, RXR had the same plan.
Are NYC hotel conversions the new Condo conversion?
Hotel market is saturated but fundamentals remain strong. People still believe they can bring something new to the NYC market (Moxy, Public, Equinox, Six Senses, etc). Chrysler building is unique and I think it would do well partly as a high end hotel, especially with RFRs hospitality track record. I actually think the high end hotel segment needs a revamp. NYC has had the same high end hotels for a long time while the lower to mid segments have had a rush of new brands/concepts. OKOs condo/hotel conversion (Aman) of the Crown building is addressing that "need" and its what should have been done with Alchemy's Woolworth conversion instead of trying to sell a 100MM+ penthouse.
First of all, the ground rent was not fixed. The ground lease, as like many inked through the mid 1900s, consist of FMV resets throughout the term of the lease which effectively reset the ground lease payment to a % of a fair market value as determined by recent land trades in the area. The issue with this reset is that it effectively gives the ground lessor participation in the upside of the property. So in theory, the more rents went up in the property and surrounding area, the more the land is worth, and thus the higher the reset will be when it hits. This is a pretty common thing term of ground leases struck in the previous century which is causing A LOT of problems given the reality that land in certain parts of Manhattan is trading for almost $1,000 /FAR. These resets are essentially ticking time bombs that only get worse as condo prices continue to soar and land pricing continues to remain at historically outlandish levels. When many of these leases were cut, no one imagined the kind of pricing that became a reality. Almost all ground leases cut in today's environment escalate at either one of two ways (1) fixed % esclations (2) GL payments indexed to either projected future NOI or EGR.
Unfortunately, the Chrysler building is the first, of many, leasehold deals that are essentially underwater by a looming FMV reset.
Thanks for clarification. One of the articles I read was a bit misleading with respect to GL escalations.
Guess I'm the only one here that actually underwrote it... so much misinformation going around.
Two things: (1) Tishman recapped with ADIA based on a pre-crisis proforma - you can guess the MLA and (2) free market resets are NOT your friend.
So Tishman sold of 90% of its stake in the building for 800M? Then ADIA took a $650M loss?
We UW it too but haven't cared enough to dig in.
Wasn't the ground lease a market reset? I don't think it was a fixed step. The fixed steps are set for the future, after this last FMR reset.
Still don’t understand why tishman and Abu Dhabi would buy the asset when they know about the GL payments. Did they not run a sensitivity analysis with more conservative underwriting assumptions?
Who buys an asset at 800m to sell it at 150m?
As outlined in my previous post, I think they had expected an exit north of $1.5B. Consider this comment conjecture.
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