- Landlord Aby Rosen is in talks with prestigious East Village college Cooper Union to restructure the ground lease for the Chrysler Building, one of the world’s most famous skyscrapers.
- Rosen is struggling under $50 million of annual ground rent and other payments due to Cooper Union, which owns the office tower but ground leases it to Rosen. The coronavirus is darkening the outlook for real-estate turnarounds.
- Rosen and his partners in the tower pledged tens of millions of their own wealth to finance their purchase of the ground lease last year for $150 million.
- They could lose their investment if they were to default and hand the building back to Cooper Union.
- Ground rent from the building comprises 60% of Cooper Union’s revenue from investments and is key to the college’s pledge to restore free tuition to students in the coming years.
- The school has hired the real-estate services firm Savills, according to a person with knowledge of the situation, to help it negotiate with Rosen.
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Prominent Manhattan landlord Aby Rosen has entered into negotiations to try to restructure his hold on the 77-story Chrysler Building, in the latest sign of struggle for the colorful real-estate magnate amid the coronavirus crisis.
At stake is more than just control of one of the world’s most recognizable office towers.
Rosen and his partners pledged tens of millions of dollars of their personal wealth to lease the Art Deco spire last year, according to a person with direct knowledge of the financial structure of the deal.
The tower, meanwhile, is the lynchpin of the prestigious East Village college Cooper Union’s efforts to restore free education to its students after investment decisions during the last financial crisis a decade ago forced it to begin charging tuition in 2014.
The school has hired the real-estate services firm Savills, according to another person with knowledge of the situation, to help it negotiate with Rosen, a signal that it could be willing to work with his real-estate firm —RFR Realty.
The academic institution owns the Chrysler Building, but has left its operation to professional real-estate investors, ground leasing the tower to various parties since construction of the landmarked building was finished in 1930.
The structure allows the college to retain ultimate ownership of the iconic property without having to manage it in exchange for lucrative rental payments.
Last year, the college reaped roughly $53.5 million in annual rental income and other payments from the property, according to its financial statements, a sum that comprised about 60% of the revenue it received from its portfolio of investments, which also includes mutual funds, stocks, corporate bonds, and other real-estate assets.
“This is a huge part of their endowment,” said Stephen Powers, an executive at Transwestern Real Estate Services, who specializes in nonprofit real-estate advisory work. “The money that comes from an asset like this is foundational for them and a disruption could force them to change how they operate or dip into reserves that may already be thin.”
Just such a threat to that windfall may now be on the horizon as Rosen and his partners struggle to carry the antiquated property through the pandemic.
Neither RFR Realty nor Cooper Union responded to a request for comment.
Last year, Rosen’s real-estate firm, which is controlled by Rosen and business partner Michael Fuchs, along with the Austria-based financial firm, Signa Holding GmbH, purchased the building’s ground lease, along with a neighboring retail space, for $150 million.
The group sourced about $75.5 million of debt, according to a person with direct knowledge of the financing, to help fund the purchase, securing that loan, in part, using their personal fortunes as collateral.
Taking on the Chrysler Building was an ambitious undertaking, even for Rosen, who has a track record of reinvigorating classic, but tired, real estate assets.
The real-estate services firm and brokerage CBRE, which handled the sale of the building’s ground lease to Rosen last year, projected in marketing materials that it presented to potential investors in the property and that were viewed by Business Insider, that the tower would hemorrhage about $31 million in losses in 2020 and $44 million in 2021 before profitability could be restored through upgrades and new leasing by 2024.
Those losses may steepen and the timeline before it can be made profitable again may be extended farther into the future as the coronavirus has hammered the real-estate industry.
Some office tenants have either missed or delayed paying rents because of the crisis, which has upended commerce, thrust the economy into a potential recession and prevented many companies from occupying their spaces.
Key to Rosen’s plan for a turnaround of the Chrysler Building was reimagining the building’s ground and lower-level retail spaces. In recent months, RFR Realty cleared out the building’s collection of stores and kicked off a campaign to lease the spaces to hipper, more upscale tenants. That effort may be dashed by Covid-19 as retailers and restaurants have been among the hardest-hit businesses, with many suspending rent payments and laying off workers.
“Those questions around retail and the timing of when it comes back haven’t been answered yet,” said Marc Frankel, a leasing executive at Newmark Knight Frank who focuses on retail deals. “I wouldn’t plan on buying a property like the Chrysler Building today and leasing it up tomorrow. If you have the time to wait, everyone believes the market will be back. But if you can’t wait and you need to fill a space now, then you might have a problem.”
The financial pressure on Rosen and his partners is set to only grow in the coming years. The group currently pays $32.5 million to Cooper Union annually in ground rent, plus over $23 million of additional money that equates to what the building would normally owe in property taxes.
Because Cooper Union is a non-profit organization, it is exempt from being taxed on property assets, allowing it to pocket the sum rather than pass it along to the city. Those charges together are set to rise to $67 million by 2029, due to escalations in the ground rent and projected increases in the tax-equivalency payment, according to CBRE’s projections.
Rosen and his partners would lose their $150 million investment in the building and the neighboring retail space if they were to default on the ground lease and allow Cooper Union to take back control of the property. That may be a scenario the school seeks to avoid by reducing the ground rent, the future escalations, or both.
Although the school could structure a new ground lease with another operator if it were to seize the building from Rosen, such a process could take years and disrupt the stream of investment income the college relies on to subsidize its operations.
The situation is the latest sign of strain for Rosen as the once-booming real estate market has suddenly darkened amid the virus crisis.
In recent weeks, Rosen backed away from two major commercial real estate purchases totalling about $600 million. RFR Realty also recently entered into contract to purchase the office building 522 Fifth Avenue, putting up a $30 million nonrefundable deposit on the building. That down payment is at risk if Rosen is unable to raise financing for the deal.
Rosen is well known in the real estate industry as a wily property investor.
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“Aby is a very savvy guy,” said Jon Mechanic a real estate attorney who leads law firm Fried Frank’s real estate practice. “He’s the kind of investor who has the creativity to be able to listen to the other side and understand their needs and structure something that helps him and helps them.”
Beginning in the 1990s, Rosen took control of Lever House and the Seagram Building, two famous Park Avenue office properties that he renovated and leased for top-dollar rents. He has since built a portfolio of millions of square feet of commercial, residential, hotel and retail space in the city, including the upscale Gramercy Hotel and the recently developed condo and hotel project 100 East 53rd Street.
Rosen has also invited controversy.
In 2016, he paid $7 million to settle allegations by the state attorney general’s office that he had dodged taxes on upscale art purchases – charges that Rosen denied. In 2014, neighbors of a home he owned in Old Westbury on Long Island were infuriated when he installed on his lawn an over 30 foot tall sculpture by the artist Damien Hirst of a nude pregnant woman whose flesh was partially removed, revealing her fetus and anatomy.
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