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Can Sam Zell Maintain the Midas Touch?

Sam Zell doesn't like the role of office building landlord any better now that his newest acquisition, the Tribune Co. media conglomerate, is the prime tenant. In the wake of his highly leveraged $8.2 billion takeover of Tribune last December, Zell is preparing to sell off the company's two biggest office assets, Tribune Tower on tony Michigan Avenue in Chicago and the Times Mirror Square Complex in Los Angeles.

In August, Zell hired New York office broker Eastdill Secured to help him dispose of the assets. Office investors predict that Trib Tower, a neo-Gothic 36-story structure built in 1922 and spanning 940,000 sq. ft., will fetch $150 to $200 million, though the price could go higher if the Chicago Tribune newspaper, which occupies about half the building, remains as a tenant.

When he sold off Equity Office Properties Trust more than two years ago, Zell was lauded for his shrewd timing in selling the portfolio near the top of the market. This time, however, many observers fear that interest in the media real estate could be sparse.

“In the past, Zell has proven to have impeccable timing in buying and selling real estate,” says Gary Denenberg, a senior vice president with office investor MB Real Estate Inc. in Chicago, a potential bidder.

“There isn't much doubt he would have been better served marketing Trib Tower six or 12 months ago when the market was healthier.”

The first building in the five-building Times Mirror complex was erected in 1935, when its eight stories ranked it as the tallest structure in the western U.S. The facility, which spans 750,000 sq. ft., is expected to sell for more than $225 million.

Both buildings are widely recognized landmarks in their respective cities and will command premium prices for their history and prime locations, says Sam Chandan, chief economist with research firm Reis Inc. in New York.

The intangibles associated with such buildings, he asserts, are enough to make some potential investors forget that the status of the aging Trib Tower has sunk — it's now considered a “Class-C+” building — and will require millions of dollars in remodeling work.

“Iconic assets like these have an unquantifiable value that rises above just the underlying cash flows,” Chandan says. “These buildings are unique and notable and attract attention in their respective cities. People will pay a premium for those things.”

Reis reports that of the office buildings sold in Chicago in the past 12 months, the mean price was $180 per sq. ft. Chandan figures Trib Tower could sell for $200 to $250 per sq. ft.

In Los Angeles, office transactions in the past year have been valued at a mean price of $382 per sq. ft. Times Mirror will likely sell for a higher price than the larger Trib Tower because it's in a coastal market with a greater diversity of potential investors and more foreign investors bidding, says Chandan.

One rumor making the rounds is that Zell will be willing to move the Tribune to a new address and sell the tower to a residential buyer.

He needs to maximize the price he gets for the Chicago building because debt payments are due later this year on part of the $13 billion he carries as owner of the company. Other sales, including the divestiture of Wrigley Field, are being considered.

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