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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

Citadel’s 425 Park Ave : An Iconic Real Estate Investment? Referred to as the “Seagram building of the 21st century,” 425 Park Avenue is the first new full-block office development on Park Avenue in over half a century (Bubny).

Seagram Building (35098307116).jpg
Seagram building

Anchored by Citadel, the state-of-the-art skyscraper contains 667,000 square feet of total leasable area with floor-to-ceiling windows overlooking the Midtown Manhattan skyline, which was designed by starchitect, Lord Norman Foster.

It stands 897-feet tall with 47 stories.

Partitioned into three distinct tiers: the Avenue Floors, Skyline Floors, and Park Floors, which are located on floors 8 through 11, 15 through 25, and 28 through 47, respectively (425 Park Avenue).

Each tier creates a setback, which is distinctly separated by a triple-height space enclosed by a diagrid of columns (425 Park). At the very top of the skyscraper is a set of three tall ornamental fins, which adds an overall aesthetic to the building. At night, these fins are illuminated through LED panels. 425 Park is conveniently located between East 55th Street and East 56th Street with 200.83 feet of frontage facing Park Avenue, which spans an entire block (NYC Planning ZoLa).

Chef Daniel Humm will operate his flagship fine-dining restaurant called Four Twenty-Five, on the first three floors of the skyscraper.

Located on the 26th floor, on the building’s second setback, is The Diagrid Club; which offers amenities for tenants such as a wellness center, hospitality by Daniel Humm, an outdoor gathering space, and a peaceful and meditative garden installed by Yayoi Kusama called the Narcissus Garden (Construction Tour: 425 Park Avenue). The garden will have 500 mirrored, stainless steel globes, inspired by the Italian Pavilion at the 33rd Venice Biennale in 1966.

The wellness center, along with the building’s design and wellness programs, makes 425 Park the first WELL-certified office building in New York City. Backed by medical research, WELL standards are focused on the “built environment,” due to the fact that “most people spend 90% of their time inside a box” (Margolies). Anything from clean air (to help improve cognition) to sunlight and physical exercise.

WELL’s seven standards include air, water, nourishment, light, fitness, comfort, and mind.

These standards concentrate on the design of the building to essentially help maximize tenants’ mental and physical well-being. Furthermore, the office skyscraper has LEED-Gold certification. Based on a point system, LEED evaluates a building’s materials—to measure environmental sustainability—the construction process, operational efficiency—to reduce operating costs and thus decrease a building’s carbon footprint—human comfort, air quality, and human health features (LEED v4.1).

The renowned asset management firm and hedge fund, Citadel Enterprises, is the anchor tenant occupying 331,800 square feet of the premises.

Citadel will occupy 16 floors. Including a three-story diagrid floor which contains a mezzanine on the 14th floor (with 20-foot-high ceilings overlooking the 12th floor trading area).

Citadel will also occupy the penthouse office floor as well (Weiss, Citadel Set to Move). Citadel is paying a New York City record high of $300 per square foot for the top two floors (penthouse offices) and $200 per square foot for the remaining fourteen floors (Clarke).

Conversation With NYU Schack Institute Of Real Estate Director Dean Sam Chandan

Initially, the hedge fund signed a lease for 211,400 square feet in 2016, but then expanded an additional 120,000 square feet in 2019, now occupying just under 50% of the building (Gourarie). After two years of leasing inactivity, as of May 2021, 425 Park found its second office tenant, Hellman & Friedman (TRD Staff, Private Equity Firm).

The private equity firm signed a 15-year lease and took up two floors totaling 27,800 square feet. If L&L Holdings Chairman and CEO, David Levinson, forecasts are accurate, an additional 100,000 SF of leasing activity this year can effectively put the office skyscraper at almost 70% occupancy. In fact, he is currently incentivizing prospective tenants to explore 425 Park, as they are offering discounted rents, with expectation of prices to increase later this year or into 2022 and beyond (Schulz).

But before the original 425 Park Avenue building was an office building, the site was home to many Midtown residents.

Robert Goelet developed several four-story apartment complexes between 55th and 56th streets in 1871 (Trager). Robert’s father, Peter Goelet, was an ultra-wealthy 19th century ironmonger and merchant who allocated profits gained from the Revolutionary War to acquire Manhattan real estate (Clarke). In fact, their $60 million fortune is valued at over $1.5 billion in today’s dollars.

When World War II ended, the first 425 Park Avenue building was built. What inspired this large project was the growth and demand of office space on Park Avenue in Midtown Manhattan, accompanied by the newly built Lever House in 1951, then followed by the Seagram Building and 425 Park Avenue in 1957. 425 Park was developed by S. Mitchell and Milton Horowitz (Ogorodnikov). The 32-story building was designed by Kahn & Jacobs and stood next to iconic buildings such as the Universal Pictures Building and the Ritz Tower.

Fast forward to 2004, the current descendants of the Goelet family, which comprises three brothers, underwent a family dispute (Clarke). This dispute was between two of the brothers which led to one of them selling their interest in the fee position. As a result, L&L Holding acquired the 33% stake from one of the brothers in an off-market transaction.

Wharton Professor Gilles Duranton, Wharton’s Dean Chair of Real Estate : A Profile
Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

Since inception in 2000, L&L owned and managed properties off of Madison Avenue and Broadway. But desired to own a piece of the world’s most prestigious buildings on Park Avenue. When they purchased a piece of the ground, their main intent was to eventually develop a modern and iconic skyscraper. As they saw an opportunity to redevelop an older office building. In fact, an HFF broker arranged a $556 million construction loan for the project. The original plan was to demolish the entire building.

Interestingly, back in 1995, the owners (ground lessees) renegotiated two of the building’s largest tenants’ leases and mortgages (Slatin).

Citibank (which took 125,00 square feet) and law firm Kaye Scholer Fierman Hays & Handler (which occupied 280,000 square feet). Both agreed to stay in the building until 2015, both signing 20-year leases.

The landlord was essentially able to match the leases for their two largest tenants with the ground lease expiration date. This was a tactful move from the landlord. As when the “smaller” tenants moved out (or their leases rolled over), the building was still able to produce cash flow up until the expiration of the ground lease.

More importantly, the leases (up until 2015) were not staggered over several years, which would effectively avoid delaying a potential development for the new owners. The timing and the likelihood that these two leases were tied to the ground lease expiration date was rare and unprecedented, which favored L&L Holding. They were not at risk of having to buy out the tenants or delaying any more time. And could therefore start putting shovels in the ground by 2015.

Additionally, in 2004, the old office building was not in the greatest condition.

A fire caused the electrical system to fail, which cut power to the upper floors. The landlord decided to use a giant extension cord to remediate this issue, as a temporary fix (Clarke). At the time, there is a strong reason to deduce that L&L had an opportunity to not only receive steady cash flows from the current landlord/operator in partnership with two of the Goelet brothers. But, also to provide value by envisioning a much-needed modern office skyscraper in one of the most prestigious corridors in the world when the ground lease expired.

Unfortunately, the deal did not go as L&L planned. In fact, it went in the wrong direction. The remaining 2 Goelet brothers squeezed L&L out of the deal to acquire their 33% ownership stake. Evidently, the brothers’ main intent was to strategically push the third brother out, using L&L as the scapegoat; rendering the development project (along with the secured construction loan) dead at the time.

However, in 2006, the Goelet brothers marketed a second ground lease in preparation for the current lease to expire in 2015.

L&L partnered with the Lehman Brothers and competed against renown developers such as Tishman Speyer, Boston Properties, Beacon Capital, Vornado Realty Trust, and the Durst Organization; and ended up winning the bid (Clarke). L&L had a unique strategy. They went against their attorneys’ advice by making a large upfront payment in the deal.

David Levinson speculated that the two brothers wanted their cash back fast, from the 33% stake that they bought out a few years prior. Furthermore, L&L agreed to pay substantially higher rent than the other bidders. For the period where they would hold the existing ground lease, realizing the value that a Park Avenue development site brings (Wells Hill Partners). The deal was inked and L&L settled on an 84-year (second ground) lease worth $320 million.

One in which they would pay a fixed rent for 39 years.

With a rent reset occurring 45 years thereafter on the new ground lease (or master lease); while still collecting rent from the original ground lease from the “most current” (older) building up until 2015—this 9-year overlap between the old and the new building is referred to a “sandwich lease.” (Clarke). Of the $320 million, Lehman Brothers wrote a 90% equity check and L&L wrote the remaining 10% (Sumner, David Levinson’s L&L Pushes Start Button).

Aside from dealing with family drama (between the Goelet family) to finally close the deal a second time, Levinson’s first ever development project had to overcome another hurdle: the GFC. While Levinson was on a trip with his wife in Paris, he received news that Lehman Brothers, one of the largest investment banks that had over $680 million of assets under management, was filing for Chapter 11 bankruptcy (Clarke). Yet despite Lehman’s troubles, it refused Levinson and Lapidus’ offer to buy out their 90% ownership stake at a steep discount. In fact, they continued to pay its financial obligations for the project throughout the restructuring process (Clarke).

Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

Interestingly, this was Lehman’s one of their two real estate projects they continued to fund in New York City post-crisis. The other asset was another L&L-owned-and-managed investment at 200 Fifth Avenue; while the several other investments that Lehman defaulted on left many investors’ and developers’ projects to go under, which was a common theme during the crisis. It can be speculated that Lehman Brothers were just as bullish on a new office product off of Park Avenue, which shared L&L’s sentiment.

But instead, Lehman crafted a strategic JV agreement that protected the downside of a defaulting partner.

Why Lehman Brothers? Should Lehman have been saved?

Ironically, Levinson recalled his lawyer asking him how he was able to let Lehman receive favorable default provisions in the agreement. In fact, Levinson responded, “Do you think we thought they were the ones more likely to go bankrupt?” (Clarke). The likelihood of a 158-year-old investment bank defaulting first to an 8-year-old real estate investment firm working on their first development project is unprecedented.

Another misalignment of interests occurred throughout the pre-stages of development. When acquiring the new ground lease in 2006, L&L made it clear that they were interested in owning the “management fee” position of 425 Park Avenue one day.

Despite the Goelet family assuring that they have no interest in selling the fee, in 2011, they went off-market and sold it to the major pension fund, TIAA-CREF, for $315 million (Clarke). TIAA-CREF was essentially L&L’s landlord for the remainder of their ground lease. As the Goelet family ended their interest in the 425 Park Avenue site, it can be speculated that L&L will not have to prepare for any more surprises from the family.

Despite many of these hurdles that L&L faced throughout the pre-development stage, there was one bright light shining at the end of the tunnel: they were able to land Foster + Partners to create a state-of-the-art skyscraper the year prior (Hlavenka).

Top four (starchitect) finalists: top left: Zaha Hadid Architects (669 feet tall, 40 stories), top right: 

OMA (648 feet tall, 38 stories), bottom left: Rogers Stirk Harbour + Partners (665 feet tall, 44

stories), bottom right: Foster + Partners (687 feet tall, 41 stories) (425 Park Architecture).

In 2013, another trade in ownership occurred: Lehman Brothers sold their 90% stake to Sonny Kalsi of GreenOak Real Estate (now BentallGreenOak) and a group of wealthy investors for $140 million, which imputes a 52% discount to their initial investment in 2006.

Eventually L&L brought in Tokyu Land Corporation, a Japanese real estate firm, as their co-developer.

To summarize the “wrap lease,” from 2006 until 2013, L&L and Lehman were the ground lessees during the pre-development stages. But from 2013 through 2090, BentallGreenOak and Tokyu Land Corporation supplanted Lehman’s ownership stake. During that period, from 2004 through 2011, the two Goelet brothers were the ground lessors up until TIAA-CREF took the entire stake from 2011 through 2019.

Throughout multiple changes in ownership structure, since 2006, L&L and their respective partners had to persevere through negative cash flows. The rents that they were collecting from the old building (from the original ground lease, which expires in 2015) was not enough to pay the ground lease owed to the Goelet’s. To make matters more complicated, in quarter four of 2013, L&L faced another major hurdle in their planned development.

To give context, the year prior in 2012, developers were optimistic that Mayor Bloomberg’s East Midtown rezoning proposal would allow them to build 60% more space without the lengthy approval process.

But in the following year, during Mayor Bloomberg’s final year in office, the City Council killed his rezoning proposal. The proposal would have allowed for more modern and taller skyscrapers (to replace older products). With the main intent to allow New York City to stay economically competitive by attracting new companies and businesses (Chung). This took a hard hit on L&L. As they envisioned building a larger skyscraper that would allow them to finish at a much faster pace.

Their original plan was to demolish the entire building and to erect a much larger one.

But they were limited to only 580,000 square feet. Luckily, they found a loophole in the existing 1961 Zoning Resolution. That is, since the building was built in 1957, a few years before the legislation was passed. L&L was allowed to keep the building’s original square footage of 670,000 square feet.

As long as it kept 25% of its core, L&L can avoid the high probability of rejection from applying for a special permit to the Department of City Planning (Clarke). Said differently, the loophole would allow L&L to keep its current square footage. As long as it kept 25% of the building’s leasable area intact—from an FAR of 15 up to 18.

Although, from a construction and design perspective, the zoning loophole made the project extremely difficult to build for Foster + Partners. They were relying on old building plans from the 1950s and due to the meticulous nature of construction—where a column cannot be an inch off. It was deemed to be one of the most complicated jobs a subcontractor could ever work on (Clarke). Additionally, it was more costly and timely, as retaining the original steel of the building adds an additional $50 million and 6 months to the construction schedule, respectively.

In 2015, the original 60-year ground lease expired, along with the leases to Citibank and Kaye Scholer Fierman Hays & Handler, and L&L was finally able to put shovels on the ground. A year later, Citadel signed the first lease, as the anchor tenant to the building. During that time, while the project was still in the early stages of construction.

David Levinson made a bold move that is uncommon in real estate development. He convinced his construction lender, Cornerstone, that he would only market the building upon it being fully built.

Levinson essentially skipped the pre-leasing stage altogether, after assigning the initial 200,000 square foot space to Citadel (Clarke). This was purely a have-to-see-it-to-believe-it play. Said differently, if prospective tenants were to see the Norman Foster designed building in person. Then they may be able to justify paying the $200-per-square-foot rent, essentially. 

In 2019, despite several delays, two key events occurred. Firstly, Nuveen (formerly TIAA-CREF) sold their fee position to Safehold. Safehold is a REIT managed by iStar that specializes in ground leases, which joint ventured with an unnamed sovereign wealth fund for a whopping $620 million (Hudson). Secondly, later that year, Citadel expanded an extra 120,000 square feet.

And by January and April of 2021, L&L received their temporary certificate of occupancy. Granted from the New York City Department of Buildings. Furthermore they landed their second tenant, Hellman & Friedman, respectively (Gourarie).

As L&L has made strides these past few years, one question remains. As of May 2021, who will lease the remaining 17 floors or 46% of the building?

In fact, if Levinson expects an extra 100,000 square feet of space to be leased this year, what type of tenants will the skyscraper attract?

The tenant mix at Midtown East is home to many large banks. In addition, private equity firms, hedge funds, and major law firms. It is the home to Bloomberg’s 1.3-million-square-foot office headquarters located at 731 Lexington Avenue (Vornado). The area is also the headquarters of JPMorgan Chase. Moreover, KPMG, The Blackstone Group, Estee Lauder, the National Football League, as well as many others. With KPMG’s 20-year lease expiring in 2023, one can speculate that 425 Park Avenue may be an option (Weiss, KPMG Stays at Midtown).

On the contrary, large accounting firms do not need ultra-luxury spaces for their employees and clients.

Furthermore, the skyscraper may not have enough space to accommodate the firm. Although, deep into the pandemic, experts predict that 15% of office space will be cut due to the demand for remote work (CBRE). In fact, despite building their new 2.4 million-square-foot headquarters at 270 Park Avenue. Jamie Dimon, CEO of JPMorgan Chase, estimates that he will only need to seat 60% of his employees in the office (Rosenbaum).

Due to the Hudson Yards development, Big Tech has gobbled up space in the West Side of Manhattan, so the probability of major tech companies leasing space in Midtown East may likely be low. However, unlike what happened in 2013 during the Bloomberg administration. Midtown East is currently going through a resurgence due to new rezoning legislation since 2020. This legislation allows 78 blocks of buildings to increase their allowable FAR or Floor Area Ratio. (Brown) With this increase in FAR, investors are focusing their efforts on repositioning assets rather than pursuing ground-up developments, unlike the ambitious 425 Park Avenue building.

Although, buildings that do not have the desired amenity packages (such as those seen in Hudson Yards) can open new opportunities for investors investing in Midtown offices. A prime example of this is RFR Holding’s Seagram Building. In the midst of finding a new anchor tenant. Aby Rosen, Principal at RFR Holding, updated the Seagram Building by supplanting its parking garage with a 35,000-square-foot playground. To host a variety of sporting activities and corporate gatherings (TRD Staff, Aby Rosen).

He is also adding a new observation deck to the iconic Chrysler Building (TRD Staff, Chrysler Building).

See the source image

Over the next couple of years, the FAR expansion will generate more than 6.5 million square feet of office space. This office space is specifically concetrated in Midtown East. This is not including unused air rights, which could potentially add an additional 3.6 million square feet of supply. (Brown). Whether it be adding supply or altering the current supply, only time will tell if demand will follow.

Lastly, New York City is fighting a tax crisis for the wealthy alongside a global health crisis. But losing the city’s millionaires and billionaires (as individuals) to Florida is not the issue. But rather losing their companies (and their employees) to relocate to Florida poses the main threat. The tax hike has led Goldman Sachs, Apollo Global Management, and Point72 Asset Management to seriously consider relocating to South Florida (Steverman).

In theory, hedge funds can execute trades anywhere.

Unlike investment bankers due to the nature of the business, which involves in-person meetings. One can conjecture that David Levinson and Kenneth Griffin, CEO of Citadel, will argue the opposite. Although, renown activist investor and hedge fund manager, Carl Icahn, in fact, permanently moved its headquarters from New York City down to Miami. But it came at a cost, as he lost both his President/CEO, Keith Cozza, and CFO, SungHwan Cho (Kilgore). Whether companies relocate permanently or if it is just a temporary trend that will not last, it may be too early to tell; yet it remains an interesting and active topic of debate. 

Due to the uncertainties and challenges that New York is facing such as tax hikes, a global health crisis, the insatiable demand for affordable housing. And question marks regarding filling the current supply of office, retail, and hotel assets. One thing is certain. However long it takes, New York City will bounce back, as history likes to repeat itself in the financial epicenter of the world. No better example exemplifies New York City’s resilience than the story of 425 Park Avenue development.

In conclusion, L&L gad to withstand the forces of family and partnership drama from the Goelet’s. In addition, had to withstand negative cash flow from both the original and new ground leases for more than a decade. Even still, as Citadel and Hellman & Freidman have yet to occupy their new office space.

If they could withstand the Lehman Brothers collapse, zoning restrictions, convoluted construction and design woes, a 3-year project delay. The project was originally slated to open in 2018. And a global pandemic. There is a good chance that L&L’s $1 billion project will prevail. Similarly, as with New York City’s economy, it is not a question of if, but when it will rebound.

Citadel’s 425 Park Ave : An Iconic Real Estate Investment? Works Cited

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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?

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Citadel’s 425 Park Ave : An Iconic Real Estate Investment?