Partial interest real estate deals are apparently on the rise in Manhattan, accounting for 63 percent of the $15.7 billion spent in Manhattan office transactions in 2011. That number is up from 19 percent back 2007, when the market was at its height.
The popularity of these deals lies, in large part, in the fact that they allow landlords to retain some control over properties that would likely revert to lenders through default and foreclosure. In Manhattan, a good many of the real estate transactions now are actually recapitalizations, where the property owner uses the capital and credibility of an outside investor to persuade the lender(s) to restructure the property debt in exchange for equity or an owning interest in the property.
Because of the popularity of such deals, some investors have been dubbed “vultures,” based on their practice of amassing funds and acquiring office buildings from distressed owners who are eventually forced to sell at a loss.
The plentiful supply of capital available from investors, maturing commercial mortgages, and conservative lending practices are factors that will likely keep the recapitalization model going strong for at least the next several years.
Some predict the trend of partial interest investments will fall off, though, once job growth creates a greater demand for office space, and rents and property values begin to rise, making it easier for owners to finance their buildings or get better sale prices.
Interestingly, the only places in America where office demand and rents are actually rising are Silicon Valley, New York City’s Midtown South, and San Francisco’s South of Market. In Philadelphia, which is not among them, tenants currently enjoy an abundance of cheap commercial office space without having to build or lease new space.
Source: New York Times, “Splitting Up Ownership to Ride Out a Rough Spot,” Matt Hudgins, June 19, 2012