By Wolf Richter for WOLF STREET.
It goes something like this: In 2006, an investment fund managed by a division of UBS bought a 925,000-square-foot office tower, dating from the 1960s, at 135 West 50th Street in Manhattan for $332 million. In 2019, it separated the building from the land, sold the land to Safehold – the company specializes in “ground leases” – for $285 million, and inked a long-term ground lease with Safehold. So UBS had $47 million left in the building and $285 million in cash from the sale of the land.
We assume that UBS retained the building because this was 2019 and there was an “office shortage” in Manhattan, and office rents were going to the moon, even for a drab 1960s tower or whatever. This way, in theory, UBS could draw income from the building – the office rents, on their way to the moon, would hopefully exceed the costs of the ground lease and other expenses – while it had drawn $285 million in cash out of the property.
So even back then in 2019, even during the hottest office market ever, the building itself was worth only a small-ish amount. But the land was worth $285 million. Over the long term, buildings are worth zero, and only the land has value.
UBS then renovated the building. Construction was finished in 2021. At the time, the building was about 40% leased, according to the Commercial Observer. According to The Real Deal, citing the recent listing, renovation costs amounted to $76 million. So now, UBS had $123 million in the building.
At about that time, the office CRE market began collapsing amid working-from-home and a massive amount of vacant office space coming on the market that no one knew what to do with. But UBS had gotten $285 million out of the property already.
By now the building is only 35% leased, office rents aren’t going to the moon, and aren’t covering the costs of the ground lease, and the whole thing has turned into a money-suck.
UBS tried to sell the office tower, there was apparently a deal, but it fell through. And so UBS dumped the building by selling it via an online auction at Ten-X for $8.5 million.
What UBS got out of the building and land it had bought for $332 million and renovated for $76 million ($408 million in total) was $285 million from the sale of the land and $8.5 million from the sale of the building, for total of $293.5 million. Figured on this basis, its capital loss was roughly 28%.
But on its financial statement, the loss will be a lot less, because buildings (but not land) are depreciated to zero over a certain period, such as 39 years per IRS rules for commercial buildings, which would have shaved the book value of the building on UBS’s balance sheet by 44% over the 17 years that UBS owned it.
Earlier this year, we discussed a similar ground-lease situation in Chicago where a 12-story, 50% vacant, old (“landmark”) office tower at 300 W. Adams St. sold for $4 million, for the building only. Alliance HP had bought the whole property for $51 million in 2012 and then divided it into a leasehold interest in the building and a 99-year ground lease. Alliance defaulted on the loan on the building, and lenders foreclosed on the building and sold it for $4 million. But Alliance HP retained the land, and it continued to collect rent on it.
So that would have been the end of the story with a headline like this: “The value of office buildings goes to zero over time, but the land has value: UBS gets off with a black eye.” Except…
The New York Times makes a mess of this.
The New York Times came out with a mess topped off with this clickbait title: “This 23-Floor Manhattan Office Building Just Sold at a 97.5% Discount.”
And that title is a lie! Buried way deep down after a lot of blah-blah-blah, the story mentions in passing that the $8.5 million in sales proceeds was only for the building and not for the land. But it didn’t subtract the sales proceeds of the land ($285 million) from the original cost of the land and building ($332 million). It just figured the “97.5% Discount” as the percentage loss between $8.5 million in proceeds from the building and the acquisition cost of the land and building of $332 million (= -97.5%).
We’ve been discussing the horrible condition of office CRE and the massive losses taken by landlords and lenders for two years, and there is no sugar-coating it, and it will drag on for years before it gets sorted out. But it’s important nevertheless to keep your feet on the ground and not concoct BS just to get clicks. Did corporate cost-cutters at the Times fire the last editor with knowledge of how any of this stuff works who could have caught this before it’s published? Well, there’s a price to pay.
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