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Kushners give up control of Manhattan tower to save themselves

Deal with Brookfield means 666 Fifth Ave will no longer be a drag on their estate empire

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Brookfield will invest US$700 million to fulfil what had been the Kushners' dream of turning the property (above) into a world-class skyscraper in the heart of Manhattan's premier office district.

New York

THE Kushners have found their out - and it comes at a price.

The family firm of presidential son-in-law Jared Kushner will be relieved of the biggest drag on its real estate empire, will no longer face a US$1.2 billion debt payment due in months and will be rid of having to overhaul an ageing property.

But in return, they have given up control of the trophy New York tower that was meant to be their crown jewel.

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Brookfield Asset Management's deal for a 99-year lease at 666 Fifth Ave, the Midtown building purchased by Kushner Cos at the height of the last real estate boom, gives the Canadian giant ownership of the tower in every way but the deed.

It will invest US$700 million to fulfil what had been the Kushners' dream of turning the property into a world-class skyscraper in the heart of Manhattan's premier office district. The Kushner family will have to watch from the sidelines.

It's a stunning conclusion to a problem that became a matter of national interest because of the role Jared Kushner, the company's former chief executive officer, plays as senior adviser to US President Donald Trump.

Mr Kushner sold his portion of the building to his family and no longer has a formal role with the company, but he's still deeply invested in its well-being. A Kushner Cos spokeswoman declined to comment on the transaction.

For Kushner Cos, the Brookfield deal ends - at least until the next century - its involvement in a property that had become an albatross.

When the company bought 666 Fifth Ave for US$1.8 billion in 2007, it was meant to signal its ascension from New Jersey, where it had built a fortune and suffered an embarrassing legal battle.

But as boom turned to bust there was little time to celebrate. The building was soon drowning in debt, and the family ricocheted between stop-gap fixes.

That has involved loan negotiations, selling pieces of the building and approaching Arab royals and Chinese financiers with hat in hand. With Mr Kushner in the White House, such moves raised conflict-of-interest concerns.

The company neared a potential rescue from China's Anbang Insurance Group last year, but talks fell apart after the terms of a particularly advantageous deal for the family were made public.

That put intense pressure on the Kushners to find a fix before the US$1.2 billion mortgage comes due in February 2019.

One barrier to the solution was the Kushners' patriarch, Jared's father. Charles Kushner, who built Kushner Cos into one of New Jersey's largest landlords before selling most of his holdings to invest them in 666 Fifth, can be combative.

In 2011, Kushner Cos sold about half of the building to Vornado Realty Trust, a better-capitalised firm headed by Steve Roth, another hard-headed real estate investor. Mr Roth wanted to update the building and re-lease it at higher rents.

But the Kushners had a moonshot plan that called for knocking the 41-storey tower down and building another, twice as tall, in its place.

The project, with a multistorey mall and condos that would need to sell at record-breaking prices, raised eyebrows in the New York financing community.

The projected US$4 billion construction loan, alone, would be a record. Many speculated that the Kushners' only option for a partner would be from China, where investors were eager to get money out of the country and into the perceived safe haven of New York real estate.

After Anbang stopped pursuing a deal to make that dream a reality, no other partner materialised, and time was running out.

Mr Kushner in 2011 had been given an extension on his mortgage, and had even had some loan interest forgiven, concessions designed to give him and Mr Roth time to make the building profitable. They failed.

The tower lost US$25 million last year, a figure that was exacerbated by the fact that the Kushners recently had not made serious efforts to lease the property up, given the plan to try and rebuild it.

As the situation worsened, one thing that bothered some Vornado executives, as well as some of the building's lenders, was the Kushners' management fee, said people with knowledge of the negotiations.

Every year, no matter how well the building did, a division of Kushner Cos was slated to receive about US$3 million for overseeing it, according to loan documents, which others saw as proof that Mr Kushner wasn't aligned with its partners and lenders.

Eventually, Mr Roth, who had long desired to own the building outright, agreed to sell Vornado's stake back to Kushner. The company said last Friday that it got US$120 million in the deal. It still owns most of the retail space.

When news broke that Brookfield was weighing a stake in the Kushner building, it sent real estate analysts back to their calculators.

The Toronto-based company wasn't buying Kushner's raze-and-replace effort, but it still planned to invest US$700 million, plus more to facilitate a paydown of the tower's debts.

For that deal to make sense for Brookfield's investors, they would need to receive more than Vornado's half of the property to be economical, they told Bloomberg at the time. Some estimated Brookfield would need to buy it outright.

The deal that emerged last Friday does that in a clever way. Brookfield will take a 99-year leasehold at the property.

What that means is Brookfield will pay a fixed rent to the deedholder, Kushner Cos, while essentially managing the building as owners, and taking the upside, or loss, for themselves.

Leasehold structures are popular with property owners who don't want to worry about management, and also those who do not want to deal with the tax implications of a sale.

What's unusual about Brookfield's deal is that it pays Kushner Cos the 99-years rent upfront, rather than annually, according to people with knowledge of the matter.

Exactly how much that is hasn't been disclosed, but would need to be enough to help the Kushners pay off at least US$1.1 billion they owe lenders.

Without Mr Kushner, and with the benefit of a century's time, Brookfield now sees what the Kushners did when they first bought the building more than a decade ago: an iconic address in an elite city with limited supply.

"Given Brookfield's experience in successfully redeveloping and repositioning major office assets in New York and other cities around the world, we are well placed to capitalise on that opportunity," Ric Clark, Brookfield Property Group's chairman, said in a statement last Friday.

But they're not the only ones thinking long-term. Charles Kushner and his wife, Seryl, have been estate planning: creating trusts and even buying apartments that their grandkids might one day use at a building they own in Williamsburg.

And in 100 years, Kushner descendants will still own 666 Fifth. They will get another crack at it. BLOOMBERG