Feldman Equities

Commercial Real Estate; Trusts Are Making Strides As Investors In New York Buildings

By John Holusha

During the early part of this decade, Lawrence H. Feldman, chairman of what was then called Feldman Equities, was anguishing over missed opportunities. He could see that there were Manhattan buildings that could benefit from his upgrading formula available at attractive prices.

But nobody was eager to finance a purchase in a market where vacancies were increasing and rents were falling. "In the early 90's we were frustrated because we couldn't buy the assets we wanted," Mr. Feldman said at a recent real estate conference at Baruch College.

Today, access to capital is much less of a problem. Mr. Feldman is chairman of Tower Realty Trust, which sold more than $350 million in shares to the public last October and has a $200 million line of credit from Merrill Lynch & Company to go shopping with.

Tower is a real estate investment trust, a tax-sheltered company that invests in and holds real estate. REIT's (pronounced REETS) have been a major factor in national real estate markets for most of the 90's, acquiring tens of billions of dollars of assets like suburban shopping centers, office buildings and residential structures.

But until last year, they had been largely absent in New York, which industry executives say was due in part to a state capital gains tax that has since been eliminated and to the sheer size of the properties in Manhattan. Because Manhattan skyscrapers sell for scores or even hundreds of millions of dollars, such an investment would have represented too large a portion of a REIT's assets. But now that some REIT's have grown so large, even a Manhattan building is a relatively small part of its portfolio.

That changed last year. Vornado Realty Trust of Saddle Brook, N.J., acquired many of the properties owned by the Mendik Company and went on a buying spree that included the $420 million 1 Penn Plaza building, which occupies the block bounded by Seventh and Eighth Avenues and 34th and 33d Streets.

In addition, another Manhattan-oriented company, S. L. Green Real Estate, formed a REIT and sold shares, as did Boston Properties, which is controlled by Mortimer Zuckerman. Financial experts say they expect the trend to continue, with privately held real estate increasingly transferred to public ownership. Still, REIT's are a small factor in the city, with Mr. Feldman estimating that they own no more than 45 of the about 1,200 major commercial buildings in New York.

"There are great opportunities in Manhattan office properties," W. Blake Baird of the investment firm of Morgan Stanley said. "We are going to see the recapitalization of assets in New York City and Manhattan. It will be a major change."

Mr. Feldman said his new status would not change the company, other than to give it a greater ability to move quickly when opportunity knocks. "We are real estate developers," he said. "We buy distressed properties and upgrade them." He said that with the national economy strong and most real estate values recovered from the lows of the early 90's, the last bargains are in the concentrated office canyons known as central business districts, like midtown and downtown Manhattan.

Central business districts, he said, are "the last recovery zone." In New York, he added, "downtown is the last place you can buy below replacement costs."

Steven L. Green, the chairman of S. L. Green, said the REIT structure should be more stable and better for tenants than private ownership. "If you have 85 to 90 percent debt, you don't have the money to make improvements and do other things to make tenants happy when the market goes down," he said. As a result of its public offering, he said , his company has only 12 percent debt and is not inclined to go above 30 percent, leaving a substantial cushion to the downturn that history suggests is inevitable sometime in the future.

"Tenants are better off in REIT-owned buildings," Mr. Green said. "Brokers will put tenants in buildings with stable ownership," he said, because tenants typically blame their brokers if problems occur with a new landlord.

Not everyone holds this view. Anthony Downs, a real estate specialist and senior fellow at the Brookings Institution, contends that because managers of publicly owned REIT's want to continuously improve earnings and dividend payouts, they have an incentive to reduce or defer capital spending. "Over time, this could reduce the quality of the nation's inventory of commercial properties if a large fraction of them become owned by public REIT's," he wrote in the current issue of Wharton Real Estate Review.

Nevertheless, David Csontos, a managing director of Insignia Capital Advisers, said REIT's were inherently more stable than private companies because it costs them less to borrow money. Insignia is an affiliate of Insignia Financial Group, which also owns the Edward S. Gordon brokerage and management company in New York.

Mr. Csontos said REIT's could borrow for as much as 3 percentage points less than a private developer or owner, giving them a powerful advantage. But, he said, private companies, which do not have the burden of the detailed reporting requirements of a public company, will probably continue to develop new properties. "At the end of the day, the world will probably be divided into developers and landlords, with the REIT's as landlords," he said.

One of the powerful attractions of the REIT form of ownership is that it offers partnerships that own portfolios of property -- partnerships that are typically owned by families, some of whose members have reached retirement age -- a means of shifting to a more liquid form of ownership, without having to pay capital gains taxes. Scott Rechler, president of Reckson Associates Realty Corporation, said becoming a real estate investment trust enabled the company to liquidate partnerships established by his grandfather more than 40 years ago.

	Back Commercial Real Estate; Trusts Are Making Strides As Investors In New York Buildings By John Holusha Copyright 1998 The New York Times Company The New York Times January 21, 1998, Wednesday, Late Edition - Final During the early part of this decade, Lawrence H. Feldman, chairman of what was then called Feldman Equities, was anguishing over missed opportunities. He could see that there were Manhattan buildings that could benefit from his upgrading formula available at attractive prices. But nobody was eager to finance a purchase in a market where vacancies were increasing and rents were falling. "In the early 90's we were frustrated because we couldn't buy the assets we wanted," Mr. Feldman said at a recent real estate conference at Baruch College. Today, access to capital is much less of a problem. Mr. Feldman is chairman of Tower Realty Trust, which sold more than $350 million in shares to the public last October and has a $200 million line of credit from Merrill Lynch & Company to go shopping with. Tower is a real estate investment trust, a tax-sheltered company that invests in and holds real estate. REIT's (pronounced REETS) have been a major factor in national real estate markets for most of the 90's, acquiring tens of billions of dollars of assets like suburban shopping centers, office buildings and residential structures. But until last year, they had been largely absent in New York, which industry executives say was due in part to a state capital gains tax that has since been eliminated and to the sheer size of the properties in Manhattan. Because Manhattan skyscrapers sell for scores or even hundreds of millions of dollars, such an investment would have represented too large a portion of a REIT's assets. But now that some REIT's have grown so large, even a Manhattan building is a relatively small part of its portfolio. That changed last year. Vornado Realty Trust of Saddle Brook, N.J., acquired many of the properties owned by the Mendik Company and went on a buying spree that included the $420 million 1 Penn Plaza building, which occupies the block bounded by Seventh and Eighth Avenues and 34th and 33d Streets. In addition, another Manhattan-oriented company, S. L. Green Real Estate, formed a REIT and sold shares, as did Boston Properties, which is controlled by Mortimer Zuckerman. Financial experts say they expect the trend to continue, with privately held real estate increasingly transferred to public ownership. Still, REIT's are a small factor in the city, with Mr. Feldman estimating that they own no more than 45 of the about 1,200 major commercial buildings in New York. "There are great opportunities in Manhattan office properties," W. Blake Baird of the investment firm of Morgan Stanley said. "We are going to see the recapitalization of assets in New York City and Manhattan. It will be a major change." Mr. Feldman said his new status would not change the company, other than to give it a greater ability to move quickly when opportunity knocks. "We are real estate developers," he said. "We buy distressed properties and upgrade them." He said that with the national economy strong and most real estate values recovered from the lows of the early 90's, the last bargains are in the concentrated office canyons known as central business districts, like midtown and downtown Manhattan. Central business districts, he said, are "the last recovery zone." In New York, he added, "downtown is the last place you can buy below replacement costs." Steven L. Green, the chairman of S. L. Green, said the REIT structure should be more stable and better for tenants than private ownership. "If you have 85 to 90 percent debt, you don't have the money to make improvements and do other things to make tenants happy when the market goes down," he said. As a result of its public offering, he said , his company has only 12 percent debt and is not inclined to go above 30 percent, leaving a substantial cushion to the downturn that history suggests is inevitable sometime in the future. "Tenants are better off in REIT-owned buildings," Mr. Green said. "Brokers will put tenants in buildings with stable ownership," he said, because tenants typically blame their brokers if problems occur with a new landlord. Not everyone holds this view. Anthony Downs, a real estate specialist and senior fellow at the Brookings Institution, contends that because managers of publicly owned REIT's want to continuously improve earnings and dividend payouts, they have an incentive to reduce or defer capital spending. "Over time, this could reduce the quality of the nation's inventory of commercial properties if a large fraction of them become owned by public REIT's," he wrote in the current issue of Wharton Real Estate Review. Nevertheless, David Csontos, a managing director of Insignia Capital Advisers, said REIT's were inherently more stable than private companies because it costs them less to borrow money. Insignia is an affiliate of Insignia Financial Group, which also owns the Edward S. Gordon brokerage and management company in New York. Mr. Csontos said REIT's could borrow for as much as 3 percentage points less than a private developer or owner, giving them a powerful advantage. But, he said, private companies, which do not have the burden of the detailed reporting requirements of a public company, will probably continue to develop new properties. "At the end of the day, the world will probably be divided into developers and landlords, with the REIT's as landlords," he said. One of the powerful attractions of the REIT form of ownership is that it offers partnerships that own portfolios of property -- partnerships that are typically owned by families, some of whose members have reached retirement age -- a means of shifting to a more liquid form of ownership, without having to pay capital gains taxes. Scott Rechler, president of Reckson Associates Realty Corporation, said becoming a real estate investment trust enabled the company to liquidate partnerships established by his grandfather more than 40 years ago. Return To Top
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