Win-Win Solutions with Partners
One of Jeff Johnson’s first investments as Managing Director at Lehman Brothers’ Private Equity Fund was a partnership with his past colleagues at Equity Office. The investment was a economic win-win for both the Equity Office Public REIT shareholders and Lehman’s private equity investors.
Transaction Summary
Lehman had the inside track on a deal that was too large to do without a partner and did not meet their LP Return Thresholds. Jeff Johnson, then at Lehman, brought the opportunity to EOP
Equity Office and Lehman structured a JV to meet both group’s Return Thresholds
1301 Avenue of the Americas was acquired in July 2000
Property totals 1,765,694 square feet that Equity Office leased and managed for the joint venture
Investment Rational
Premier Midtown Manhattan location with limited lease exposure for first ten years
Manhattan's vacancy rate had declined since 1994, it was at a historical low of 4.2%
The $411psf acquisitoin basis was low relative to the estimated replacement cost
Leases were 25% below market creating an upside opportunity
Johnson negotiated a joint venture where EOP obtained management and leasing fee income for improved ROE, and Lehman had a 4-year lockout from a buy/sell to achieve private equity return objectives
Results
Initial Purchase Price was $725 million ($411psf) and Equity Office bought out Lehman’s interest in 2004 based on $825 million ($467psf)
Allocated value in 2007 Equity Office sale to Blackstone was $1.3 billion (58% higher)
Both Equity Office and Lehman significantly outperformed their Return Thresholds