Macklowe in tentative deal to cede NY properties

NEW YORK (Reuters) - New York real estate titan Harry Macklowe has reached a tentative deal with Deutsche Bank (DBKGn.DE) to turn over seven Manhattan office buildings he bought last year for $7 billion, a person familiar with the matter said on Friday.

Macklowe borrowed $5.8 billion in February 2007 from Deutsche Bank to buy nearly the entire Manhattan portfolio of buildings formerly owned by Equity Office Properties, the person said. The loan is due February 7. The tentative deal would allow Macklowe to manage the buildings until they are sold.

Macklowe's struggles underscore the rapid and severe credit crisis that has wiped out easy and generous debt financing and made lending more difficult and expensive.

Since Macklowe bought the buildings, the commercial mortgage-backed securities (CMBS) market -- a major source of capital for real estate deals -- has all but dried up.

Banks have been beset by problems stemming from the residential subprime lending market. Risk across all lending has been repriced, making loans more expensive and leaving Macklowe stranded.

Other real estate buyers may be affected similarly.

"The borrowers are going to be reaching into their pocket or they're going to be dealing with the same thing that happened to Macklowe," said Howard Michaels, chairman and CEO of The Carlton Group, a real estate investment banking firm.

Macklowe bought the properties in conjunction with Blackstone Group LP's (BX.N) $23 billion acquisition of Equity Office in February 2007. The properties include Worldwide Plaza at 825 8th Ave., home to law firm Cravath Swaine & Moore.

BOOST RENTS

Macklowe's strategy was to buy the Equity Office buildings whose long-term leases were about to expire and boost rents to market levels.

"The deal didn't fail because he couldn't execute the business plan," Michaels said. "It failed because the finance market and values have changed. It's obviously a confirmation that things are worth less today than they were a year-and-a-half ago."

Meanwhile, demand for office space has softened as employment has slackened. The U.S. Labor Department said on Friday employers cut 17,000 nonfarm jobs in January, the first monthly decline since August 2003.

Macklowe owes Deutsche Bank $5.8 billion in acquisition financing that is known as "non-recourse." The terms allow Deutsche to take control of the buildings, but does not give it a claim to the rest of Macklowe's empire.

He put $50 million of his own money into the purchase, the source said.

His son, William Macklowe, president of Macklowe Properties, declined to comment on the tentative deal.

"They are in discussions with Deutsche Bank," said Steve Solomon, a spokesman for Macklowe Properties. Deutsche Bank also had no comment.

Macklowe still needs to come up with $1.2 billion to repay a bridge equity loan from Fortress Investment Group LLC (FIG.N) that he secured by interests in some of his own holdings.

"It's a big ouch," Michaels said.

GM BUILDING

The loan is secured by a 49 percent interest in other Macklowe properties -- including the trophy General Motors Building on Fifth Avenue and 59th Street. Deutsche bought 25 percent of the equity from Fortress, the source said.

To come up with the money to repay the equity loan, Macklowe has hired CB Richard Ellis Group Inc (CBG.N) to either sell or recapitalize the GM Building.

He bought the GM Building, previously half-owned by Donald Trump, in 2003 for a then-record $1.4 billion. He turned the 50-story structure into a hot property, luring hedge funds and private equity firms as tenants and commanding some of the highest rents -- more than $150 per square foot -- in the United States.

Building a glass cube on the building's plaza, Macklowe transformed its dreary failed underground shopping area into Apple Inc's (AAPL.O) largest Manhattan location.

The GM building's transformation has allowed Macklowe to refinance the original loan, meaning an additional $1.9 billion is owed in relation to the property, a source said.

The New York Times reported this month that Macklowe said he believed the building may fetch $3.5 billion to $4 billion.

Michaels said it would not be a surprise if Macklowe ends up buying back one of the properties.

"Harry's still a very wealthy guy. If he's permitted to, and pays the highest price, the banks are interested in getting a trade done."

(Editing by Brian Moss and Phil Berlowitz)