FAO Schwarz Invokes Option to Extend Lease at New York City’s GM Building

FAO Schwarz is seeking to extend the lease for its flagship store at New York’s General Motors Building, almost three years after its landlord, Boston Properties Inc. (BXP), said the toy seller would likely have to leave.

Toys “R” Us Inc., the Wayne, New Jersey-based parent of FAO Schwarz, in January exercised a five-year option in its lease, Kathleen Waugh, a company spokeswoman, said in an e-mail. It had been set to expire in 2012. The parties are now in arbitration over the rent for the iconic store, at Fifth Avenue and East 58th Street, two people with knowledge of the situation said.

The extension would save Toys “R” Us from having to find an alternative Manhattan location at a time when retailers are paying record prices for New York’s most-trafficked areas. It also means that Boston Properties will forgo the opportunity to market about 60,000 square feet (5,570 square meters) of space in the world’s most expensive shopping district.

“If Toys ‘R’ Us really believes in FAO as a brand, it would make a lot of sense that they would want to stay there,” said Robert Futterman, chairman of Robert K. Futterman & Associates, a New York-based retail brokerage. “Fifth Avenue has become an iconic street for international and domestic brands. It speaks to Wall Street and it speaks to the world.”

Arista Joyner, a spokeswoman for Boston-based Boston Properties, said in an e-mail that the company had no comment.

FAO Schweetz, ‘Big’

The FAO store, a magnet for New York tourists, is on the same plaza as Apple Inc.’s “Cube” store, across the street from Central Park and the Plaza Hotel. The three-level space features a candy shop known as FAO Schweetz, the Madame Alexander Doll Factory and the Muppet Whatnot Workshop, as well as a giant piano made famous by Tom Hanks’s dancing in the movie “Big.”

FAO “will probably not be the most economically viable potential tenant we have for that space over time,” Boston Properties President Douglas Linde said at a real estate conference on June 4, 2008, 11 days after the company announced it would buy the 59-story white granite skyscraper.

Linde was responding to questions about how the new owner would unlock value at the GM Building. Its two biggest office leases, with law firm Weil Gotshal & Manges LLP and cosmetics maker Estee Lauder Cos., don’t expire until 2019 and 2020, respectively. Boston Properties and its partners paid $2.8 billion for the tower, the most ever for a single U.S. building.

‘Fair-Market’ Value

The option entitles the tenant to extend the lease at “fair-market” value, one of the people with knowledge of the situation said. The people asked not to be identified because the talks are private.

The stretch of Fifth Avenue between Rockefeller Center and Central Park had an average asking rent of $1,850 a square foot, exceeding Hong Kong’s Causeway Bay shopping district’s $1,664 a square foot as the world’s priciest, according to a September report by broker Cushman & Wakefield Inc.

Spanish retailer Inditex SA said on March 4 that it paid a U.S. record of about $8,300 a square foot to own a storefront at 666 Fifth Ave., where it plans to house its Zara apparel brand. A year ago, the parent of Japanese clothier Uniqlo agreed to rent space in the same building for a record New York lease.

Moving Costs

It would be “really hard” to find a Fifth Avenue location big enough to house FAO Schwarz, Futterman said. Toys “R” Us probably wants to avoid the costs of moving and building out a new space to its standards, he said.

The retailer also wouldn’t want to move FAO Schwarz to Times Square, where it would have to compete with the Toys “R” Us flagship, Futterman said. The company bills that site as “the world’s greatest toy store” on its website.

Toys “R” Us bought FAO Schwarz in 2009. About a third of Toys “R” Us’s equity is owned by Vornado Realty Trust (VNO), a competitor to Boston Properties and owner of 161 retail properties in the U.S., including 24 “street retail” locations in Manhattan, according to its annual report. The New York-based real estate investment trust acquired Toys “R” Us with KKR & Co. and Bain Capital LLC in 2005.

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel in New York at kwetzel@bloomberg.net

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