Kushner’s Manhattan trophy tumbles down

Bloomberg

When Jared Kushner closed on 666 Fifth Avenue, the Manhattan trophy property, for a record $1.8 billion two years ago, little did he know it was the peak for an investment that shows no signs of bottoming.

Since Kushner bought the building, its occupancy rate has dropped 10 percent and rental income has declined. Citigroup Inc., Kushner’s biggest tenant, vacated about 80,000 square feet of space in August and the skyscraper had about 69 cents in rental income available for every $1 owed in the third quarter, down from 80 cents in the second quarter, according to loan servicing documents examined by Bloomberg.

Even in the best neighborhoods of Manhattan, buyers who expected revenue to rise are struggling as vacancies increase across the U.S. While Kushner isn’t in danger of default because he has a fund to meet declining income, the January 2007 purchase shows the challenges facing investors who borrowed heavily to make acquisitions in the property boom.

Loans more than 60 days late climbed to 0.91 percent in December from 0.32 percent a year earlier, data compiled by Barclays Capital in New York show.

"Cheap and plentiful financing made these deals possible," said Jeffrey Lacilla, an instructor at New York University’s Schack Real Estate Institute who has almost two decades of experience in Manhattan commercial property. "The question now is whether they can live long enough for the building to be able to sustain itself when the reserves run out."

Reserve fund
Kushner, who also owns the weekly New York Observer newspaper, said new leases at the 41-story building will help bolster cash flow. The reserve fund had $98.2 million as of Nov. 24 to cover debt payments and other expenses, according to a servicer report. Kushner sold a 49 percent stake in the building’s retail space in July for $525 million.

Part of the proceeds were used to increase the fund, which had fallen to about $32 million as of the end of May, records show. The fund started at $100 million when the loan was originated.

"There’s eight years left on the debt, and we have $100 million in reserve so any inference that this building is in trouble or distressed is ridiculous, even in this crappy real estate market," Kushner, 28, said in an interview.

So-called pro forma loans allowed borrowers to take on more debt on the assumption that higher income in the future would cover the interest and principal.

About 14 percent of commercial real estate loans that were bundled and sold as bonds in 2007 are not generating enough income to cover debt payments, JPMorgan Chase & Co. analysts, led by Alan Todd, said in a Jan. 6 report. There was a record $237 billion of commercial mortgage-backed bonds sold in 2007, according to JPMorgan estimates.

Kushner is a principal at Kushner Cos., the Florham Park, New Jersey-based real estate company founded by his father, Charles. Jared Kushner took on increased responsibilities for managing the company in 2004, the year his father stepped down as chairman after he pleaded guilty to tax evasion and lying about political donations.

When Jared Kushner stepped in, the company had more than 24,000 apartments in New Jersey, Pennsylvania, Delaware and Maryland, said Steven Solomon, Kushner’s spokesman. He made his largest purchase in January 2007, when he bought 666 Fifth Avenue at 52nd Street in New York for what at the time was the most paid for a single office building in the U.S. Later in 2007, Kushner sold almost 17,000 apartments for about $1 billion in cash and $920 million in assumed debt.