Does Bear Stearns Own 383 Madison?

Author:
Updated:
Original:

The barely above nothing per share price JP Morgan Chase agreed to pay to acquire Bear Stearns has many questioning whether Bear Stearns owns its headquarters at 383 Madison avenue. The soaring skyscraper on prime midtown real estate occupies about 1.1 million square feet on 45 floors. It was selected in 2001 as one of the best new skyscrapers by an industry group. It cost upward of $280 million to build and, despite recent pressure in global real-estate markets, is presumably still worth more than the $236 million price tag JP Morgan agreed to pay.
This has led some, including an analyst on the conference call hosted by JP Morgan last night, to ask whether or not Bear Stearns owns this building. The answer is a bit complicated. In its 10K for 2007, Bear said it had entered into a "synthetic lease" arrangement for 383 Madison Avenue, under which it is obliged to make lease payments based on the lessors underlying interest costs. Companies put synthetic leases in place for accounting and tax reasons. They are meant to allow a company to achieve the tax benefits of ownership without the accounting burdens of ownership. Companies are allowed to treat payments made under synthetic leases as operating costs, which reduce corporate taxes they pay. The terms of the lease typically allow them to also achieve the tax savings of ownership through reduced payments
But because Bear Stearns retains an option to repurchase at the end of the term of the lease, for practical purposes it retains many of the benefits of ownership. It stands to eventually capture the appreciation in the value of the building. So although the building is considered "off balance sheet" for accounting purposes, Bear likely retains much of what is considered "owernship" of the building. In 2007, Bear Stearns said the maximum residual value of the option to purchase was approximately $570 million.
Effectively, this means that Bear Stearns was sold JP Morgan Chase for less than the value of its real estate assets. This negative valuation, in turn, suggests JP Morgan is accepting huge liabilities from Bear.

Update:
Choire Sicha points out that the Federal Reserve claims the building is worth $1.2 billion. He thinks that's a low-ball estimate. "And it's gotta be worth more. The MetLife building sold for $1.72 billion in 2005; 666 Fifth Avenue was bought (for better or for worse!) at the end of 2006 for $1.8 billion," he says.

Related