Kushner Cos. may cut stake in NYC tower below 50%

Brookfield eyes infusion into 666 Fifth Ave.

NEW YORK •Whenkushner Cos. bought 666 Fifth Ave. for a record-setting US$1.8 billion, it made a down payment of US$50 million. When it added a partner years later, that company put down US$80 million.

Now Brookfield Asset Management Inc. is offering to buy a stake in the troubled New York City office tower and put up as much as US$700 million — in cash.

That figure, which emerged on Friday, is a standout in Manhattan real estate, where empires are typically built on debt.

Though Kushner has owned a majority stake in the property, Brookfield will probably demand more than 50 per cent or other concessions for its giant equity infusion, according to five people familiar with the building’s finances.

Representatives for Kushner Cos. and Brookfield declined to comment.

The marquee property in the Kushner Cos. portfolio, 666 Fifth Avenue is weighed down by a Us$1.2-billion mortgage. It also needs hundreds of millions of dollars in renovations. Attempts to find other investors who would take a back seat to the Kushners in a redevelopment deal have come up short over the last couple of years.

Months-long negotiations with Brookfield are progressing, though the final terms aren’t set. The companies are now discussing more than US$1.5 billion of financing, including as much as US$1 billion of debt. That eclipses current appraisals on the property, which top out at US$1.3 billion.

Kushner Cos., owned by family members of Jared Kushner, the son-in-law of President Donald Trump, wants to maintain a stake in the property, which was its first big splash on the Manhattan real estate scene.

But without a new partner and financing, it runs the risk of having lenders seize the property when the mortgage comes due in February.

As a first step in its latest refinancing plan, Kushner Cos. said this month it would buy out its partner, Vornado Realty Trust, which owns 49.5 per cent. Toronto-based Brookfield, one of the world’s largest investment firms, certainly has the funds for the deal. Under the latest discussions, Brookfield would put up US$500 million to US$700 million in equity, though it’s not clear what structure would be used to make the deal worthwhile to its shareholders.

“I’m not going to say it’s chump change, but it’s not going to change anyone’s lifestyle over at Brookfield,” said Lawrence Longua, a retired real estate professor at New York University’s Schack Institute of Real Estate and now an adjunct instructor at Fordham University’s new real estate institute.

The transaction could be structured any number of ways, with components — such as preferred equity with an outsize guaranteed return — that could sweeten the deal for Brookfield while allowing Kushner Cos. to hold a nominally larger stake, two of the people said.

When Vornado purchased its stake for US$80 million in 2011, it secured a guaranteed 11 per cent return on the funds, deal documents from the time show.

In the end, Vornado and Kushner Cos. couldn’t agree on how to manage the property. Vornado wanted a modest update to the building, while Kushner Cos. favoured a plan to knock down the tower and build one twice as tall in its place.

Vornado “is going to walk away from this getting a net US$120 million,” Longua said. “I’d go back to my shareholders and say, Look at what I did.”

Brookfield now has the opportunity to bring the offices up to top standards and charge premium rents.

“They are going to come in, give Vornado an exit, and they are going to take advantage of the tremendous runup in value going forward,” Longua said. Brookfield has said it would follow a plan similar to one executed at the onetime home of the New York Daily News at 5 Manhattan West, stripping off its sides and re-cladding it in floor-to-ceiling glass.

After a successful turnaround, Brookfield could sell the refurbished tower.

It could go to “an international buyer who wants a trophy property in a deadcentre location on Fifth Avenue,” said Lynne B. Sagalyn, a real estate professor at Columbia Business School.

A partnership with Brookfield would be a great relief for the Kushners. The 41-storey building, which the family bought in 2007, lost US$25 million last year and has almost always been unprofitable.