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Partial Stakes Are Changing The Way Office Buildings Are Bought And Sold In NYC

The office buildings at One Worldwide Plaza, 230 Vesey St. and 1515 Broadway all have one thing in common: Their owners are shopping them around, looking for buyers of non-controlling ownership stakes as a way to capitalize on their growing value.

11 Madison Ave., where Credit Suisse leases 1.2M SF for its U.S. headquarters.

As confidence in the economy grows, landlords want to monetize and keep control of their assets, while new investors eye an opportunity to enter the real estate market alongside a local expert who knows the best way to manage a building. Both parties in a partial interest sale are looking for a way to take advantage of tax rules that incentivize dividing a building's ownership, rather than selling it entirely.

Combined state and local commercial property transfer taxes stand at 3.025% in Manhattan for sellers of controlling stakes. Landlords avoid this tax completely when they sell 49% or less of their properties.

"There is a record amount of uncommitted capital, there is limited property and low interest rates," JLL managing director Glenn Tolchin said. "These three factors mean there is an opportunity for partial sales."

CBRE released a survey this week finding there is as much as $1.7 trillion in "dry powder" investment funds to deploy in real estate this year.

Of all Manhattan office sales worth $10M or more in 2016, 28% were partial stakes in buildings, a jump from 17% in 2014, according to JLL. That increase was even more profound for Manhattan hotels: In 2014, partial stake sales made up 5% of hotel transactions of $10M or more. In 2016, nearly a quarter of all major hotel sales were partial stake transactions.

In January, Tolchin and JLL managing director Anthony Ledesma brokered Paramount Group and Savanna's purchase in a minority stake in Harbor Group International's 55 Broadway, valuing the building at $215M.

Ledesma said that the success of closing a partial deal comes down to creating a balancing act. On one side, taking into account the economic interests of the partners. On the other, putting in place new control mechanisms in the joint venture that lead to the smooth execution of the agreed-on business plan.

"This is an opportunity for operators to take some chips off the table," Ledesma said, "while simultaneously elongating the business plan and retaining future upside in the property."

JLL's Bob Knakal, speaking at a Bisnow event in 2016.

Tolchin sees the increase in partial sales in a positive light. Real estate investors are looking for more creative ways to enter a building's capital stack, Tolchin said, an indication that the market has changed.

Tolchin also cannot envision the trend reversing, at least until the end of 2017.

"New York would have to become an unattractive place to invest for the trend to reverse," Tolchin said. "We don't really want to think about that."

Among the factors driving the increase in partial stake sales, Cushman & Wakefield New York investment sales chairman Bob Knakal said many institutional investors and sovereign wealth funds are adopting their own rules against owning controlling stakes of their investments. That makes buying 49% or less of an office building their only option to enter the real estate investment market.

Knakal said that he has also noticed a trend of partial sales replacing sales of full office buildings, especially in the market of investment-grade office space.

"It is hard for anyone to find high-quality office buildings on the market sold as full buildings anymore," Knakal said.

Twelve of the top 20 investment sales of 2016 were partial stakes, according to The Real Deal. The biggest minority buyer of 2016 was the Hong Kong Monetary Authority, which put up $1.15B for a 49% stake in the Salesforce Tower at 3 Bryant Park from Canada's Ivanhoé Cambridge and Callahan Capital Partners in August.

That move was days before SL Green sold a 40% stake in 11 Madison Ave. to Prudential's PGIM real estate group for $480M, with PGIM also assuming a portion of the office tower's debt in the deal.

At the end of 2016, China Investment Corp., a Chinese sovereign wealth fund, purchased a 45% stake in the former McGraw-Hill building at 1221 Sixth Ave. using Invesco as the middleman in a $1B deal valuing the 50-story, 2.6M SF building at $2.3B.

With minority stakes in One Worldwide, 230 Vesey and 1515 Broadway on the market for a combined asking price close to $4.5B, 2017 is already shaping up to be another huge year for this growing piece of the Manhattan investment sales puzzle.