Private equity juggernaut the Blackstone Group is reportedly shopping the office portion of its tower at 717 Fifth Avenue, for a sum that sources pegged at $370 million. But the 26-story tower, divided into three condominiums, comes with an unusual property tax situation that reduces the value of the stake, insiders said.
While Blackstone owns the 370,000-square-foot office condo, retail investor Jeff Sutton – with frequent collaborator SL Green Realty, a minority partner – owns the two smaller retail units, which measure a combined 103,962 square feet, city records show.
The retail is home to Dolce & Gabbana which signed a 15-year lease in 2011, and Armani, which signed a 15-year lease in 2007. Other retail tenants in the building include fashion designer Escada and the men’s store Oxxford Clothes. Office tenants include Andrew Farkas’ Island Capital Group.
The curious part? The building’s owners pay property taxes based on how much space they own, rather than the value of that space, according to a copy of the condo by-laws seen by The Real Deal. As a result, the owner of the office condo pays 75 percent of the taxes for the entire building, even though that portion earns less than half as much as the retail in rent.
Though this kind of agreement to allocate the tax burden does occasionally crop up in commercial condo properties, it’s not common to allocate taxes based on each unit’s footprint, instead of the assessment, said one tax attorney who briefly reviewed the situation at the request of The Real Deal. He did not want to comment on the record because he has represented one of the owners. Of course, parties can agree to any kind of economic structure, and did so in this instance.
The Armani lease is valued at $250 million and the Dolce & Gabbana lease at $300 million, or a combined $35 million per year in rent, according to news reports. Meanwhile, the office portion’s cap rate of 4 percent for the $370 million asking price would put its net operating income at just under $15 million per year.
What’s more, the discrepancy is only set to grow, since the retail rents are well below market. The building, located at the corner of Fifth Avenue and 56th Street, is on a stretch where retail rents are among the highest in the world. Asking rents jumped to $2,760 per square foot in the second quarter of 2013 from $1,500 per square foot in 2007, data from Cushman & Wakefield show.
Once a new lease is signed, the rent would likely double or triple, increasing the disproportionate share of the tax burden the office condo must bear.
The combined taxes for the current tax year are $11.7 million and Blackstone’s share is $8.6 million, while’s Sutton’s is $3.1 million, a review of tax records shows.
Sutton was part of a group of partners that bought the retail portion of the building in 2004. Then in 2006, along with SL Green, he bought out those other partners.
In 2007, Blackstone and Sutton divided the building into commercial condos, property records show.
In 2012, Sutton bought out a portion of SL Green’s ownership stake, reducing the real estate investment trust’s share to 10.92 percent, the firm said in regulatory filings.
In addition, Sutton has a right of first offer to buy the office condo. Taking advantage of that opportunity, Sutton, with the advice of investment bank Eastdil Secured, hunted for buyers for the office unit priced at about $370 million, several sources said.
No one took them up on the offer, and now Blackstone is offering the building for sale, with CBRE Group leading the effort. According to published reports, they have to sell it for at least 95 percent of that price or offer it again to Sutton at the reduced price.
The city’s Department of Finance, which records the assessments, did not respond to a request for comment. Sutton, CBRE Group and brokers for Eastdil declined to comment. Blackstone did not respond to a request for comment.