Five years after a cash-strapped Sotheby’s was forced to sell its 10-story building on the Upper East Side of Manhattan and then lease the space, the auction house is not only buying it back—for a $195 million premium—but also repaying accumulated debt.

The $370 million purchase, following successful litigation against the property’s owner, RFR Holdings, for putting the building on the market and selling it to a third party without affording Sotheby’s its right of first refusal, is expected to be consummated by July 2009. The closing date is set so far off so that RFR can acquire a property of similar value to avoid what would otherwise be daunting capital-gains taxes on the sale, according to a source familiar with the transaction. Sotheby’s has already secured the purchase with a $50 million down payment.

As part of the deal, RFR principals—including the heavyweight collector Aby Rosen, a frequent buyer at the Sotheby’s evening sales—received a bonus in the form of “certain terms for future sales of works of art at [the house’s] auctions,” according to an SEC report filed by Sotheby’s, a publicly traded company that is required to release any information that might affect its stock performance. This arrangement has raised eyebrows in the art community, which discerns a conflict of interest in Sotheby’s mixing its art business with a commercial real estate transaction. Rosen declined to comment about this aspect of the deal, as did a representative for the auction house, apart from noting that the “certain terms” are similar to those offered to its other VIP clients.

To finance the acquisition, as well as to pay back a separate $100 million long-term debt that comes due next year, Sotheby’s recently issued $150 million in senior unsecured notes maturing in 2015 and $200 million in senior unsecured convertible notes—which the purchaser can “convert” into the firm’s common stock if the share price rises above a specified level—with a 2013 maturity. Details of that part of the transaction have not been finalized yet.

“As you know, the capital markets have been very choppy,” says Sotheby’s chief financial officer William Sheridan, “yet we went out to raise $300 million, and [the issue] was oversubscribed. More people wanted the Sotheby’s paper, and we were able to extend our liquidity profile.” In the end, the firm realized net proceeds of $340.2 million.

Last November, Sotheby’s stock—listed on the New York Stock Exchange under the symbol BID—which had been trading for roughly $60 per share, tumbled 29 percent on the 8th, the day after a highly publicized Impressionist and modern art evening sale in New York fizzled. At press time, the share price was about $27, a comparative steal, so it’s no wonder that investors were eager to buy the convertible notes, with their implicit bet on the stock rising.

George Sutton, a senior research analyst at the Minneapolis-based Craig-Hallum Capital Group, who tracks Sotheby’s stock, predicts that it will reach a “target price” of $32 in the coming year. Although this is significantly below where Sotheby’s was trading last fall, it still represents a major turnaround since 2003, when the share price was about $9. That was the year when the company, to fund the settlement of the 2001 class-action antitrust suit for price fixing that ultimately cost it and coconspirator Christie’s $256 million apiece, was forced to sell its trophy property to RFR Holdings for $175 million and then lease it back for $18 million in annual rent. “When we sold the building,” says Sheridan, “we had our backs to the wall.”

Just two weeks after that transaction, Alfred Taubman, then the firm’s controlling shareholder, who was in prison for his role in the price-fixing scheme, terminated talks concerning his possible acquisition of Sotheby’s, citing its poor financial health. The house’s ability to raise new capital this year, in a time of roiling financial markets, reflects its rehabilitation and solid bottom line. Sutton explains, “If you liken it to a normal consumer, it’s as if they can get the loan despite the difficult economic environment.”

Asked about earlier press reports that RFR had listed the building for $500 million in May 2007 and ultimately settled with Sotheby’s for $130 million less, Sheridan would only say, “This building is a real strategic asset for the company.” While noting that the hospitals nearby “would love to have this property,” he wouldn’t comment on whether the firm would ever be willing to sell, remarking, “Let’s get it back first.”

More to the point, with its financial reputation reinstated, will Sotheby’s once again put itself on the market, as it did unsuccessfully in 2002–03? Answers Sheridan, “I can’t speculate on what’s out there.”

"At Last, No Lease" originally appeared in the September 2008 issue of Art+Auction. For a complete list of articles from this issue available on ARTINFO, see Art+Auction's September 2008 Table of Contents.