The old fraud was someone selling you the Empire State Building. A new company wants you to buy State Street Financial Center in downtown Boston. But it’s not a fraud; just a focused real estate investment.
Commercial real estate involves big chunks of capital. Some of those investments will meet underwriting, some will be home runs, and some will be duds. There are very few investors who have the capital to invest in a diversified portfolio of real estate to even out the highs and lows. That was the lure of REITs. An investor could access to a diversified pool of real estate assets.
ETRE Financial is trying to go the opposite way and float a public offering of an interest in a single real estate asset. The firm would own half of a joint venture that owns the Boston skyscraper. You, the investor, would hold an interest in that one building.
This is ETRE’s second attempt at this structure. The first attempt was for 1201 Connecticut Avenue NW, Washington D.C.
State Street Financial Center is a 36-story office tower that has a million square feet of primarily office space and a five-level parking garage. The Property was developed in 2003 through a collaboration among the Gale Company, State Teachers Retirement System of Ohio and a Morgan Stanley real estate fund. The Property was named “Boston Building of the Year” by the Building Owners and Managers Association International, or BOMA, in 2003.
It’s a great real estate asset. But the value is tied to one lease. The building is rented to a single tenant: a subsidiary of State Street Financial. That lease expires in 2023, subject to two ten-year renewals.
You also have to deal with the mortgage financing that matures in 2017.
To me, it seems like the investment is very focused. You would want to make sure you like the credit of State Street, that you like the Boston office market, that you understand what could happen with the mortgage re-financing, and that you understand the effects of the lease extension and expiration. Again, this is the opposite of an investment in a diversified REIT or private real estate fund.
I think it’s an intriguing investment choice. Possibly, it could be an intriguing way for real estate funds to exit from investments.
Typically, I don’t think a single lease negotiation or extension wold be material non-public information. Changes to this lease would definitely be material non-public information and subject to insider trading abuse.
By the way, you can own a chunk of the Empire State Building, as part of the diversified REIT, Empire State Realty Trust.
Sources:
- S-11 Filing for ETRE REIT Series A-1
- Want to buy into a high-rise? Here’s your chance by Jay Fitzgerald in the Boston Globe
- Single-Building IPO Is in Works by Eliot Brown and Robbie Whelan in the Wall Street Journal
- Stealing the Empire State Building
UPDATE: A prior version of this story indicated that this was the third attempt at this structure. The first filing was merely a template using an unnamed building in Manhattan.