Tight financing can mean big opportunities for dealmakers, developer Steve Witkoff told the audience at Schulte Roth & Zabel’s Bridging the Gap forum yesterday (Tuesday.)
“It’s very difficult to get deals done, but the flip side of that is, if you do it correctly, there’s tremendous upside,” Witkoff said.
The Witkoff Group is at the head of a joint venture that just closed on a deal to redevelop 701 Seventh Ave, on the north end of Times Square — a deal that, to hear Witkoff describe it, is oozing with potential.
The $430 million acquisition, dubbed the Times Square Gateway Center development site, could be the home of a 340,000 s/f, 36-story, multi-use development with retail space, a hotel tower, and the nation’s largest single LED screen.
The deal almost didn’t get done, Witkoff said, because of the challenges of securing capital for a hotel, retail investment and construction all at once.
The solution came in the form of Barry Sternlicht’s Starwood Property Trust and Starwood Capital Group, which provided $357 million in mortgage financing at closing, to join a $60 million check from the Witkoff Group.
“Barry understood it all,” Witkoff said. A question mark still hangs over the hotel portion of the development, but again, Witkoff is upbeat.
The fully-funded retail development, with its 24,000 s/f LED sign, is expected to be operational within two years. If the first four floors of the building can be rented at a rates slightly less than some recent high-profile Times Square deals, Witkoff estimates, that retail income alone will give the investors a 35 percent internal rate of return over three years — and that’s if retail rents in Times Square don’t continue to climb, which is not what Witkoff expects.
“I believe rental rates in Times Square are going to far outstrip Fifth Avenue,” he said. With the ground costs taken care of, the hotel only needs construction funding to get built. “In the next week or two, we believe we’re going to announce a major brand taking over the hotel,” Witkoff said.
At that point, if his numbers add up, construction funding shouldn’t be hard to find. A 475-room hotel can be built at the site for about $500,000 per key, Witkoff estimates, adding that the success of the W Hotel next door suggests each of those rooms would be worth $1 million once they’re available to the teeming hoards of Times Square tourists.
Maefield Development and Infinity Urban Century spent years doing the legwork required to take exclusive control of the site in January 2012, including securing purchase agreements for the underlying land and buying out current tenants.
Rather than a flip payment for the property, Maefield and Infinity are partners in the new joint venture and stand to yield a portion of the profit if the development is successful, Witkoff said. “I like downside protection and a lot of upside potential,” he said.
New Valley, an investment unit of Vector Group, is the fourth partner in the venture. The retail portion of the development includes an 87,000 s/f box space, Witkoff said, and some foreign retailers are already making inquiries.
But, he added, the branding potential of the huge wrap-around LED sign might be enough to lure in “that one very special tenant,” such as Google, Amazon or Samsung.Wallace Schwartz and Douglas Heitner of the law firm Kasowitz, Benson, Torres & Friedman represented Witkoff and New Valley in the deal.
Witkoff’s confidence in the Time Square market comes from first-hand research, including personal observations of the 24-hour bustle at the crossroads of the world. “At two in the morning, I walk past that Forever 21 store and it’s almost suffocating, there are so many people,” he said.