How a Distressed Lexington Avenue Property Became a Strong German Investment

575 Lexington Avenue

A major fund owner focusing on managing real estate properties has taken ownership interests in several U.S. properties, including a Midtown office building with a troubled recent history.  

Prudential Real Estate Investors, and known as PREI, operates closed end real estate funds on behalf of German investors, according to a press release, and is the real estate investment management and advisory business of financial services giant Prudential Financial Inc.

It announced in a press release yesterday that recently, it struck reached an agreement to acquire for $56 million the Rio San Diego, a six-story, 190,000-square foot office building in San Diego’s Mission Valley suburb, from Jones Lang LaSalle—the second time a PREI fund has owned the property.  This time, the firm bought it for 20% less than the company sold it for about seven years ago.

Another of the properties is a San Francisco office building.

But the interesting local addition, is another turnaround situation.  The PREI fund USPF V, which it recently closed, has invested in 575 Lexington Ave. in New York City.  That 35-story building, owned and operated by Normandy Real Estate Partners, has been sold twice in the past decade—and was nearly put into default by the first purchaser, a marquee New York City real estate investment firm.

Normandy, along with New York Life Insurance Co., bought the building last year for about $360 million, according to the Real Deal, handing owner Silverstein Properties—the developer of, among the others, the World Trade Center site—a loss of about $56 million just six years after it bought the property in a deal New York Post columnist Steve Cuozzo wrote was a steal.

In fact, Silverstein and its partner, the California State Teachers’ Retirement System, faced foreclosure proceedings when huge chunks of the building remained unrented after a major 2008 renovation. "The ownership duo avoided losing the building by making a $75 million payment toward the loan on the building," the Real Deal reported, noting that the rents managed to stay above the building's value in the last year of the Silverstein-CSTRS partnership.

Normandy gutted the lobby a second time in four years after it bought the property in 2012, and appears to have turned it around. A Real Estate Weekly article posted on Normandy's site says the firm has struck two lease deals, including a major tenant expansion, in the 739,040 square foot building. Weill Medical College of Cornell University has expanded its current presence to occupy more than 182,320 square feet, a nearly 35,000 square foot increase.

Prudential Real Estate Investors was listed as a partner with Normandy and New York Life when the lease sale was announced last month, which also noted that total year-to-date leasing in the building now totals more than more than 213,700.

“We are very pleased to have reached this level of equity commitments for continued U.S. investments,” noted David Pahl, PREI senior portfolio manager in the press release. “We’re grateful for the tremendous support and confidence our German investors place with us and we are very optimistic about the investment environment over the next several years in the U.S.”

PREI, which created its first fund in 1994, says it has acquired more than 80 properties for more than $3.7 billion, “for the entire range of funds.” The firm is based in Madison, N.J.


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