Bear Skyscraper Looks Like Bargain on Paper
By Alex Frangos From The Wall Street Journal Online
On the face of it, it looks like the real-estate deal of the century: J.P. Morgan Chase & Co. agreed to pay about $236 million for Bear Stearns Cos. and as part of the deal gets a well-located Manhattan skyscraper valued at as much as $1.4 billion.
But, as is often the case in real estate, the reality is more complicated than that. The windfall J.P. Morgan appears to be getting on Bear Stearns headquarters building is offset by a wide range of other risks and obligations the firm is taking on in the $2-a-share deal, including two million square feet of lease obligations. Bear Stearns also has a complicated $570 million financing on the midtown Manhattan building at 383 Madison Ave. called a "synthetic lease," which is comparable to debt. Still, the real-estate dimension of the deal looks like a partial coup for J.P. Morgan, given the cost other firms like Goldman Sachs Group Inc. are having to pay to construct new space. Bear's home was completed in 2001 and cost around $500 million, nearly half of which went to pay for technology and interiors.
Indeed, spokesman Brian Marchiony said yesterday that J.P. Morgan was scrapping plans to move the company's investment-banking and trading operations to a building planned for the World Trade Center site. Instead the operations will be moved to the Bear Stearns building. J.P. Morgan is retaining its right to build at World Trade Center site, he said. Bear Stearns's 43-story, 1.2 million-square-foot headquarters retained center stage in the unfolding drama of the implosion of one of the most venerable names on Wall Street. Angry shareholders complained the building is worth more per share than the buyout price, raising the possibility they might do better in a bankruptcy than in a sale to J.P. Morgan. But as part of the deal, J.P. Morgan obtained an option to buy the headquarters for $1.1 billion if it isn't able to buy Bear Stearns, according to the merger agreement. That makes the building a pawn in the shareholder vote. Vote against the deal, and shareholders are stuck with the price that J.P. Morgan's has negotiated. If J.P. Morgan's option didn't exist, Bear shareholders could have counted on selling the building at auction, where it's possible multiple bidders could have driven the price higher.
J.P. Morgan's announcement last year that it was moving its investment-banking unit to the World Trade Center was heralded as a major milestone in the rebuilding effort. But the agreement was nonbinding and its completion has languished in recent months, according to people familiar with the deal. The World Trade Center is owned by the Port Authority of New York and New Jersey. The company will continue to negotiate with the Port Authority and views its option to build at the site as a valuable real-estate asset that could be used for other purposes, executives said. Still, its decision not to move its lucrative trading operation downtown marks a setback for the World Trade Center rebuilding effort.
A Port Authority spokeswoman says the bistate agency still expects J.P. Morgan to move to the site. "We believe their commitment to the site hasn't changed," says Candace McAdams. "We look forward to them playing a great role in the rebuilding of the World Trade Center site." Real-estate experts say the building at 383 Madison Ave. could fetch as much as $1.4 billion on the open market, considering its location near commuting hub Grand Central Terminal and its relative newness. To be sure, credit-market turmoil and Bear's own demise could damp prices for New York office space. A sale of Bear's headquarters would require the paydown of a $570 million encumbrance on the building that's in the form of a complex financial structure on the building called a "synthetic lease." Such a structure allows the company to keep the value of the building off of its balance sheet and is also a tax-avoidance measure. The building could be worth anywhere from $1.1 billion to $1.4 billion, according to real-estate experts, but the actual proceeds to shareholders would have to be reduced by the $570 million owed in the lease.
As part of the Bear Stearns buyout, J.P. Morgan also is getting 65 acres and five buildings with 673,000 square feet in Whippany, N.J. Still, J.P. Morgan is taking on more than two million square feet of leases that Bear Stearns had at offices in New York and around the world.
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