Not every day, however, does a requirement as straightforward as Dentsu McGarryBowen’s uncork such an elaborate and interconnected series of transactions as it did at the Starrett-Lehigh Building.

A longtime tenant in the 2.3-million-square-foot building and one of the property’s largest users, the advertising firm needed to expand. But there was a small problem: Despite its size, the building—an artsy, far West Side location popular among creative tenants—had virtually no available space.

Starrett-Lehigh Building. (Courtesy Property Shark)

Dentsu McGarryBowen occupied more than 100,000 square feet in the building with several years left on its lease, but it couldn’t imagine relocating elsewhere or subleasing the space.

“This building is exactly their style,” said David Hollander, an executive with CBRE who, along with colleague Sacha Zarba, represented Dentsu McGarryBowen in the transaction. “They didn’t want to be in a more conventional location. They couldn’t imagine being anywhere else.”

Mr. Hollander poked around and soon found an opportunity. The Harry Fox Agency, a tenant on the fifth floor, was looking to relocate and shed its 50,000 square feet—exactly the amount of space Dentsu McGarryBowen was hoping to accumulate. Adding to the luster of the potential deal, Mr. Hollander had been in conversations with the building’s landlord, RXR Realty, which was willing to cancel the Harry Fox lease so that it could sign one directly with Dentsu, an arrangement that offered advantages for the tenant.

But what seemed at first glance like a perfect swap turned into anything but.

Harry Fox, a musical licensing agent, subleased the space from apparel giant Tommy Hilfiger, an even bigger tenant than Dentsu McGarryBowen at Starrett-Lehigh, and the company had the right of first refusal to take space back for its own use. As it turned out, Tommy Hilfiger, too, was looking to expand just as Dentsu McGarryBowen was.

Mr. Hollander now had a problem on his hands: He had to convince Tommy Hilfiger to back off. At the same time, Harry Fox had to find a new home, no easy task in a tightening Manhattan office market.

“The transaction became like a series of dominoes getting knocked over,” said Greg Taubin, an executive at Studley who represented Harry Fox. “Once the transaction got going, every component triggered consequences for the other.”

Mr. Hollander needed leverage, and he quickly found a way to get it.

The Harry Fox offices were on the Starrett-Lehigh Building’s fifth floor and it wasn’t the only space there that Tommy Hilfiger had subleased.

Department store Lord & Taylor also occupied approximately 21,000 square feet of sublease space from Tommy Hilfiger and was negotiating to lease it back to the company. Dentsu McGarry Bowen stepped in. It would take the 21,000 square feet for higher rents than Tommy Hilfiger was willing to pay.

If the situation was turning into a game of poker, Mr. Hollander was bluffing. In reality, the Lord & Taylor space wasn’t good for Dentsu because the expiration came more than three years before the company’s lease for its existing space on floors 10 and 11 expires in 2024. When renewal time came for the expansion space, Mr. Hollander knew that the landlord would have a huge advantage negotiating an extension because Dentsu would be a captive tenant, with the bulk of its space upstairs.

In the meantime, Matthew Astrachan, an executive with Jones Lang LaSalle who represents Tommy Hilfiger, was busy trying to facilitate a solution. He was convinced Tommy Hilfiger didn’t need the Harry Fox space. It could seize the Lord & Taylor space at a more affordable price and retain nearly 20,000 square feet it was preparing to sublease on the building’s 17th floor. Mr. Astrachan said Tommy Hilfiger initially wanted to shed the 17th floor space because it sat outside the company’s primary envelope of offices on the fourth, fifth and sixth floors. Whether through Mr. Astrachan’s urging or its own reflection,

Tommy Hilfiger eventually realized that the 17th floor was actually ideal. Part of the reason the company needed expansion room was to use a portion of space to construct and test retail showrooms that it could then deploy in its stores.

“It was fine to have that up on the 17th floor because it was a separate operation they were doing that was different from the use they had in the rest of their space, which is all offices,” Mr. Astrachan said. “Once we figured that out, it uncorked the deal.”

Mr. Astrachan drew up a deal for Tommy Hilfiger to sublease 21,000 square feet of space back from Lord & Taylor, and Mr. Hollander and Mr.

Zarba arranged a 50,000-square-foot direct lease with RXR Realty for Harry Fox.

Then everything hit one last nerve-jarring speed bump.

The deal that Mr. Taubin was arranging downtown for Harry Fox collapsed. It was early November, two months into a fevered tangle of dealmaking. That elusive window in which everyone’s interests had finally aligned was closing. Mr. Taubin, however, had smartly arranged a backup plan at the Donald Trump-owned office building 40 Wall Street.

“After our first deal fell apart, we literally drew up a deal at 40 Wall Street in a week,” Mr. Taubin said. “The Trump Organization was incredibly accommodating. They really wanted us as a tenant in their property.”

Harry Fox ended up signing a 37,000-square-foot deal for 40 Wall Street’s entire sixth floor. Although the space is smaller than the office it leases at the Starrett-Lehigh Building, Mr. Taubin said the firm is able to house the same number of employees because its offices will be tailored to the company’s real estate needs.

“The space at Starrett Lehigh was great for HFA five years ago, but through a new build-out, we’re getting tremendous efficiency now,” Mr. Taubin said.

On the Thursday before Christmas, both Tommy Hilfiger and Dentsu inked expansion deals. Tommy Hilfiger will occupy approximately 350,000 square feet, and Dentsu will take roughly 170,000 feet.

“This was seriously the most complicated deal I personally have handled,” Mr. Hollander said. “Every deal has its posturing, but in the end, it worked because we all cooperated and worked together.”
dgeiger@observer.com

RXR, led by its chief executive Scott Rechler, acquired the 2.3 million-square-foot far West Side office building last year for a whopping $900 million, a purchase price that equated to almost $400 per square foot. Though buildings in Midtown have traded for double that or more on a per square foot basis in recent months, the sheer magnitude of the investment turned heads as a jumbo-sized commitment in a neighborhood that many brokers and tenants still consider off the beaten path.

Starrett-Lehigh Building. (Courtesy Property Shark)

In recent months however, a series of leasing transactions in the building has put the prominence of its roster of tenants, not to mention the affection they have for the property, on ample display.

Mr. Rechler said that he began to grasp how tenants saw the property as a core component of their culture and identity when his firm was bidding on it last year. He gained the insight while interviewing a principal at the architecture firm the Bjarke Ingels Group, which has space in the property, and came away determined to win.

“I met with him and asked him why? Why Starrett?” Mr. Rechler recalled. “The tenants in the building have made the decision to be here all by themselves and I wanted to know why. And he answered me, ‘what other building could I go to?’”

More recently, firms like Tommy Hilfiger and the advertising firm Dentsu McGarryBowen have expanded significantly in the property. Tommy Hilfiger grew by 45,000 square feet in the property last May. Then, at the start of 2011, the company, which is one of the Starrett-Lehigh Building’s largest tenants, took another 21,000 square feet. At the same time, Dentsu expanded by 47,000 square feet. Dentsu now occupies about 170,000 square feet in the building and Tommy Hilfiger has 350,000 square feet.

What has surprised Mr. Rechler is the way the bustling activity has taken place even before RXR has had a chance to undertake a substantial renovation of the property. Mr. Rechler said that the company is planning to invest more than $50 million to upgrade its lobby, common spaces and other facilities. He also has plans to create amenities that will help the building continue to attract the kind of creative tenants it caters to.

“We’re planning to launch a bike valet for tenants who ride bicycles to work as well as a dog valet for those who want to bring their pet,” Mr. Rechler said. “We spent the first 90 days of ownership interviewing over 100 people in the building and the surrounding neighborhood and designed the repositioning plan to create a place that will be attractive to them and the other tenants that want to live and work in this area.”

The planned opening of the No. 7 Subway extension just blocks away by the end of next year is also likely to improve the building’s desirability, negating one of the chief complaints that the property, which is located on 11th Avenue and 26th Street, is inconvenient to public transportation.

Though the renovation work has yet to begin, brokers who have done deals in the building say that RXR’s presence was felt soon after it took control.

“They’ve been really fantastic, their whole approach, they’ve brought a more institutional and professional feel to the property,” David Hollander, an executive at CBRE who represented Dentsu in its recent deal, said. “It’s a much more sophisticated negotiating process now that they are the landlord. They provide assurances that the things you’re talking about in the leasing negotiations will get done and have put the right staff in place, so if you have a question about something or are dealing with an issue during a move in, there’s someone dedicated to resolving it.”

Mr. Rechler said it was important for him to put RXR’s stamp on the building as soon as it closed on the asset.

“On the first day of ownership, we had the entire lobby cleaned,” Mr. Rechler said. “We also changed the approach with the security overseeing the lobby.”

During the holidays, Mr. Rechler said he received some encouraging feedback.

Martha Stewart whose firm Omnicom is a tenant in the building, sent him a note about the decorations RXR had hung in the lobby.

“It read great job,” Mr. Rechler said.

A partnership of Joseph Chetrit and Yair Levy, spearheaded by Charles Dayan from Bonjour Capital, bought the building for $289.8 million in 2005, according to city records. But with the trendy Chelsea office market enjoying a boom, driven in no small part by the tech bubble, the building could sell for around $500 million, according to some sources.

The owners took out a $235 million mortgage from Wachovia in 2006 and were close to default a few years later, according to The Real Deal.

The building currently has five tenants, including two long-term office tenants until 2030, as well as Bed Bath & Beyond, Marshall’s and TJ Maxx. One-third of the retail is below market rate.

“This is the next big building,” said Doug Harmon of Eastdil Secured, who is marketing it. “They have five million people who go through every year.”

The top two floors are currently vacant, with 170,000 feet of contiguous office space, one of the few such big blocks of contiguous space left in Chelsea. Moreover, the building offers development potential, with 250,000 of additional FAR on top of the building and an adjacent site of 75,000 feet that could potentially serve as a hotel development.

“The market is on the move,” Mr. Harmon said. “Where would you want to work and live if you could?”

lkusisto@observer.com

There's a certain fearful symmetry in putting "hedge fund" and "1330 Sixth Avenue" in one sentence. But it seems that both are having a moment.

Andor Capital Management, a technology hedge fund manager based in Greenwich, Conn., has signed a five-year deal to occupy a portion of the 5,875-square-foot 24th floor. Lloyd Desatnick of Jones Lang LaSalle represented the tenant.

Also, S.A.T. Investment FLP, an asset manager focused on automated trading, has signed a five-year lease for 5,715 square feet on the fifth floor in the same building. No outside brokers were involved, and RXR Realty was represented in-house for all transactions.

Recall, RXR bought the 40-story tower for $400 million last fall, after Harry Macklowe had lost it in 2009 to a unit of the Canadian pension fund. Despite the $30 million the developer spent renovating the Plaza district gem, rents plummeted to around $65 a foot. Now they're back up around $100, The Commercial Observer has learned, and the tenants are looking quite pre-Lehman themselves. 

lkusisto@observer.com

Now in a sign that a comeback may indeed be upon us, RXR Realty is about to score their first new deal since taking over 1330 Avenue of the Americas, The Observer has learned. Artisan Partners is in the final stages of signing a lease on the 31st floor, where 10,400 square feet were available. The rent is rumored to be $100 a square foot, while other deals are also said to be near to closing in the building, at rents 30 percent above what the building was fetching just a couple of years ago. 

Recall, Harry Macklowe bought the 40-story tower for $498 million in December 2006, and spent $30 million renovating it. That could easily have turned it into one of the most coveted buildings in the Plaza District, but the financial collapse and Mr. Macklowe's troubles drove rents down to a mere $65 a foot. 

Heated bidding ensued in 2007, when a unit of the Canadian pension fund put 1330 Sixth up for sale--with bidders including SL Green, the city's largest landlord. They were beat out by darkhorse RXR Realty, which had previously sold off its business to SL Green a few years before, but came back on the Manhattan scene with the bold buy. 

Another former Macklowe holding, 510 Madison, is one of the few other buildings in the city said to be fetching rent above $100 a foot. Also joining the club is 350 Park Avenue, where three $100 deals have recently been signed, The Observer has learned. 

Since taking over 1330 Sixth Avenue, RXR has managed to create quite a bit of buzz, with concierge service, an upcoming mobile app that helps tenants arrange car service and dry cleaning and a landlord that has offices on-site. RXR Realty's William Elder could not, however, be reached for comment. 

lkusisto@observer.com 

The little blue bird has been perching in a spartan temporary New York City space since September, searching for the perfect spot for its first New York City headquarters. Now The Observer has learned that it plans to sublease Facebook's former digs at 340 Madison Avenue, according to a source with knowledge of the deal.

Facebook first leased 11,000 square feet on the sixth floor of the glass birthday cake-shaped building, wherein the Office of the Comptroller of the Currency was also housed, in 2009. It fled recently for some similarly corporate two-floor digs just down the street at 335 Madison, where it could expand to as much as 150,000 feet.

The Grand Central area, a hub of finance wonks and high-end insurance law firms, is far from the lofty spaces and hip organic sandwich joints techies have long preferred. But with the world's two most powerful social media companies potentially just blocks from one another, for better or for worse, it seems only a matter of seconds before the classy office strip is dubbed Silicon Avenue (there, done). The recent deals also place both companies near the once throbbing heart of the advertising industry so lionized by Mad Men and so slowly being supplanted by tweets and friendings.

The deal is said to be a few weeks away. For now, Twitter and its broker, Clayton Kline of Jones Lang LaSalle, declined to comment. Scott Rechler's Long Island-based RXR Realty, which purchased the building for $570 million in the spring as its first Manhattan investment, also declined to comment.

lkusisto@observer.com

The Commercial Observer: RXR Realty bowed out of the Manhattan real estate market about two years ago. What prompted the return?

Mr. Elder: As you probably know, the company was sold in 2006--actually at the beginning of 2007--to SL Green. As part of the sale, all the city assets were basically integrated into SL Green, and then many of the suburban assets, Scott Reckler and his partners retained. SL Green did actually buy some of the suburban portfolio as well, but Scott retained holdings in New Jersey, Long Island, Westchester and Connecticut.

And the feeling at the time was that the market had reached a peak and it was time to hunker down and wait for the cycle to return, which, looking back on it, was perfect timing for that strategy to be implemented.

When do you re-emerge in the market?

So RXR came back into the city in a meaningful way in 2009, and the company started buying mostly in the capital stack--junior and senior mezzanine pieces throughout various buildings in the city. And then in the middle of 2010, and then late 2010, we executed on two property transactions: one being 340 Madison Avenue and the other being 1330 Avenue of the Americas.

Speaking of capital stacks, tell me about 1 Park Avenue. If I understand correctly, earlier this month, RXR just got paid off for its investment in a mezzanine piece.

That was an investment that we made in the middle of 2009. The thought at the time was, we were going to purchase one of the senior mezzanine pieces at a substantial discount--which we did--with the viewpoint that we would own the asset at some point in time.

Again, to my point earlier about New York in recovery mode, we never thought that anybody would recapitalize the asset--which Vornado just did, or that we'd be paid off at par value. So that's one of those investments that we probably made in excess of a 10 multiple on our original investment in one year's time.

What was attractive about 340 Madison Avenue?

With 340, we loved the in-place rent stream. We loved the asset from a physical standpoint: the facade, the lobby, the elevators and the physical plan. It was a great asset, and if you recall at that point, that was kind of the inflection point of the new market, where buildings were still trading in the $350-to-$400-a-foot range. We liked that asset for the yield that it had, and the relatively safe, long-term cash flow and the ability to harvest the little bit of vacancy that was there at the time.

So we liked it all the way around, from a physical standpoint and the investment profile.

And what attracted you to 1330 Avenue of the Americas?

At 1330 Avenue of the Americas, we viewed that as just one of the greatest buildings in New York: Central Park views, a really first-class trophy infrastructure, new lobby, new elevator cabs and a great tenant roster. And, in fact, it had the beginning of the building blocks to really take advantage of the improving market.

With 340 Madison Avenue, it sounds like there are plenty of opportunities to add value.

Definitely. Just through the transactions we'll do in some of the vacant space. There's just two floors--the 22nd floor and part of the 10th floor. Other than that, the building is in very, very good shape. And the 22nd floor is the top of the building.

Previous to SL Green purchasing the company, how active was RXR in Manhattan?

At the time we were called Rex & Associates, a publicly traded real estate investment trust. We owned about 24 million feet throughout the tristate area. In the city we owned just about 5 million feet; so very, very active. We owned several trophy-quality assets, many of which are in the same neighborhood as 1330. We owned 1350 Sixth Avenue; 810 Seventh Avenue; 1185 Sixth Avenue; 919 Third Avenue.

So we were very involved in the New York City market and also the tristate markets. I think we were viewed as one of the top landlords locally and certainly from a national REIT standpoint.

Now that you're resurfacing in Manhattan, what will that mean with regard to your focus on Long Island, which traditionally has been a large part of your business?

I think it's actually good news for the Long Island market. The focus on the city is really driven. ... It doesn't mean we aren't focused on the other markets as well. We're still focused on New Jersey, Long Island, Westchester and Connecticut. I think we just look at New York City as a really good place at this point in time to spend a disproportionate amount of our time and our energy and our focus, just given the fundamentals of what New York is right now.

I think our view on the New York City market is that every cycle you go through, the city continues to kind of push past the prior peaks of the prior market, which I think it's on the way to doing right now. I think all the fundamentals are in place for the early stages of a booming recovery.

What is your forecast for 2011 and 2012 in terms of leasing and investment sales?

I think it's safe to say that the properties for sale right now--just from an on-the-market perspective--are pretty anemic right now. There is deal flow and there is new product coming to the market, but it's not as vibrant as what we would hope for. So what that means is that we spend a large percentage of our time--both mine and Scott and our investment teams--kind of mining relationships that we have throughout the city and elsewhere, uncovering hidden opportunities through partnerships or investment in the capital stacks or outright asset purchases.

jsederstrom@observer.com