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Big Auditor's Return to Downtown Seems Dead


June 19, 2002

It was just the kind of move the city needs to herald the revival of corporate interest in Lower Manhattan: an effort by KPMG, the third-largest accounting firm in the world, to move its headquarters from Midtown to Lower Manhattan, near ground zero.

Instead, it now appears to be the deal that got away.

For months, the city was trying to make the move happen. After the attack on the World Trade Center, financial companies moved tens of thousands of downtown employees to Midtown, Jersey City, Brooklyn and Westchester.

So a decision by KPMG to relocate 2,500 people to a new headquarters downtown, at the World Financial Center, would have been "gigantic," said one person involved in the prospective deal.

That is why it was such a disappointment when at the last minute, city officials and real estate brokers say, the deal ran afoul of competing factions at Lehman Brothers, the investment bank that was negotiating to lease 450,000 square feet to KPMG. The space was in 3 World Financial Center, the tower just across from the World Trade Center site that Lehman owns in partnership with American Express.

While one set of executives at Lehman issued a formal document in preparation for signing a lease with KPMG, a separate group of investment bankers abruptly pulled the plug earlier this month, saying instead that the company was selling the property, according to the brokers and officials.

The city is still hoping to lure KPMG downtown, but people working closely with the accounting firm say that the company is once again looking for space in Midtown.

"It's a shame that KPMG won't make Lower Manhattan its new home," said M. Meyers Mermel, chief executive of TenantWise.com, a real estate company. "Downtown is still waiting for a major post-9/11 commitment that would indicate a bottom in the market."

One official, however, refused to give up, saying that KPMG could move to other vacant buildings in Lower Manhattan, or cut a deal with the new owner of Lehman's space. Representatives of KPMG and its broker, Insignia ESG, toured two nearby buildings yesterday, 2 World Financial Center and 1 Liberty Plaza.

"It's clearly a setback," the official said. "But I haven't given up all hope on KPMG."

Lehman Brothers did not return calls requesting comment.

The KPMG discussions are a good illustration of the problems city and state officials face in trying to rebuild corporate confidence in Lower Manhattan. The transportation system has to be rebuilt, and many employees are reluctant to move near ground zero.

The state and city have used tax breaks and cash grants to get tenants back downtown. In the first five months of this year, 1.6 million square feet of space was leased, according to TenantWise, but there is still 16.3 million square feet of vacant space available.

KPMG, which has offices at 345 Park Avenue and 757 Third Avenue in Midtown, began talking to Lehman Brothers several months ago about leasing space downtown.

Rents downtown are at least $15 a square foot cheaper than in Midtown, a difference that could save KPMG at least $6.75 million a year. The company was also talking to city officials about a cash grant and tax breaks.

Lehman Brothers, which quickly moved to Midtown after the attack on the trade center, has to rent or sell its old downtown offices or continue to pay millions of dollars a year in rent and fees. It has 1.1 million square feet in 3 World Financial Center, and it rents 700,000 square feet at 1 World Financial Center.

KPMG had first negotiated for space at 1 World Financial, but several weeks ago Lehman suddenly shifted the deal to the space it owns at 3 World Financial Center.

"This was an important deal," said one person involved in the negotiations. "Downtown could recover pretty quickly if it got a little momentum."

Then, he added, "10 days ago, Lehman told us they'd decided to sell and not do a lease."

City officials were crestfallen, while KPMG executives were left scratching their heads and wondering why Lehman Brothers would spend all that time negotiating a lease.

"We're still considering all our options in Manhattan," said Bob Zeitlinger, a spokesman for KPMG, "and that would include downtown locations."

Downtown landlords and city officials are watching Lehman's proposed sale of its stake in 3 World Financial Center, which has attracted interest from the Durst Organization, Tishman-Speyer and the Lawrence Ruben Company. Two prospective buyers report that Lehman Brothers is not talking to them, either. "They're not acting like very interested sellers," said one prominent developer who toured the tower recently.

One executive said that may be because Lehman Brothers is negotiating a sale with the city's largest downtown landlord, Brookfield Financial Properties. City officials, in turn, hope that Brookfield makes a deal with KPMG, if the accounting firm can wait that long.

Copyright 2002 The New York Times Company

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