Morgan Helping Futures Exchanges Build New Home

Having built a global business stretching from Paris to Tokyo, the real estate investment banking unit of J.P. Morgan & Co. is about to arrange a groundbreaking deal closer to home.

Bank officials are hammering out a contract with the New York Commodities Exchange Center on a financing viewed as critical to New York's future as a financial capital: a $225 million headquarters that would enable the five commodities exchanges to stay in the city.

"It is of extreme, vital importance to the city and the downtown marketplace" said Bruce E. Surry, a managing director of Edward S. Gordon & Co., a commercial real estate broker.

The project includes 100,000 square feet of state-of-the-art trading space plus offices at a site two blocks north of the current World Trade Center headquarters.

|A Tremendous Opportunity'

J.P. Morgan has extensive investments and leases in the neighborhood. That makes the project especially enticing for the bank, said Jackson P. Tai, Morgan's managing director of real estate. "We find this mandate to be a tremendous opportunity for us to help the lower Manahattan real estate market."

The mandate also is in line with the big bank's specialty in transactions that combine corporate and real estate finance. Morgan was one of several exchange members among the dozen that competed for the assignment. Its contract is subject to final approval from the individual exchanges.

So-called trading boxes, where frantic men and women cluster together shouting buy and sell orders and tossing slips of paper on the floor, are by nature crowded. But the crowding at the New York exchanges has become so severe that it has stifled the introduction of new futures contracts and threatened to give the Chicago exchanges the upper hand in competition between the two cities.

After years of observing fits and starts, New Yorkers concerned with the issue are glad to see that the project is finally moving forward on their side of the Hudson River rather than in New Jersey.

The five exchanges - which trade futures on coffee, sugar, cocoa, metals, cotton, energy, and stocks - leased a 25,000-square-foot floor in the World Trade Center in 1977.

By 1985, when officials began planning a move, trading activity had doubled, to more than 35 million contracts a year out of 159 million traded nationally.

The World Trade Center lacked appropriate space for expansion, said Steven Dixon, a partner in LaSalle Partners, and the cost of bringing the telecommunications equipment to today's standards would have been prohibitive. LaSalle acted as a real estate adviser to the exchanges in the relocation.

The plan in 1985 was to put up a building over the Manhattan entrance to the Brooklyn Battery Tunnel. That plan was put on hold, however, after the 1987 stock market crash.

The New Jersey Option

A short time later, the exchanges sent shock waves through the local real estate brokerage community with talk of a move to Jersey City. Although the exchanges had a natural bias in favor of staying in New York, Mr. Dixon said, the cheaper space across the river was quite attactive.

That relocation would have drained tenants and jobs from New York and pushed down prices in an already anemic office market.

The trading floor and exchange offices would cost $225 million to build. If the exchanges approve the contract that was being hammered out last week, the city would contribute $100 million toward that cost and Morgan would find financing for the rest of it.

A Complex Deal

Mr. Tai and Gregory Guyette, the vice president assigned to manage the project for the bank, said Morgan's task would be to get the most out of a complex mixture of subsidies, cash flows, and tenant income by custom designing a mixture of debt and equity finance.

The objective will be to maximize tax breaks and other abatements as well as lease income from the space and revenue from trading operations, which includes ticker income and trading fees for the exchanges.

"This is ... project finance as much as it is real estate finance," Mr. Tai said. Real estate financings are usually underwritten on the basis of lease income from a building. In this case, the financial strength of the exchange business is also critical.

Split Ownership

The plan is for the trading area and offices to be situated in the bottom 17 floors of a 1.2 million-square-foot office tower.

Developer Tishman Speyer Properties would be responsible for arranging financing for the top half of the project, in which ownership would be split 40-40-20 among Tishman, the exchanges, and New York City.

Tishman already is pitching leases in another 17 or so floors to the exchanges' 3,000 or so member firms.

There is some skepticism in the marketplace that Tishman's part of the financing would prove feasible in the soft leasing market. If Tishman failed to find tenants or financing, the top half of the building might be omitted. But the exchange part could survive, it is claimed.

Although some of the tenants would be drawn from competing space in the city, the complex is expected to serve as a magnet for thousands of jobs and for firms that pay hundreds of millions of dollars a year in taxes and would otherwise have left the city.

Indeed, the prospect of losing the exchanges to a site in Jersey City prompted local authorities to subsidize the move. They offered a city-owned parcel at the outskirts of the financial district as well as a cash-and-forbearances package that is valued at $143 million.

Thanks to the city subsidies, which also include waivers of real estate taxes and ground lease payments on a city-owned parcel near the World Trade Center, lease rates for the exchanges and the members will be competitive even in today's soft market, Mr. Dixon said.

Mr. Surry said the 91 million-square-foot downtown neighborhood could ill afford the loss of the exchanges right now. Unleased office space continued to rise in the first six months of 1991, by 1.2 million square feet, according to an E.S. Gordon report. About the best thing that can be said of that rate is that the deterioration was worse in the first six months of 1990, when 2.9 million square feet opened up.

Rents Still Sliding

Average asking rents continued to decline, to about $29 a square foot, and actual rents are still lower. New space costs $40 a square foot or more to build.

The decline in rental costs posed a major obstacle to building new quarters in New York. Land for new development is expensive and hard to find, and new buildings must compete with cheap space that is plentiful nearby.

In addition, the very favorable terms at the World Trade Center made it especially difficult for the exchanges to swallow the cost of moving elsewhere in the city.

Also, they needed space that costs considerably more than the average office space. Mr. Dixon noted, for example, that the trading floor would be raised over an "interstitial space" to permit changes in telecommunications systems without disrupting floor activity. And with traders occupying only 15 square feet apiece - about one-tenth the space that office workers usually occupy - an expensive air-conditioning system is another must.

PHOTO : A Two-Block Move for $225 Million Source: New York Mercantile Exchange

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