Leventhal sees extraordinary return on record Hancock deal

By Thomas C. Palmer Jr., Globe Staff

Boston developer and real estate investor Alan M. Leventhal said yesterday that his company paid $910 million for Back Bay property including the landmark John Hancock tower, a record for a transaction in the city, because it is an investment that will pay off handsomely. "There's really just a single motivation," Leventhal said. "We've been entrusted with a substantial amount of money by our investors, and it's to deliver the returns we said we're going to. At the end of the day, the reason we bought the John Hancock complex is this is a great investment."

In his first interview about the purchase of one of the nation's iconic office structures, Leventhal spoke for about an hour at the headquarters of his company, Beacon Capital Partners LLC, at One Federal St. The office overlooks the Post Office Square park named after his father, Norman Leventhal, a prominent Boston developer, civic leader, and philanthropist who is now retired.

Alan Leventhal said investors of his national real estate investment firm will get an "extraordinary cash return" of more than 13 percent on the Hancock deal over the next four to five years, and he expects to hold the properties for "some significant period of time."

Beacon Capital Partners was founded in 1998, the year after the Leventhal family company, Beacon Properties, sold its assets to Equity Office Properties for about $4 billion.

Beacon Capital Partners owns about 20 properties, including about 10 million square feet of space, in six major cities nationwide. But, aside from a large presence in Cambridge's Kendall Square that it has now sold, Beacon Capital had not been active in the Boston area until recently.

Asked whether he was aggressive about bidding against national real estate giants for the distinctive Hancock tower because he wanted an increased presence in his hometown, Leventhal demurred. "Because of my own personal feelings about the city and our history here, I'm delighted to see we have a strong presence," he said. "But that's a consequence of our investment decisions, it doesn't drive our investment decisions."

In the interview, and in an earlier letter to investors in Beacon Capital's third investment fund, which drew $740 million before it closed last summer, Leventhal outlined why the three Back Bay buildings and a large garage owned by John Hancock Financial Services Inc. represent a good future gamble.

• The average per-square-foot cost of the tower is $307, which is about 30 percent under what it would cost to replace the building. "And you can't replace it," Leventhal said. "You'd never build that today."


• The buildings have a strong tenant roster of top-credit national firms, with leases that are significantly under current market rates, and thus promising increased revenues in the future.


• There are potential opportunities to add lucrative retail space to the "Old Hancock" headquarters, on Berkeley Street.


• John Hancock Financial Services, which is remaining in the buildings with about a third of the total space, made the deal more attractive to Beacon Capital during negotiations by leasing an additional 120,000 square feet for the next four years. That means that the space is 96 percent leased, a high figure especially in today's soft leasing market.

Hancock also pledged to sublease to Beacon Capital the ground under its 2,000-car parking garage, which it holds through an 80-plus year lease from the Massachusetts Turnpike Authority. Retail opportunities may exist there as well.

Beacon Capital borrowed a total of $620 million to purchase Hancock's four properties, putting about $300 million of its own money in. The total includes the $910 million price plus additional costs of acquisition.

"We bought it at a very attractive price, and in this environment we were able to put on relatively low interest-rate debt," Leventhal said.

Leventhal, 50, is chairman and chief executive of Beacon Capital Partners, which now has holdings in Washington, D.C., Los Angeles, San Francisco, Denver, and Boston. The company, which Leventhal said is the largest private investors fund focused on office space, purchased more than $1 billion in properties last year.

He said his purchases in the Back Bay, including not only the Hancock buildings but also 501 Boylston, the New England Life Insurance Co. home, reflect a new confidence in the area. "Our view of the Back Bay is it's changed quite a bit in the past few years," he said. "The Back Bay has become not just a residential and retail location but really a prime office location."

Leventhal said that has occurred largely because of the rebuilding of the nearby Prudential Center complex by Boston Properties, which purchased it in 1998 and was previously Boston's largest office real-estate transaction.

Although real estate executives who closely followed the Hancock sale predicted the package would go for about $860 million, the further reduction in future leasing uncertainty that Beacon Capital negotiated before the closing last Friday boosted the price over $900 million.

"People always think in a competitive bid, `He must be paying these extraordinary prices.' The final number seemed a lot higher than was being talked about," Leventhal said, but, "This is a very good investment, and the numbers speak for themselves."

Leventhal also made his offer more attractive by keeping Hancock staff in place to maintain the building while he sets up a management structure to handle the new acquisitions. There is a 120-day transition period, and many of the Hancock employees are expected to be hired by Beacon Capital.

He also said he knew that the company he started in 1998 would eventually have a strong presence in Boston. "What drives us? It's been motivated by opportunity," Leventhal said. "We felt a year and a half ago there were great opportunities in Washington." Beacon Capital bought about a half-dozen buildings in the Washington area, which remains strong because of the impact of the federal government despite economic weakness in other cities.

Now it's Boston's turn.

Beacon Capital is about to begin construction on the $400 million Channel Center mixed-use development near the Fort Point Channel in South Boston. And, with the Hancock purchase, Beacon Capital brings to three -- along with Equity Office and Boston Properties -- the number of gorillas in the Boston office market.

Kevin C. Phelan, executive vice president at the brokerage firm Meredith & Grew Inc./Oncor, interviewed last week before the Hancock sale closed, said this transaction isn't just about money for Leventhal.

"I think his father, his uncle, had a lot to say about building Boston, and my sense is Alan -- it's like George W. [Bush], he's got to do better than his father, in the best sense of the word," said Phelan. Phelan added, of the elder Leventhal, who keeps an office in the Beacon Capital Partners' One Federal Street suite: "I don't think he could wish Alan anything but please do better than I did and leave a better legacy."

And Leventhal is bullish on Boston.

Asked about whether development in Boston is being well guided, he said: "I think we're doing the right thing citywide.

"Sometimes we can all be frustrated that it takes as long as it does," he said, citing in particular the multiple delays in building the South Boston Waterfront district. "But I think when you take a long-term view of the city we're coming up with very good results."

Thomas C. Palmer Jr. can be reached at tpalmer@globe.com.

This story ran on page C1 of the Boston Globe on 3/18/2003.
Copyright 2003 Globe Newspaper Company.