The popular makeup company is looking to lease a roughly 1,400-square-foot space at 691 Fifth Avenue, a property owned by Vornado Realty Trust, one of the city’s largest commercial landlords.

The space is currently occupied by the skin care company Elizabeth Arden, but Vornado has been marketing the space for rents $3,000 per square foot or higher.

691 Fifth Avenue.

Though rates have risen on Fifth Avenue, the city’s priciest retail corridor, into the high $2,000s per square foot, many brokers familiar with the area say that $3,000 would set a new benchmark.

Sources familiar with the deal say that MAC is only in talks at 691 Fifth Avenue and that a signed lease has not yet been completed. The company, an edgy subsidiary of the cosmetics giant Estee Lauder known for professional grade makeup and its vibrant color palatte, is already a tenant of Vornado at 1540 Broadway. It signed a pricey lease at that building last year and has done well at the location, which is located in Times Square, one of the busiest retail markets in the city.

Given that store’s success, MAC is perhaps more at ease in considering the $3,000 per square foot price tag at 691 Fifth Avenue. Neither Vornado nor MAC could be reached for comment.

Mark Keller and Edge Fund Advisors acquired 1540 Broadway in two phases.

Last month, CB Richard Ellis Investors sold its remaining 51 percent stake in 1540 Broadway, the iconic, 42-story property also known as the Bertelsmann Building. For the buyers—Edge Fund Advisors and HSBC Alternative Investments Limited—the deal marks the final chapter in an acquisition grab that began last year when the joint venture took a 49 percent nonmanaging member stake. Mark Keller, Edge’s chief executive and chairman, spoke to The Commercial Observer about the investment strategy and plans to expand his company’s reach from the nation’s capital to the Big Apple.

The Commercial Observer: Considering how prestigious 1540 Broadway is, the deal closed rather expediently, no?

Mr. Keller: It was an interesting effort. It was the rare transaction where you have a sizeable deal and it’s happening in two phases, plus a refinancing, all over a nine-month period of time. So when you add up all the dollars that went back and forth, it was a rather large transaction.

Was the decision to buy CB Richard Ellis Investors’ remaining equity interest something that had been discussed when Edge and HSBC Alternative Investments Limited bought its initial 49 percent ownership stake, or did the sales opportunity take you by surprise?

We built rights into the relationship, obviously, so all the parties had various rights with regards to the building. If you wanted to sell your interest the other party would have the right of first refusal, and so all those rights were built in. However, we had anticipated that, through those discussions, we wouldn’t really see that day until some time in 2013. We figured we’d have to refinance the loan in 2013 because it had a one-year extension option on it that was expiring in basically 2012.

Had you been familiar with 1540 Broadway before the 49-percent acquisition last year?

I knew the property when [Harry] Macklowe was trying to sell it, and I was really jealous when CBREI picked it up at that price [ed. note: $355 million]. I always thought that was a great transaction. And when we got wind that CBREI was thinking about bringing in a partner, not only did I already know the property, but I had a lot of respect for it—the location, the architecture and even the vacancy. It was really great vacancy if there can be such a thing.

Conventional wisdom is that “no vacancy is good vacancy.” What, exactly, do you mean?

The space was gutted. The owners had removed all the old improvements so it was right down to the skin and we could offer prebuilt and custom build-outs. Obviously, sometimes you have tenants who want to move in immediately, and that’s why we did the prebuilt suites. But, for the most part, a good-size tenant wants to have its own space, and not some space that has dated T.I. and was lived in by someone else. It’s hard to lease that.

Yahoo moved some of its sales and marketing departments into three tower floors at 1540 Broadway this summer. Was that space the kind of “great vacancy” you’re referring to?

Yeah. With a lot of [landlords], if they have vacancy they don’t want to spend the extra money to gut the space. “Maybe some portion of it can be used or maybe this maybe that …” But the fact is that going into brand-new space makes a difference in attracting tenants—especially if you have a tower floor or you have a column-free building or a brand-new fit-out. If I’m a leasing agent I’d love to have my hands on that stuff because you have a lot of opportunity there to create value for the tenant. So that’s good vacancy.

Beside build-outs, are there any other renovation strategies planned at 1540 Broadway?

We’re doing two things to the building, both of which we negotiated with CBREI in the first transaction. We had negotiated that there would be significant improvements to the curtain wall, and that is going to be underway now. It’s a fairly significant curtain wall repair. And we’re putting in a building management system as we speak. It’s a building engineering system. It allows you to manage the energy flow through the building. It’s an HVAC computerized system, allowing you to basically manage the airflow better.

Edge is based in Washington, D.C., where you have a portfolio of commercial assets. In New York, 1540 Broadway is your only building. Are you considering other acquisitions?

Yeah, there will be more. We’ve been looking, but 1540 was a large transaction, both in terms of the size of the loan and the time spent closing the second phase. It took time, and it took more time than we would have liked. It was a lot of documents. I think now that all of that’s behind us we’ll have more time to focus on the deals we’ve had to pass on.

Are you looking at specific asset classes in Manhattan or in particular neighborhoods?

No, not really. We’re looking at the asset that fits our kind of mid- to long-term profile. We’re not short-term players so we really look at assets where, if it’s a shorter-term play, it’s because it’s probably something unique that allows us to achieve our strategy. But in general our strategy is to mature the investment over a seven- or 10-year period, and to go through another refinancing cycle with the asset in order to maintain the leasing.

Even though CBREI has divested its remaining ownership stake in the asset, Edge and HSBC Alternative Investments continues to retain CB Richard Ellis as property manager and leasing agent. Are there any plans to change that equation in the weeks ahead?

We’re continuing the relationship with the property management group at CBRE and we’re continuing our relationship with the leasing team on the property, which is run by [CBRE tristate chief executive] Mary Ann Tighe. Outside of seeing huge success from them, we also like working with them as people. And I think they really understand this asset and they’re enthusiastic about it—and that helps us be enthusiastic about it, too.

According to a release issued Tuesday afternoon by CBRE, Xinhua has leased 18,600 square feet, the entire 44^th floor, which it will use as both offices and television studios. The deal brings the occupancy of 1540 Broadway up to 84 percent, which seems to bode well for the commercial market generally. Howard Fiddle, vice chairman of CBRE, who ranked among the all-star leasing team, described Xinhua's new home in glowing terms.

"The 44^th floor is a special floor," he told The Observer. "A big section of it is double height. It's one of the most dramatic pieces of office space in Manhattan."

Mr. Fiddle said he's excited to be leasing to Xinhua, which was represented in the deal by Jones Lang LaSalle, and which Mr. Fiddle said is a "very, very recognizable name" in China and around the world. He expects that the company, which will mark its territory with an antenna fastened to the building's roof, will use the space to broadcast content back to China, rather than to American television.

The building itself presented a minor obstacle to the deal. The 45^th floor, which isn't used as office space, houses the machine room. It's noisy, and Xinhua studios need silence.

"I know more about soundproofing than I ever thought I would," Mr. Fiddle said.

walden@observer.com

Deutsche Bank sold the office condo portion of the building last week to CB Richard Ellis Investors for $355 million, marking the first important building transaction in 2009, and giving a market made murky by instability some sense of perspective. To use industry jargon, it gave the market a “comp.”

“We were lacking references, we were lacking comparables, so certainly this is going to be one,” said Borja Sierra, executive managing director of Savills.

“I’m sure people will take it as a reference,” agreed Tom Fink, the senior vice president of Trepp.

In other words, real estate professionals will parse the details of the transaction like a teenage girl parsing a text message from her high-school crush.

Here’s what is known: Deutsche Bank, the seller that acquired the building last year from Harry Macklowe after he could no longer pay his mortgage, financed the transaction at a loan-to-value of less than 68 percent.

“It says to me that to sell a building today of that scale you need a seller financing,” said Peter Riguardi, the president of New York operations for Jones Lang LaSalle. “And I think that without that, the deal probably doesn’t happen.”

Meanwhile, the $355 million sale price puts the value per office square foot at about $392. “People will take those $350 or $400 a square foot as the new pricing for this type of properties,” Mr. Sierra said. “This is virtually half of what they would have cost a year ago.”

The last time prices for midtown space were in the mid-$300s was 2004, according to Real Capital Analytics’ Pete Culliney.

And the vacant office space in the building, which is only 78 percent leased, was valued at around zero.

It’s instructive. Or is it? There’s a bit of a conflict in the industry right now over whether 1540 should be used as a lesson on the real estate market, or whether it should be treated as a one-off, regarded in much the same way as the sale-leasebacks at Sotheby’s and The New York Times headquarters.

Nat Rockett, a senior vice president at Jones Lang LaSalle, is in the one-off faction. “It’s indicative, but there’s the danger that we try to make too general of a statement on the market as a result of one transaction,” Mr. Rockett said. “There are all sorts of specific realities of 1540 that make it what it is.”

A real estate executive, who would only speak anonymously, described some of those realities. In addition to the quality of the building, which he described as “A minus minus minus,” or maybe a “B,” he said that the most important metric to note was the returns.

“It traded at our view at a 12 percent levered return, and 9.5 unlevered return,” he said. “The price per foot is deceptive.”

So maybe what we have is a faulty barometer? Either way, in the industry’s present state of bewilderment, one has to expect that industry members will latch on to every new data point.

It’s not so different in the under $100 million commercial real estate market, where Massey Knakal chairman Bob Knakal has taken to using signed contracts—rather than closed transactions—as comps in determining pricing for some building types.

“Since the markets are moving so rapidly, and the sentiment and psychology are moving so rapidly, we’re looking at the closings and the contract signings in the past three weeks,” Mr. Knakal said.

But back to 1540. Good barometer or bad, at the very least, the transaction, brokered by an Eastdil Secured team that included senior managing director Douglas Harmon, represents some semblance of long-term faith in the market.

“The good news is that there are still buyers across the country who want to own in Manhattan,” said Eric Michael Anton, executive managing director at Eastern Consolidated. “Things were so bleak over the last month or two, it’s good that a deal of this size closed.”

There are even those optimists, like Mr. Fink, who see the sale as a harbinger of a strengthening market. “What we’re seeing now is the beginnings of a thaw,” he said. “It’s not like things will go back to how they were two years ago. But when I have clients telling me that they are amassing capital to put to work as soon as they think prices come to a low enough level, and you see buildings sell to a sophisticated seller like CBRE, it begins to show we’re nearing a bottom.”

drubinstein@observer.com

CB Richard Ellis Investors officially bought a majority condo interest in 1540 Broadway today, according to a release just issued by the investment fund's media department.

The Observer on Wednesday reported that the deal involving the 44-story, Times Square property was likely to close Thursday. Sources continue to put the price at about $355 million. CBREI's spokeswoman declined to confirm the price, citing a confidentiality agreement -- though it will surely pop up in city records in due time.

When Harry Macklowe bought the building as part of a ravenous $7 billion, seven-tower portfolio deal in 2007, he valued the building at $950 million, according to the Wall Street Journal. Mr. Macklowe was later forced to turn the portfolio over to his creditor, Deutsche Bank, which promptly put the seven trophies on the block. This is the sixth of the towers to sell (only Worldwide Plaza remains).

This is the biggest building deal this year in New York City, and one of the few large real estate transactions of any kind.

Eastdil Secured represented Deutsche Bank and mezzanine lenders in the transaction.

Read the full release below:

CB RICHARD ELLIS INVESTORS PURCHASES 1540 BROADWAY OFFICE BUILDING IN NEW YORK ON BEHALF OF INSTITUTIONAL PARTNERSHIP

Capital Improvements to Include Addition of Gym and Conference Center and Upgrades to Cafeteria for Tenants

LOS ANGELES – March 5, 2009 -- CB Richard Ellis Investors, the global real estate investment management firm, has purchased a 905,533 square foot condo interest in 1540 Broadway, a 44-story Class A office building in Manhattan. This purchase was made on behalf of its CBRE Strategic Partners U.S. Value 5 fund, a commingled limited partnership real estate fund raised from institutional investors in the United States, Europe and the Middle East.

The sleek and distinctive building, which is 78 percent leased, has great visibility within the Times Square submarket, often referred to as “the crossroads” of the world. Times Square is centrally located with easy access to entertainment, shopping, restaurants, hotel amenities and transportation hubs, and has been the preferred location of corporate headquarters, business services, media/entertainment conglomerates and financial firms for many years.

CB Richard Ellis Investors is planning a capital improvement campaign that includes the addition of a gym and conference center that is open to all building tenants as well as upgrades to the cafeteria, building systems and lobby.  These enhancements are part of CB Richard Ellis Investors’ signature 5-Star Worldwide service program, designed to provide services and amenities to increase tenant satisfaction. The 5-Star program combines the attributes of a concierge service, building conference center and information conduit.

“We are very selectively acquiring and providing capital to owners of high-quality office assets in the premier U.S. markets,” said Vance Maddocks, Chief Executive Officer, CB Richard Ellis Investors.

The price is said to be around $355 million. Macklowe Properties purchased the tower in February 2007 in a deal that valued it at $950 million, or $1,079.55 per square foot of office space, according to The Wall Street Journal. The new sales price would translate into just over $403 per square foot.

Despite the 44-story tower's prime location in Times Square, it has more than 200,000 square feet of vacant space, according to CoStar.

Mr. Macklowe acquired 1540 Broadway as part of an epic $7 billion, seven-tower shopping spree in the early days of 2007. A year—and a universe in the real estate market—later, Mr. Macklowe was forced to turn over the properties to one of his creditors, Deutsche Bank. The bank has since managed to sell all but two of those towers, 1540 Broadway and Worldwide Plaza.

The sale of 1540 Broadway would leave Deutsche Bank with only one.

And all those fantastic leases and sales that titillated, that seemed ever on the verge of closure, turned out to be fantastic teases. Here, in no particular order, are the eight major deals of 2008 that never were.

NBC Universal

In May, NBC Universal announced the imminent creation of a business center outside of its 30 Rock headquarters. Brokers said the company wanted 600,000 square feet. Brokers fanned out across Manhattan. “They went through every fucking building that there was,” one broker said. “They were clearly the most
conspicuous deal of 2008 that never happened.”

Worldwide Plaza and 1540 Broadway

In September, the family-owned George Comfort & Sons was said to be closing in on these towers, detritus from the ruined Macklowe empire that ended up on Deutsche Bank’s balance sheet. The deal was said to rely on NBC’s putting its business center in Worldwide. That didn’t happen. And then neither did the Comfort deal.

“The price kept coming down and down, the market kept going from bad to worse to horrific to abominable,” said Eric Michael Anton of Eastern Consolidated. Nevertheless, sources close to the negotiations insist that a deal will be forthcoming, with at least one-half of the desultory duo selling by year’s end.

452 Fifth Avenue

HSBC gave us a whopping two deals that never were. First, HSBC wanted to lease or sell its headquarters at 452 Fifth. And then it wanted to take a mega-chunk of space at Larry Silverstein’s 7 World Trade Center. The failure of one plan meant the failure of both.

According to one investment broker, 452 Fifth, though lovely, was a “difficult sell.” “It’s sort of a mishmash,” the broker said. “HSBC had for 20 years crafted it for its own use, so it’s not so easy to re-craft for tenants, especially in a bad market.”

250 West Street

In 2007, it was reported that El-Ad, of Plaza conversion notoriety, had sold 250 West Street to Coalco for about $200 million. When The Observer checked in with kindly Coalco New York president Mikhail Kurnev in August, he confirmed that the deal was still in the works, and he anticipated “closing in the next few months.”

We hear the otherwise successful Mr. Kurnev has since been sent packing to Moscow. Neither Coalco nor El-Ad would comment for this story. But sources say Coalco wants its deposit back, El-Ad doesn’t want to give it back, and that the two are now litigating.

Hearst Tower

This angular beauty can’t find a ground-floor retail tenant, despite its icy good looks and more than two years on the market. Brokers blame the Hearst parents, who apparently want a higher-class tenant than the Eighth Avenue location will attract.

100 Church

In February, Newsweek was said to be taking 200,000 square feet at this downtown building, owned by the Sapir Organization. At the time, 600,000 of the building’s 1.1 million square feet were vacant. And then Newsweek backed out.

Fast-track to December. That 600,000 square feet is still, by and large, vacant. Certainly, the recession is partly to blame. But word has it that the building’s gaudy new lobby, with its more than 50 Swarovski crystal chandeliers, didn’t help any.

One Hanson Place

Another glorious building sitting empty, now running on three years. Canyon-Johnson Urban Funds and the Dermot Company bought the Brooklyn building, once home to a town of dentists, in 2005, revamped it, and hired Newmark Knight Frank Retail to market the space.

This year, the developer fired Newmark and hired the retail group at Prudential Douglas Elliman, and still nothing. We imagine the old banking hall’s landmarking—both interior and exterior—likely has something to do with it, along with the high price of the space, and, needless to say, the recession.

Orrick, Herrington

Orrick, Herrington & Sutcliffe was for months this close to taking up to 300,000 square feet at the Citigroup Center. And then, it wasn’t. Reportedly, Orrick wanted to wait for rents to fall. The attorneys advised themselves wisely.

drubinstein@observer.com