Enron Fallout Threatens
REIT's New York Tower

Though Arthur Andersen LLP isn't expected to move into new headquarters in New York's Times Square for another two years, the firm's role in the Enron Corp. scandal has some analysts wondering how easily the building's developer, Boston Properties Inc., would be able to lease the space if Andersen were to back out.

So far, there's no indication that the accounting firm will alter its plans.

Boston Properties, a real-estate investment trust whose chairman is publishing and real-estate magnate Mortimer B. Zuckerman, is in the process of developing the 1.2 million-square-foot, 47-story office tower at 42nd Street between Seventh Avenue and Broadway. Arthur Andersen, a Big Five accounting firm with offices all over the world, has signed up to lease nearly half of the space in the tower, with a move-in date scheduled for late 2003 to early 2004. Andersen would occupy floors four to 27.

"It's way too early to determine what, if any, effect this will have on Arthur Andersen as a company," says Douglas Linde, Boston Properties' chief financial officer. "Our sense is this will take a long time for it to work itself out, potentially years. This is a challenging time for them but we believe they will come out strong. We have a hard time believing the goal is to take Arthur Andersen down."

As for the REIT's Times Square Tower, which Morgan Stanley estimates would represent 1.5% of Boston Properties' current portfolio, Mr. Linde says, "we understand the space at Times Square is their long-time home and consolidation space, not redundant space. We would expect that Arthur Andersen will continue to lease that space."

An Arthur Andersen spokesman said: "We are absolutely proceeding with our plans" to lease the space at Times Square Tower.

But with a resolution of the Enron debacle far from imminent, analysts have been discussing a number of possible scenarios that Boston Properties may have to face. Even in the worst case, where Arthur Andersen doesn't occupy the space, some analysts express confidence that by 2003, demand for office space will have picked up so much that Boston Properties won't have a problem finding a replacement.

But others aren't so sure. Steve Sakwa, analyst at Merrill Lynch in New York, says should Andersen disavow its lease, Boston Properties will face even more difficulty in leasing its space as the economy is still weak and financial-services firms aren't in expansion mode. He says Boston Properties may have to provide more inducements for tenants to lease space, and its ability to lease all the space will be a little more of a challenge. Mr. Sakwa adds that while he doesn't think losing Andersen would cripple the company, it certainly would put a little pressure on 2004 earnings.

Gregory J. Whyte, an analyst at Morgan Stanley in New York, says Boston Properties' ability to lease the other half of Times Square Tower would be a logistical challenge if Arthur Andersen ends up not occupying the space it has preleased. He says a building that is significantly preleased when under construction has a better chance of attracting big tenants, who view such preleasing as a stamp of confidence.

Arthur Andersen's woes also could end up determining how much Boston Properties garners in rent, according to Lee Schalop, an analyst at Banc of America Securities in New York. If Arthur Andersen were to reject the lease in the worst-case scenario that it file for bankruptcy-court protection, Mr. Schalop says, then Boston Properties would have to re-lease the space with the risk that the new rent would be below what Arthur Andersen agreed to pay.

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