Boston Properties, Inc.
Boston Properties, Inc.
8 Arlington Street
Boston, Massachusetts 02116
Fax: (617) 536-3128
Sales: $269.9 million (1996)
Stock Exchanges: New York
SICs: 6512 Operators of Nonresidential Buildings; 6514 Operators of Dwellings Other Than Apartment Buildings; 6798 Real Estate Investment Trusts
The media empire of Mortimer B. Zuckerman, publisher of U.S. News & World Report, New York City’s Daily News, and the Atlantic Monthly, was established from the fortune he amassed in commercial real-estate development. When Boston Properties, Inc. was reorganized in 1997 from a partnership of Zuckerman and Edward H. Linde to a publicly owned real-estate investment trust, it owned 63 office buildings, nine industrial properties, two hotels, and a parking garage. But it was a full-service real-estate company that also managed almost all its own properties, had put up buildings for other parties, and had substantial in-house expertise in acquisitions, development, financing, marketing, leasing, accounting, and legal services. The company’s presence was chiefly in the Boston and Washington metropolitan areas.
Boston Properties, 1970-96
Born and raised in Montreal, Zuckerman earned a master’s degree in business administration and two law degrees—one from Harvard Law School—before going to work for the Boston developer Cabot, Cabot & Forbes in 1962 at a starting salary of $8,750. Within three years he was chief financial officer and a partner in the firm, and by the time he was 30 he was worth $5 million. When Zuckerman left to open his own company at the beginning of 1970, he had a stake, along with Cabot, Cabot & Forbes, in 18 properties, including 12 California industrial and business parks. He and Linde, a colleague at the firm, also claimed about $4 million for their share of a Boston building. When the company offered only $2.2 million, they took the matter to court and eventually won their claim, plus $400,000 in interest.
Shortly after founding Boston Properties, Zuckerman took Linde as a quarter-share partner. Linde had the job of constructing buildings and managing properties, while Zuckerman made deals and arranged the financing. At first Boston Properties was most active on the West Coast. As the controlling general partner, it constructed the nine-building Hilltop Business Center in South San Francisco during the early 1970s and also built two industrial properties in this community.
By late 1985 Boston Properties owned and managed 53 buildings in Washington, Boston, and New York as well as California, with more than 9 million square feet of space. The market value of its portfolio was estimated at $1.3 billion, with 55 percent of the value borrowed, which was considered on the conservative side among developers. The company held its properties for the long term and had sold only two thus far. Boston Properties weathered the real estate recession of 1989-93 and claimed an average annual return of about 14.2 percent between 1992 and 1996. Between 1989 and 1996 it completed eight third-party development projects on a fee basis in the Baltimore, Boston, New York, and Washington metropolitan areas.
Greater Boston Development, 1970-97
Early in its career, Boston Properties was chosen by Boston Mayor Kevin White to build Park Plaza, a 10-acre, five-tower residential-retail-office complex overlooking the Public Gardens next to Boston Common, the city’s downtown park. Opposition quickly arose from neighborhood groups objecting to the size and height of the development, especially because it would cast a shadow over the park. After seven years a scaled-down version was approved, but Boston Properties walked away from the project, “exhausted by the process,” according to Zuckerman.
Boston Properties lost this battle but essentially won the war, because Zuckerman and Linde were so busy pushing Park Plaza that they had no time for other ventures that might have collapsed in the 1974-75 crash of the Boston real-estate market. With cash on hand the company bought sites cheap from financially troubled developers. Mayor White approved Boston Properties’ plan to build a Marriott hotel (completed in 1982) on public waterfront land even though a committee he had appointed ranked it dead last among eight proposals. The company also won a competition to develop a Cambridge 24-acre urban-renewal site adjacent to the Massachusetts Institute of Technology, on which it constructed 10 buildings, including another Marriott hotel.
In the early 1970s Zuckerman and Linde identified the area of suburban Boston along Route 128 as ready for the development of modern office buildings, and they selected the quadrant west/northwest of Boston between the Massachusetts Turnpike and U.S. 93 as the most desirable area in which to concentrate their efforts. Between 1978 and 1988, Boston Properties acquired 13 key sites in that area and completed development of 17 office buildings on those sites, containing more than two million net rentable square feet.
Controversy developed over a plan by a limited partnership, with Zuckerman and Linde the largest investors, to build an office park on an 18-acre Concord site, which the partnership acquired already cleared in 1985, only 700 yards from Henry Thoreau’s beloved Walden Pond. This plan conflicted with the intention by conservationists, led by musician Don Henley, to preserve 2,680-acre Walden Woods. In 1991 Zuckerman said he had sold his interest in the project for $4.2 million to an undisclosed buyer who would be co-owner of the site with Linde, with Boston Properties to continue as developer. Linde and his partner were said to be seeking more than $8 million for the site. According to the Boston Globe, when the tract was sold to the Walden Woods Project in 1993 for $3.5 million, the seller was Zuckerman himself.
Boston Properties began construction, in 1996, on its first speculative office project in seven years, starting work on a three-story, 102,000-square-foot building in Lexington, Massachusetts, a suburb of Boston. This structure was on the site of a 36-acre office park, purchased in 1985, that already held an existing office building. Boston Properties was investing about $5 million of its own money, with the remaining $14 million in development costs being financed with a bank loan. By mid-1997 it was fully leased to MediaOne of Delaware, Inc. Also in 1997, the company agreed to purchase, for $21.7 million, an existing office building in Quincy, another Boston suburb.
Greater Washington Development, 1979-97
Boston Properties opened a Washington office in 1979 and completed Capital Gallery, an office building south of the Mall and southwest of the Capitol, in 1981. Six years later it completed the U.S. International Trade Commission Building slightly to the east. After four years of negotiations, the company bought two full blocks to the southeast of these projects for Independence Square. A 360,000-square-foot building for the Office of the Comptroller of the Currency was completed on this site in 1991. Boston Properties led a partnership that in 1990 received a 20-year, $383-million lease for a new National Aeronautics and Space Administration headquarters to be built just east of One Independent Square. This structure, holding nearly 600,000 square feet of office space, was completed in 1992.
In 1981 Boston Properties formed a joint venture with U.S. News & World Report to construct a new headquarters for the magazine, a luxury hotel, an office building, and two condominium buildings. When Zuckerman purchased U.S. News in 1984 he acquired the other half of the real estate (although his publishing ventures were not integrated into Boston Properties). The magazine’s headquarters building was sold in 1987 to Shuwa Corp., a Japanese firm, for about $80 million, reportedly a record price for office space in Washington. Boston Properties completed a 1-million-square-foot complex in the nation’s capital near Rock Creek Park in 1986 that consisted of the 101-unit Edison House condominiums and mixed-use Whitman Place, in which the Association of American Medical Colleges rented five floors. The company also developed a 1-million-square-foot Federal Judiciary Building near Union Station but did not assume ownership of the structure.
Outside of Washington, Boston Properties was active in Montgomery and Prince George’s County in Maryland and Fairfax County in Virginia. Between 1982 and the end of 1990 the company completed 14 office buildings on a 127-acre Springfield, Virginia, site off 1-95, retaining 11 of them. (Two more were approaching completion in 1997.) Democracy Center, a three-building office complex in Bethesda, Maryland, was completed in 1988. By that time seven of nine planned buildings had been completed for the 66-acre Maryland 50 Industrial Park in Landover, of which the company retained three.
In 1995 Boston Properties made one of its rare sales, accepting $43.5 million from the Hyatt Corp. for the Park Hyatt Hotel in Washington. A Boston Properties executive said the company wanted to get out of the hotel business in order to focus strictly on commercial real estate. Hyatt, which wanted to continue operating the hotel, was concerned that a new owner might not retain its management contract.
The two Springfield office buildings nearing completion in 1997 were to be occupied by the U.S. Customs Service and Autometric, Inc. Boston Properties also was developing two office buildings in Reston, Virginia, with completion expected in 1999. One of the two was to be the headquarters of BDM International. The company also was redeveloping two Sugarland office buildings in Herndon, Virginia, which it acquired in 1996.
Manhattan Activities, 1983-97
Boston Properties entered New York City in 1983, when it bought for $84 million the land and architectural design for 599 Lexington Avenue, a 47-story office building planned to rise at 52nd Street and Lexington Avenue in midtown Manhattan, from a firm that had walked away from the project. Built without any rental commitments, this $300-million speculative venture was completed in 1986. The gamble paid off when more than half of the 1 million square feet of office space was leased before the end of the year without offering discounts. This building was Boston Properties’ largest in 1997 and commanded higher rent per leased square foot than any other of its properties.
In 1985 Boston Properties made a winning bid of $455.1 million for one of the most valuable remaining parcels of prime Manhattan land, the New York Coliseum site at Columbus Circle on the southwestern periphery of Central Park. Its bid was a per-acre record and the largest sum of money ever offered for a piece of public land in New York. The company planned giant 58- and 68-story towers of office, hotel, retail, and condominium space flanking an enormous atrium, and it had lined up the investment-banking firm of Salomon Brothers as both co-owner and major tenant.
In a controversy eerily similar to that of Park Plaza, however, the proposal drew fierce opposition from community groups and such celebrities as Jacqueline Kennedy Onassis, Walter Cronkite, Henry Kissinger, and Bill Moyers. A prime objection was that the towers would throw long shadows over the southern part of the park in the afternoon. The opponents lost their case in federal court, but by then Salomon Brothers had backed out of the deal because of the 1987 Wall Street crash. The proposal was subsequently scaled down and did not officially die until 1994, when negotiations between Boston Properties and the site owner, the Metropolitan Transportation Authority, ended in acrimony.
Boston Properties announced in August 1997 that it had agreed to buy 280 Park Avenue, a complex of two large office towers in midtown Manhattan between East 48th and 49th streets, from the Bankers Trust Co. for $321 million. The company said Bankers Trust would remain as a tenant, as would most other corporate tenants. Linde said the company was seeking other investments in midtown Manhattan office buildings.
Boston Properties in 1997
Boston Properties owned 75 commercial properties with 11 million square feet of space in 1997, when Zuckerman and Linde filed to take the company public as a real-estate investment trust. Its properties consisted of 63 office buildings (including seven under development), nine industrial properties, two hotels, a Cambridge parking facility, and several tracts of undeveloped land. All these properties were in the Boston, New York, and Washington metropolitan areas except for the Hilltop Business Center and two industrial buildings in South San Francisco. All were being managed by the company except the two Marriott hotels and the parking garage. More than 10 percent of the company’s space was being leased to federal agencies. In 1996 the company earned $7.3 million on revenues of $269.9 million. Its dividend represented an attractive 6.5 percent of the $25-a-share asking price.
On the debit side, the company’s debt-to-market-capitalization ratio was a high 37 percent, and virtually all of the money raised by this offering would go to pay down the debt of 14 buildings. Boston Properties also lacked a large inventory of undeveloped land (only about 47.4 acres owned or under contract or option), meaning land purchases for new development would dilute earnings, at least in the near term. The company’s $300 million credit line was considered modest by the standards of the late 1990s. And its federal-government tenants, although the ultimate in creditworthiness, were not paying top dollar. Some analysts said Boston Properties would need to make $500 million to $800 million in office deals each year to generate significant growth.
Investors, however, fully subscribed to the offering of Boston Properties’ shares in June 1997 at $25 a share. After using most of the net proceeds of about $730 million to pay off mortgage debt, Boston Properties still retained $770 million in debts. Some 17.9 and 14 percent of the company remained in the hands of Zuckerman and Linde, respectively. Zuckerman continued to be chairman of the company, with Linde continuing as president and chief executive officer.
Boston Properties Limited Partnership; Boston Properties Management, Inc.; ZL Hotel LLC.
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Vinocur, Barry, “Boston Properties Wins Raves for Its Portfolio,” Barron’s, June 9, 1997, pp. 41-42.