Perspectives: Bertelsmann on Broadway; A Buyer Takes a Stake in Times Square

FOR the last several years, Times Square has needed a juicy real-estate deal, one in which some major company commits itself to using a sizable share of the new office space that was speculatively created in the late 1980's.

It took a bankruptcy declaration to get it, but the deal has finally come in the decision of Bertelsmann A.G., the privately held German media company, to buy 1540 Broadway, the newly built but empty office tower between 45th and 46th Streets.

A bankruptcy judge must still approve the "prepackaged workout" by the buyer, the lenders to the project and the entity that built the project, Broadway State Partners, whose general partners are Eichner Properties and VMS Realty Partners. That is expected by the fall.

For Times Square, the Bertelsmann transaction is primarily significant as a statement by a major media, entertainment and publishing company that the location is an appropriate home. That gives a lift to longterm hopes for the area as an office center.

The deal also removes from the market a major chunk of the newly built but unspoken-for space in the Broadway area. Two other new buildings also are in bankruptcy -- 1585 Broadway, at 47th Street, and 750 Seventh Avenue, at 49th Street, both Solomon Equities projects. Purchasers are understood to be in the wings for both.

The sale agreement is also interesting as an indication of what it takes to get a major user-buyer into the Times Square area in the current market. In this case, among others, a key issue was getting the lenders themselves to agree on a unified position. Citibank was the lead lender to Broadway State Partners, but it had sold positions in the loan to 16 Japanese financial institutions under rules that called for unanimous agreement on almost any change in the loan's collateral.

The sale will present the new owner with the challenge of finding a tenant for the already built vertical shopping mall that was created mainly at the developer's expense and that the Hahn Company, based in San Diego, was committed to operate. When the lenders balked at Broadway State Partners' request for an additional loan commitment of more than $60 million to complete the building, they balked as well at the proposed added costs for the central atrium.

INSIDERS said that Hahn wanted it to include a huge and expensive device that came to be known as "the whizbang," an electronic screen 20 feet high and 80 feet wide that would hang from the ceiling and display events, advertising and more. The lenders were skeptical about it. With the developer's bankruptcy, Hahn is now out of the picture.

The 1540 Broadway project, designed by Skidmore Owings & Merrill, is no cookie-cutter office building. Christian Alpers, Bertelsmann's senior vice president in charge of corporate development, says the building has 1,088,000 gross square feet of space. Of that total, there are 868,000 gross square feet of office space. The offices are in a 46-story glassy blue-green tower entered from 45th Street east of Broadway.

The shopping mall at the base, entered from the east side of Broadway between 45th and 46th Streets, has 140,000 square feet of space, 65,000 square feet of it usable by stores. Also in the base are 40,000 square feet of theaters, leased to Loews Theaters, and 35,000 square feet of garage space, leased to an operator. There is a small separate building of 5,000 square feet on the 46th Street corner that is integrated into the retail component.

The new owner sees itself as making a longterm commitment to the Times Square area. Its focus was mainly on its own longterm office needs, said Peter W. Olson, president of Bertelsmann's United States operation.

The company intends to use 600,000 square feet for two of its groups and lease out the rest, Mr. Olson said. The Bantam Doubleday Dell publishing group will move into the lower third of the building early next year. The group has about 1,000 employees, most of them currently in 270,000 square feet at 666 Fifth Avenue, at 53d Street. The lease has eight years to run. Bertlesmann is expected to sublease the space.

The world headquarters of Bertlesmann's Music Group, with about 500 employees, is to occupy the top third of the Broadway building in mid-1993. The group acquired the RCA label in 1986, when Bertlesmann also bought the Doubleday Company (excluding the New York Mets). Subsequently, the Doubleday stores were sold.

THE music group's main location is 1133 Avenue of the Americas, at 44th Street, where it has 10 floors on a lease that is up in 1994. Another present location is 6 West 57th Street, home of Arista Records.

As a home for companies in media, entertainment or publishing businesses, Times Square seems a natural to many real-estate brokers. In one major lease concluded three years ago, Viacom International, a diversified communications and entertainment company, took 500,000 square feet at 1515 Broadway, at 44th Street.

From New York City, Bertelsmann received a tax-reduction package valued at $10 million to $11 million. The company agreed to set aside 50,000 square feet to be used as low-cost "incubator" space for small international companies locating in New York City.

Peter R. Friedman Ltd. served Bertelsmann as broker and consultant. J.D. Kuhn Properties was Citibank's consultant. According to Mr. Friedman, studies of occupancy costs done for Bertelsmann's, which included the possibility of buying or renting outside New York City, showed that acquisition in Manhattan was now preferable.

"What you now see is a parallel to the situation in 1976," said Mr. Friedman.

That was a year of a national election, of lower interest rates and an upturn in housing starts after a dismal recessionary period. Real estate prices surged from 1979 to 1981.

As for Broadway State Partners, it has lost a reported $50 million in equity in the project, most of it spent to assemble the site. Equity came not only from Eichner Properties and VMS Realty Partners, but also from a limited partner that was brought in after the $260 million construction loan closed in 1987, a Japanese construction firm, Hazama-Gumi Ltd., based in Tokyo.

The consortium of lenders had advanced $252 million on the construction loan when they stopped funding it. The sale price of $119 million wipes out the partners' equity as well as a large part of the lenders' investment.

Real-estate analysts have been "playing" with the $119 million figure to see what it shows about current values in the area. Comparisons are deceptive, since the amount paid depends on how the total price is allocated between the office and nonoffice space. It is difficult to know how much value to ascribe to the shopping mall, for example.

If the office space is assigned a value of $100 a square foot before tenant work is completed, some specialists say that the new owner-user will achieve initial occupancy costs in the mid- to high-$20-a-square-foot area for the tax-abated building. But using other assumptions, an owner-user's costs can fall in the mid-$30-a-square-foot range.

The many variables include the cost at which the owner-user can borrow money and the amount spent for improving space for itself and other tenants. Estimates on operating costs and taxes also vary. Taxes are eventually phased in even though there is a temporary abatement under the Industrial and Commercial Incentives Program.

Nevertheless, a financially strong corporation with a need for office space for its own use is considered in real-estate circles to have an unusual opportunity to make a long-term investment in Manhattan real estate. After the purchase it can emerge with an annual occupancy cost equivalent to or less than what a prime tenant paid as base rent when moving into a new Manhattan office building in the early 80's.

As for the retail space, Mr. Alpers said, "We are working on a concept. We are in effect a developer. We must decide: Will it work for a single retail user or should we look for a number of tenants?"

It is too soon to know which is the case, he said.