Dec. 6 (Bloomberg) -- SL Green Realty Corp., Manhattan’s largest office landlord, agreed to buy Gramercy Capital Corp. real estate investments for $390.8 million, including the right to a 100 percent leasehold on New York’s Lipstick Building.
The agreement includes the assumption of $265.6 million in debt for interests in land beneath the Lipstick Building at 885 Third Ave., as well as 2 Herald Square and 292 Madison Ave., SL Green said in a statement today. The company, based in New York, expects the deal to be completed within 90 days.
“These transactions conclude an important consolidation in our ownership of land and improvements representing 1.2 million square feet of prime Midtown properties, all with long-term operating leases to third parties,” Andrew Mathias, president of SL Green, said in a statement.
SL Green, founded by developer Stephen L. Green in 1980, has been active this year as a buyer and seller of real estate and an investor in distressed property debt. It has also been raising rents at its Midtown office towers in anticipation of rising demand for space in the biggest U.S. office market.
The transactions with Gramercy Capital simplifies the ownership of the land under the buildings, said Joshua Stein, principal of New York law firm Joshua Stein PLLC and the author of “Stein on New York Commercial Mortgage Transactions.”
“The main reason for them to consolidate their position is so they don’t have to deal with a joint venture partner and to just continue to collect the coupon for the next few decades,” Stein said.
Gramercy Capital shares jumped 26 percent to $2.84 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain in two months. SL Green added 1.7 percent to $67.03.
Gramercy was previously a financing unit of SL Green and was run by the real estate investment trust’s executives. Gramercy last year acquired its management company, which had been a unit of SL Green, and hired its own executives, including Chief Executive Officer Roger Cozzi. SL Green remains its largest investor.
The deals announced today “produce a substantial increase in our corporate liquidity, and further deleverage Gramercy’s balance sheet,” Cozzi said in the statement. They will add about $89.9 million to Gramercy’s cash flow, he said.
The transaction for the Lipstick Building, nicknamed for its elliptical shape and red granite exterior, gives SL Green the entire stake in the joint venture that owns the fee and leasehold interests in the property. The company and Gramercy Capital bought a 79 percent interest in the ground beneath the office tower in 2007, and leased the land back for 70 years.
The owner of the Lipstick Building, Metropolitan 885 Third Avenue Leasehold LLC, filed for bankruptcy reorganization last month. The filing followed a lawsuit in June by Royal Bank of Canada, which sued to force a sale of the 34-story tower because the landlord had defaulted on a $210 million loan.
SL Green also acquired $38.7 million in mezzanine debt on 601 West 26th St., known as the Starrett-Lehigh Building, the company said today. The purchase adds to an existing investment in the property.
Mezzanine loans are a form of higher-interest debt that’s subordinate to a first mortgage. They’re backed by an equity stake in the company owning a property, typically enabling the landlord to leverage more of the asset’s value than a primary lender would allow.
SL Green has bought properties including 125 Park Ave. and 600 Lexington Ave. in Manhattan this year. It agreed in October to provide financing to developer Joseph Moinian to complete 3 Columbus Circle, a 26-story tower at 1775 Broadway.
The company is considering the partial or total sale of six properties, according to a presentation at an investor conference today. The sales may include 220 East 42nd St., the former home of the New York Daily News, as well as 100 Church St. and 711 3rd Ave. in Manhattan, SL Green said.
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