By Daniel Geiger
REBNY handed the trophy to a team from the real estate services firm Newmark Knight Frank on Monday night for its coveted Ingenious Deal of the Year.
Although there are typically a dozen or more entries from many of the city’s top real estate brokerages, the ceremony hands out only first, second, and third place awards. It’s usually a tight competition, and many of the deals that miss honors are worthy of recognition.
Here, we feature a deal submitted by Andrew Roos, vice chairman of Colliers International and the firm’s top-producing broker last year. Roos structured a complex lease at 605 Third Avenue last year for the United Nations Population Fund.
The organization, a U.N. office that provides services globally relating to reproductive health, was facing a lease expiration at 220 East 42nd Street, a space it had occupied for over 20 years. The tenant, known as the UNFPA, wanted to relocate to a space that would be more modern and operationally efficient, while also capitalizing on the downturn in rents. The office also needed to be in close proximity to the U.N.’s East Side headquarters campus.
With vacancies opening along Third Avenue, one of the areas in midtown that bore the brunt of the downturn, Roos was able to find the cheap available space that met the UNFPA’s needs. Pfizer, the pharmaceutical giant, was subleasing a large block of space at 605 Third Avenue as part of the company’s plan to reduce its Manhattan footprint and consolidate facilities.
The space fit the UNFPA’s roughly 130,000 s/f requirement and featured several advantages over the organization’s existing space, including larger floors and an existing open layout floorplan that the UNFPA had been seeking to foster operational efficiencies. Roos was also able to negotiate with Pfizer to furnish the space, further reducing the UNFPA’s expense in relocating to the building.
The deal would be highly complex however. Because the UNFPA is a subsidiary of the U.N. it has diplomatic immunity. Landlords are often wary to do deals with such tenants because the immunity prevents them from being liable for rent in the event they fall into arrears and also exempts them from having to resolve any lawsuit or dispute with the landlord in a U.S. court. The UNFPA in fact had a provision in its lease requiring any disagreement between the organization and its landlord be arbitrated at an international court at The Hague in the Netherlands.
Predictably, Pfizer refused to do the sublease deal.
Yet Roos was able to resurrect the transaction by enticing the building’s landlord, Fisher Brothers, who was looking to solidify occupancy in the space beyond Pfizer’s remaining seven year term, to find a solution. Normally, Fisher Brothers could have solved the issue by just canceling the existing lease for the space and doing a deal directly with the UNFPA. Complicating the matter was that the space was actually leased to Nielsen Company, which had subleased the space to Pfizer and was paying above market rents.
Fisher Brothers was unwilling to cancel the existing leases because Nielsen was paying such an attractive rent, and because Pfizer had outstanding credit. So Fisher Brothers worked out a complex deal with Roos in which the landlord of the roughly 1 million s/f building sub-subleased the space from Pfizer and then sub-sub-subleased it to the UNFPA.
A seven year extension beyond the term of the Pfizer lease was built into the deal, which would allow the UNFPA to rent the space for at least a total of 15 years, with rents that started in the $20s per s/f and escalated to $30s per s/f over the length of the lease. The UNFPA would have likely paid rates in the $50s per square foot to renew at 220 East 42nd Street.
In the end, the transaction took 18 months to negotiate and structure, and it required the approval of five different entities: the U.N., Pfizer, Nielsen, Fisher Brothers, and 605 Third Avenue’s lenders.