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Lois Weiss: Better Than Sliced Bread, Taystee Venture Lays Framework for Harlem Offices
May 8, 2019
By Lois Weiss
A portion of the former Taystee Cake Factory in Harlem is on the verge of another life as a new, Class A office building that could include life sciences tenants.
Brokers Shimon Shkury and Victor Sozio of Ariel Property Advisors were hired by Taystee’s developer, Janus Property Group, with an eye on bringing in an equity partner to jump start the development of a 360,000 square-foot Class A office building – the first that would be developed in Harlem in decades.
Located at 450 W. 126th St. and stretching mid-block to W. 125th St. between Amsterdam and Morningside avenues, the site is currently vacant land in the midst of a larger factory complex.
In 2012 Janus – at that time along with Monadnock Construction -- paid $3.43 million for the rights to three acres of the dilapidated buildings that comprised the former Taystee bread factory. The rights were won in 2011 through a 2010 request for proposals by the City’s Economic Development Corp., which was on board with Janus’s vision of making it a home for both TAMI tenants and biotechs.
The expectations were that companies affiliated or spun off from area colleges would be the most interested in the space. Of course the target tenants included spinoffs from Columbia University whose new Jerome L Greene Science Center is diagonally across Amsterdam from the project.
But first, Scott Metzner and Jerry Salama of Janus had to ensure the old factory was not landmarked and that the area was rezoned, which it was in 2012.
During 2016 and 2017, small tenants were starting to sign up for the various buildings and the project was on track to sign 500,000 square feet when the negotiations for what would be an anchor tenant fell through. Such an anchor tenant would be needed for a traditional construction mortgage and without an anchor, Janus would have to rethink the project.
In 2018, the duo made a decision to build sooner rather than later as it would provide more certainty for the tenants who also have current lease expirations to consider.
“When we took it over it was vacant land,” said Shkury. “Tenants want to have a date certain when they can enter their office and Janus felt if they build it, they will come.”
Shkury had known Metzner and Salama since he started his career. Along the way, they worked on various business projects; he sold some buildings for them, and they remained friendly, having constant conversations about their developments and bouncing around ideas.
Three years ago, Shkury started a capital services group to dovetail with the investment sales and investment research divisions.
Rather than finding just a lender for a project mortgage, the joint venture assignment for the Ariel brokers was to raise equity from a partner who would be excited about the project and have a similar long-term investment strategy and timeline.
Janus was willing to contribute the land to the venture and take on a like-minded partner while giving up a portion of the economics.
A typical such venture would give the equity partner maybe 80 percent of the project, but Janus wanted to retain about half the stake. “The traditional financing is not what we are looking for, we were looking for equity and we would put our land into the venture at a valuation that would be good for the buyer but enable Janus to retain a substantial equity stake and control,” Shkury said.
Along the way, not only did they decide to build on spec, but started targeting life sciences. Working with LevenBetts Studio as design architect and SLCE as executive architect they found a clever way to plan the basic building so that it could be easily altered for a life science tenant without a lot of additional work or capital.
According to Sozio, the brokers approached over 100 possible venture and equity partners.
“We had to take data points from all over the City and the various life sciences projects and present the package in a way the equity partners could take it all in,” said Sozio. “It will be a transformative development for the area.”
They had to not only “sell” the Harlem neighborhood that was being rejuvenated with the new Columbia University buildings but also the concept of a building that could be targeted to both office users and the life sciences. And investment committees are notoriously picky.
“The Alexandria Center provided a data point and a blue print for a life sciences project,” Sozio said of the project in Kips Bay. “Proof of concept already existed in places like Cambridge, Mass” The mayoral administrations have also been pushing the life sciences sector. “It snowballed nicely as we got moving with this,” Sozio said.
The project was close to being shovel ready and of the 100 capital providers that were approached, they received a few dozen letters of intent with some offering just first mortgages, and others equity. Some wanted to invest as “preferred equity,” so they would be paid first, and others wanted to participate in different parts of the capital stack, but in those cases they wouldn’t be partners and interests of the developer and investor would not be aligned.
“Everyone were impressed and intrigued but they needed more return for the risk and we needed someone willing to take less of a reward,” said Shkury. “The challenge was whittling down the candidates, finding someone to become a partner, share the risk and partake in the upside.”
Those that were intrigued were educated as to the possibilities and took on walks through the buildings and the area which has no Class A offices.
Since Janus controls the entire city block and other sites that were not part of the initial discussions about the office building project, as the investors became excited about the opportunity, they were also worried about the potential competition from Janus’s other buildings that were being rented to other small tenants.
To reassure the investors and get to `yes,’ the Ariel brokers worked out a right of first offer, known as a ROFO for other Janus projects.
As a few contenders stepped up and negotiations continued, the brokers had to perform further analyses. Since they were not just selling a building, they had to analyze the proposals, the return expectations and capital structures and get them into a format that would enable them be compared as “apples to apples.”
They finally chose a group that the brokers had worked with before and felt were a perfect fit for the Janus executives.
Just when things got close, there was another challenge. The investors, a client of JP Morgan Asset Management, needed a certain structure for tax purposes.
“We really had to bridge a gap between an institutional lender and two entrepreneurs,” said Shkury.
The deal closed in December 2018.