Lafayette Corporate Center, Boston

In 2002, two of the largest commercial real estate transactions in New England were the $500 million sale of the Braintree-based Flatley Co.’s 4,223-unit apartment portfolio in Massachusetts, Rhode Island and New Hampshire and the $133.5 million purchase of the 600,000-square-foot Lafayette Corporate Center in Boston by the Boston-based Abbey Group.

Remarkably, one of the largest real estate acquisitions in Boston was originally constructed adjacent to the Combat Zone in 1984, when that seedy area was in full flourish and could have served as a prototype of urban decay.

The original mall was once a colossal retail failure. A bankruptcy ensued, and it remained a troubled site until a new developer with a better idea created an office center and retail complex on the street level. This was the result of an $85.6 million renovation and expansion of the original building in 1999.

The confidence shown by a proven Boston-based developer, the Abbey Group, contributes significantly to the new vision for that entire urban area, in tandem with the commitment made by the developers of the Millennium Place residential project. It is a strong signal to the vitality of urban development in downtown Boston, even though the city’s commercial real estate market remains somewhat stagnant.

Today, the Lafayette Corporate Center’s acquisition by the Abbey Group may well serve as a benchmark in the history of development in downtown Boston for the underlying stability of the market despite the ups and downs of Boston’s commercial real estate economy over the past two years.

Interestingly, the Flatley deal did not escape its own share of irony. The properties were not even for sale when the buyer first expressed interest.

Beyond these interesting anecdotal accounts, the Abbey Group’s $133 million acquisition, and the $500 million dollar sale of Flatley Co.’s multi-state apartment portfolio provide much more current and practical insights into the ins and outs of significant commercial real estate transactions.

Here are several basic principles of buying and selling significant commercial real estate that were reinforced through these landmark transactions.

Sophisticated parties can get deals done. Experienced and sophisticated clients unquestionably aid transactions. The closings for both the Lafayette Corporate Center and the Flatley apartment portfolio were smooth and cooperative. That speaks to the high quality of the sellers and the buyers. The companies were well-managed, very professional and basically good fundamental real estate developers. They knew what they were doing. The sellers knew what they had and their value. The buyers knew what they were getting.

For example, the Abbey Group has had much success in developing properties in Greater Boston. This company transformed the former Sears warehouse into the Landmark Center when no fewer than three prior developers had failed to materialize a project on the site.

The Abbey Group had an astute vision for that property which included the construction of two very large atriums in the existing building to develop interior spaces and interior light for office tenants. Once soundly conceptualized, the Abbey Group then successfully marketed the space to high quality office tenants, including Blue Cross and Blue Shield of Massachusetts and Harvard; robust retail tenants such as Bed Bath and Beyond, Best Buy and interesting accent tenants such as General Cinema.

The Lafayette Corporate Center and Flatley properties were well done and well maintained. They had a good, strong tenant base. The Flatley properties had an occupancy rate of 94.6 percent, and monthly rents averaging $1,263. The Lafayette Corporate Center had a terrific long-term office tenant base with State Street Corp. and Massachusetts Financial Services occupying approximately 570,000 square feet.

Notwithstanding the complexities involved, for the right real estate owner each property made a lot of sense economically – even though few properties of this magnitude were closing last year.

Sophisticated parties can get deals done quickly. In the case of the Lafayette Corporate Center, the time that elapsed from the purchase and sale to the time of sale was only four months, and this process included required approvals from the Boston Redevelopment Authority.

In fact, the timetable in the $500 million Flatley deal from purchase and sale to closing was even quicker – just 60 days.

In this technological age, geography doesn’t have to matter. In the Flatley deal, the buyer was located in Denver, buyer’s counsel was in California, and the title insurer was headquartered in Houston, and the seller was based in Braintree. In the Lafayette deal, the seller was based in Philadelphia, and its counsel in Boston. Buyer’s lender was in New York, and its counsel was in California.

Lawyers do matter. There are experienced real estate lawyers who get deals done, and there are other lawyers who are consumed with being lawyers. This is really the line of demarcation in real estate. The best real estate lawyers focus on the real issues with a constant view to closing, as opposed to roaming the terrain of every possible theoretical legal, title or lending permutation.

The purchaser of the Flatley properties, AIMCO, and the seller, as well as the seller of Lafayette Corporate Center and its buyer, benefited from experienced, knowledgeable counsel, which aided tremendously in expediting the completion of these deals.

Similarly, long-term relationships matter. The Abbey Group’s real estate counsel once served as the company’s in-house counsel, and their mortgage broker, Holliday Fenoglio Fowler, has been involved in numerous real estate financings with them. Flatley’s real estate counsel had represented the company previously in the sale of two shopping plazas.

Current Times

Clearly, these two transactions are a far cry from the driving dynamics of earlier real estate deals in the 1980s and 1990s, when property owners, developers and lenders were far more prone to speculative investments and developments, almost ignoring market fundamentals. Projects that were poorly conceived, poorly developed and poorly received attest to that far different time; they resulted in failed projects, failed companies and failed financial institutions.

The Flatley and Lafayette transactions are truly reflective of a more mature and disciplined market.

Essentially, real estate is fundamental. If one has too many levels of complexity and creativity – one walks on the periphery of success. What has resulted in the past few years is much more discipline on everyone’s part – buyers, sellers and lenders.

Time is the acid test, but Lafayette and Flatley were two rock-solid transactions involving outstanding companies that were reflective of the very few major real estate transactions completed in 2002. It will be interesting to see if the discipline holds as other large properties are now on the market and attracting more geographically removed institutional equity investors than in the past.