It’s crunch time for the Durst Organization at 1 World Trade Center.
Despite popular wisdom that Douglas Durst’s 10 percent, joint-venture partnership with the Port Authority was a sweetheart deal, it turns out he’s under the gun to find new tenants or face getting booted from the project.
According to PA board minutes we unearthed from August 2010, if Durst doesn’t achieve a “minimum threshold for lease-up” once the tower opens, the agency can buy back his $100 million share.
Sources now tell Realty Check the “threshold” is 150,000 square feet within the first year after the tower’s opening — which begins when Condé Nast moves in by January. Moreover, it isn’t sufficient that the new leases merely be signed by the end of 2015 — the tenants must actually be paying rent on them in that year.
The 150,000-foot total can’t include the roughly 1.5 million square feet previously signed to Condé Nast, China Center and the federal GSA. The few, freshly signed office leases since those total about 50,000 square feet, including 35,000 feet for KiDS Creative — a mere third of the threshold figure.
The “iconic” 3 million square-foot tower is about 60 percent leased. Durst, citing weak demand, recently reduced asking rents on middle floors to the $60s per square foot from the low $70s, although KiDS Creative is paying in the $90s for the 85th floor.
The previously undisclosed pressure on Durst illustrates an overlooked truth: His $100 million purchase of a 10 percent stake in 1 WTC, while a sound deal with low risk, augurs anything but a honeymoon, even as his Midtown office buildings are facing large lease expirations.
His 1 WTC exposure is modest compared to his empire’s Forbes-estimated value of $4.4 billion. But it must be viewed in context of the Durst Organization’s overall competitive posture.
The company, for all its deal-making prowess, faces the same challenges as any developer/landlord. And the PA has more teeth in the 1 WTC deal with Durst than many believed.
The JV promises Durst a relatively modest return compared with the profits he made at 4 Times Square and 1 Bryant Park. Durst can make money several ways on the deal — including a 99-year contract management fee, a reward for saving the PA money on the tower’s final stage of construction, and leasing commissions similar to those at any office building (and to be shared with Cushman & Wakefield).
But, by our reading of the documents, Durst won’t share directly in rent proceeds until the tower is “stabilized” at 92.5 percent occupancy — right now a distant dream. Until then, he receives only a fixed, single-digit return on the $100 million investment.
The management fee is around $2 million this year, and Durst has already harvested about as much as he can, around $30 million, from cost savings on 1 WTC’s final stage of development.
All the revenue combined might yield tens of millions of dollars more over time — hardly peanuts, but modest compared, for example, with the estimated half-billion-dollar value creation Durst achieved at 1 Bryant Park.
Durst’s four-year involvement at 1 WTC has gobbled up company time and resources even as it’s generated bad press over cost-cutting changes to the original design and security lapses that saw pranksters sneak past dozing guards and make their way to the top.
Meanwhile, the PA has enjoyed significant benefits in addition to cost savings. At the time it tapped Durst over two other companies in 2010, when the site still carried a terrorist-target stigma, the PA had neither expertise nor enthusiasm to find private-sector tenants.
Durst swiftly negotiated a 50 percent space reduction by the GSA, which had previously committed to over 500,000 square feet. The scaling-back of a government tenant made the tower more attractive to private-sector users, and freed up 270,000 square feet for higher rent than the GSA’s bargain-basement $40s.
Then, Durst lured Condé Nast from his own 4 Times Square — nudged along by the PA’s agreeing to cover Condé’s lease costs at 4 Times Square until 2019.
It was a feat Durst won’t likely be able to repeat. He’s unlikely to woo another tenant from his uptown holdings, where about 25 percent of his 10 million square feet are likely to become available in the next few years — at 4 Times Square, 1133 and 1155 Sixth Ave. and 114 W. 47th St.
At 1155 Sixth, law firm White & Case plans to leave behind 450,000 square feet in 2017. To make the 1984-vintage tower more competitive, Durst plans to spend tens of millions on a partial redesign, including a new ground-floor façade, a new terraced rooftop, and installation of floor-to-ceiling corner facet windows.
The looming vacancies don’t mean Durst is in trouble: tenants come and go, and there’s time to replace the ones who leave. But he’s got his work cut out for him even as the PA will be holding his feet to the fire.
Software firm Infor has leased the 21,802 square-foot duplex penthouse at SL Green’s 635-41 Sixth Ave., increasing its stake in the building to nearly 115,000 square feet.
SL Green leasing director Steven Durels said the deal brings the 271,000 square-foot property to 100 percent leased.
The landlord is redeveloping the two-building complex between West 19th and 20th streets into a single property.
Cushman & Wakefield repped Infor and Jones Lang LaSalle acted for SL Green.
Note: The rendering of the Knickerbocker Hotel rooftop on July 14 should have been credited to Neoscape.