AT 666 FIFTH, THE DEVIL’S IN THE DETAILS – AND THE DETAILS DON’T ADD UP

[3/16/17]  The deal that put Jared Kushner TRData LogoTINY on the map also nearly destroyed him. In January 2007, his family firm, Kushner Companies, paid a then-record $1.8 billion for 666 Fifth Avenue, a 41-story office-and-retail tower that was the firm’s first major asset in Manhattan.

“In this particular transaction, we bought really the center of the world,” Kushner told The Real Deal in October 2007, a few months after the purchase. “It doesn’t get any better than that.”

Things went south from there. Critics had slammed the deal for being overleveraged – cash flow at the time of the purchase covered only 65 percent of the debt service – and indeed, Kushner eventually needed to work out a deal with the lenders and bring in Vornado Realty Trust as a partner in order to hold onto the asset.

All through the ordeal, he kept the faith. And if one read Bloomberg’s piece from Monday about an impending deal to bring Chinese insurer Anbang into the tower at terms highly favorable to Kushner Companies, it’d be easy to view the transaction as a home run for the firm and for its partner, Vornado.

According to Bloomberg, Anbang agreed to pay Kushner Companies $400 million and assume the lion’s share of the burden of redeveloping the building, adding luxury residential condominiums to the upper floors and revamping the retail. Anbang would seek a construction loan of over $4 billion for the project, according to the story, and Kushner Companies, which committed to a $750 million investment in the tower’s retail portion, would retain a 20 percent stake in the property. Vornado would walk away with a fat profit.

Several market observers, however, told TRD that the numbers, no matter how they’re spun, just don’t make sense. Some even questioned Anbang’s commitment to the property, saying the news reports could serve as a way for Kushner Companies to court other interested investors even if the Chinese insurer walks away.

“The capital stack [for 666 Fifth],” said one luxury condo developer active in the market, “is insane.” The investor documents obtained by Bloomberg estimate that the completed redevelopment will be worth $7.2 billion. For the project to pencil out at those numbers – even assuming very rosy projections for the office and retail components – the partnership would have to be underwriting the condos at an average of up to $9,000 per square foot, the developer said. That’s a price not even the most ostentatious of the current crop of buildings has come close to – 432 Park Avenue, for example, was asking an average of $6,894 per square foot, according to an analysis by TRD in January 2014.  And it’s had to offer significant discounts to buyers.