Emmes Group to sell Midtown portfolio.

Real estate investment firm, the Emmes Group, will be selling three of its Midtown office buildings, a portfolio that one of the brokers handling the sale, Cushman & Wakefield's Ron Cohen, said could grab as much as $500 per square foot.

Located at 509, 535, and 545 Fifth Avenue, the three buildings contain a total of 600,000 s/ f, meaning that the Emmes Group could be in for a lofty $300 million payday.

Adding to the attractiveness of the portfolio is that 535 and 545 Fifth Avenue comprise an en tire block front between 44th and 45th Street, a feature that would allow a buyer to potentially redevelop the site years down the road as leases run out in the mostly occupied buildings.

"You wouldn't be able to redevelop the land right now because there are commitments," Cohen said. "But that possibility could factor into its value. This property could be sold again down the road as a development site."

Put on the market last Thursday with initial bids due in December, the buildings are sure to grab the attention of both pension funds and private investors alike, Cohen indicated, and potentially even local REITs, such as Reckson and SL Green.

"It's very rare to get a full block front in the city, no less in Midtown," Cohen said.

Besides the block front that 535 and 545 offer, the former also could be a candidate for a residential conversion in its tower portion.

"It has light and air, high ceilings and a great Midtown location," said Heather Jaffe, who is part of the C&W team handling the sale. "These days, you don't need much more than that to have a good conversion."

The buildings have a combined vacancy of 11%, but that space could be quickly filled, Jaffe indicated, by hedge funds--who covet such office stock--if the new owner institutes a high-end build out program.

Andrew Davidoff, cofounder and CEO of the Emmes Group, indicated that the sale of the portfolio wasn't as much a product of capitalizing on record building values as it was simply abiding by the firm's planned hold period for the assets. Emmes purchased the buildings over a decade ago when, in comparison to today's spiraling values, they were priced at rock bottom levels.

The sale of the buildings may come with a hangover however as it won't be easy for the firm to immediately reallocate its capital to achieve returns as spectacular as it did in the 1990s given today's market of single digit returns amid rising interest rates.

Typically using no more than 65% leverage, the firm feasts off of low interest rates, and also volatility in the real estate market. A market characterized by pricing instability--far different than the current one of consistently escalating values--can have the effect of causing capital providers to contract and gives firms like the Emmes Group, who utilize significant amounts of equity, a competitive advantage in that they can secure lower interest rates on what portion of the capital structure they do leverage.

As a consequence of this, in recent years the firm has found it far easier to sell than acquire properties that fit its demanding requirements for returns, a predicament just the opposite of the position the firm found itself in during the period between 1992 and 2000, when it could easily find deals. It was such a buyers market during that stretch of time, Davidoff said, that the Emmes Group allocated three times as much capital towards purchases as it harvested from dispositions. Now it is the other way around with the firm reaping three times as much from dispositions as it allocates for acquisitions.

Currently the firm focuses on deals attached with hidden complications or certain unattractive features that scare most investors off.

"Emmes will play on things that won't attract 20 to 30 bidders," Davidoff said. "The properties typically have issues."

An example of the firm's purchase of such a deal is its 2003 acquisition of a 2500-unit apartment complex in Brooklyn called Flatbush Gardens that had gone into bankruptcy under the former owner. Badly neglected, the property was priced at $87 million but required the Emmes Group to spend another $14 million to make necessary capital improvements. In October of 2004, the firm then sold the complex for $138 million, turning a quick profit.

But "those opportunities are few and far between," Davidoff said.