Payment Due! Class A Midtown Loans
Tom Acitelli Oct. 19, 2009, 6:57 p.m.
As conditions in Manhattan’s commercial market grow grimmer, one question continues to dog investors: Where’s the debt and how can I break me off a piece?
The Manhattan office market dropped 22.9 percent between the second quarters of 2008 and 2009, according to the Moody’s/REAL Commercial Property Price September Indices, compared to 30.1 percent regionally and 21.2 percent nationally. (The indices track the price changes for commercial real estate in the top 10 U.S. markets by comparing prices of different assets over time.) Meanwhile, vacancy rates have plunged, and analysts expect anywhere from $1.8 to $700 billion of distressed commercial debt to come due by 2013.
Some of that, of course, falls in top-flight Manhattan. Several Class A, midtown office towers—the majority of which stem from auctions of Macklowe Properties’ distressed portfolio—have mortgages that mature in 2009 and 2010 (six in 2010 alone, in fact), according to September data from research firm Real Capital Analytics and regulatory filings.
Nonetheless, a lot of vultures waiting to pick up distressed Manhattan assets at fire-sale prices are going to be very disappointed, said Dan Fasulo, a managing director at Real Capital and an ardent Manhattan market watcher.
“I think, at some point, if the building is not performing, if it lost a major tenant or rents went down and they can’t pay debt service, [a lender] might foreclose, but these lenders are not going to give away assets for cents on the dollar,” he said. “They are going to tuck it away in their portfolio. … I don’t think lenders are gong to be in a rush to liquidate the good sites.”
One of the few commercial assets that Macklowe Properties was not forced to unload in August 2008, after defaulting on loan payments to creditors surrounding an epic $7 billion Manhattan commercial deal in 2007, was 400 Madison Avenue.
On Feb. 1, 2010, Macklowe has a $65.5 million mortgage payment due, leading Real Capital to classify the property as potentially troubled. But with 98 percent of 400 Madison leased to tenants like Pokeman USA, Xroads Solutions Group and Goldin Associates, the likelihood of Macklowe defaulting on the loan is low, Mr. Fasulo said. The debt service coverage ratio (DSCR) on the property is 2.24, according to Real Capital, meaning cash flow from the building is more than twice the debt-servicing costs. Macklowe, led by chairman William Macklowe, declined to comment for this article.
THE VERDICT IS STILL out on the biggest, most delayed deal of 2009, though it might have been the closest thing to a fire sale New York can expect in the foreseeable future. George Comfort & Sons, along with RCG Longview, DRA Advisors and the Feil Organization, closed on the last distressed Macklowe property, Worldwide Plaza, in July for $590 million—65 percent below what it had sold for in 2007—after two other deals fell through.
Ultimately, Deutsche Bank agreed to provide the investors with a $470 million mortgage; write down Macklowe’s original $1 billion mortgage from 2007; and put up $135 in equity. Though the building was 50 percent vacant, analysts expect it to fill up soon since the $369-per-square-foot price tag allows the investors to entice new tenants with exceedingly competitive rents.
Some of the other buildings in George Comfort’s portfolio face more immediate risks.
A $60 million payment at 63 Madison Avenue comes due on Jan. 1, and the property reportedly entered special servicing in July. According to Costar, 550,000 square feet of the nearly 800,000 total leasable feet remains vacant, and Real Capital estimates the DSCR is 1.49. The firm has another January payment due on 498 Seventh Avenue, stemming from a $181.5 million mortgage it refinanced in 2004. The company purchased the 876,704-square-foot building with Loeb Realty Partners for $42 million in 1997.
Real Capital also included George Comfort’s 339,900-square-foot building at 119 West 40th Street on its list of troubled properties. Though the building’s $160 million mortgage does not mature until 2017, according to Real Capital, the building went into receivership over the summer due to “depleted cash reserves,” Lois Weiss reported in the New York Post.
Comfort, Fortis Property Group and Leon Charney bought the building for $182 million in 2007 and launched a major renovation. In early 2008, a Wien & Malkin fund picked up the $23 million mezzanine debt on the building from RBS Greenwich Capital and Wachovia at the discount price of $16.8 million. Wells Fargo is among the larger tenants whose lease expires this year, and even in the event of renewals, rates are expected to drop.
With a DSCR of 1.13, 119 West 40th is nearing what Mr. Fasulo called “the red zone” below 1. “Anything even close to 1 now is a red flag because these numbers were compiled at origination of loan, so if they’ve lost a tenant or rents have gone down, they’re done.”
That Comfort was able to negotiate the biggest deal of 2009, despite being in danger of defaulting on 119 West 40th, is a unique product of the current downturn, Mr. Fasulo said.
“In the past, if you lost all this money for your investors, no one would invest with you again; now that’s not the case,” he said. “The tremendous and unique violence of this market is going to give a lot of people a pass. People are going to say, ‘It’s not me, it’s the market.’ Also, there are only so many qualified property owners out there.”
“We are currently in negotiation on all three refinancings, and I expect a good result on each property,” George Comfort & Sons president and CEO Peter Duncan said in an email. He declined to elaborate on the details of specific mortgages.
THE NAME THAT APPEARS most frequently on Real Capital’s list of potentially troubled midtown properties is the once high-flying Broadway Partners.
Broadway’s buildings at 340 Madison Avenue, 450 West 33rd Street, 280 Park Avenue and 237 Park Avenue were in September all classified as potentially troubled (as was 100 Wall Street downtown). Two of them, 100 Wall and 237 Broadway, had loans due in May 2009; 280 Park, which has a $1.1 million mortgage that does not come due until 2016, was also listed as potentially troubled due to a maturing mortgage. Meanwhile, the $472 million mortgage that Broadway took to buy 340 Madison—yet another distressed asset from the Macklowe portfolio—for $550 million comes due on Jan. 1, 2011.
One of Boston’s investments that looked relatively safe in 2008 is also in danger of foreclosure, Mr. Fasulo said: “Four fifty is in bad shape. I think they are going to lose that one.” Broadway paid $700 million for the 16-story office building at 450 West 35th Street in June 2007. The 1.75 million–square–foot building is 85 percent occupied, with tenants including the Associated Press, the New York Daily News, and U.S. News & World Report.
“Broadway is current on its loan obligations and has no maturities in the 2009-2010 time frame,” a Broadway Partners spokesman told The Commercial Observer in an email. He declined to comment on the terms of specific loans.
The New York Observer reported in August that Broadway renegotiated $459 million of loan payments to its primary lender, Lehman Brothers, that were due in May on 10 properties it purchased between December 2006 and May 2007. Broadway agreed to transfer three of the troubled properties to Lehman in July, and retain a minority stake in the remaining seven in exchange for an immediate cash payment of $26 million and an additional $14 million later. Lehman agreed to extend the loans to June 10, 2012.
Meanwhile, income on many of the buildings Broadway paid top dollar for are dipping fast. The office tower they bought at 280 Park for $1.25 billion in November 2007, with a $1.1 billion loan from JV Investcorp Realty, for instance, is now worth only one-tenth of what the firm bought it for: $147 million.
TWO BUILDINGS WITHIN A block of each other on West 57th Street are listed as potentially troubled due to mortgages that matured on Oct. 1. A JPMorgan CMBS Fund holds both the $29 million first mortgage on 50 West 57th Street and the $31 million first mortgage at 140 West 57th Street. Though both properties have gone into special servicing, in looser credit markets both would have surely qualified for refinancing. With a DSCR of 2.06, the 89,650-square-foot property between Sixth and Seventh avenues seems to be in slightly better shape than the smaller building one block east, which has a DSCR of 1.41.
Which brings us to Mort Zuckerman’s Boston Properties, the REIT that now finds itself, rather paradoxically in the current market, with both the largest number of mortgages maturing in 2010, and piles of cash at its disposal. As of July, Boston had $820 million in cash and nearly its entire billion-dollar line of credit available, according to its 2009 second-quarter earnings report.
Boston took a $188.3 million write-down on three of the office buildings it bought from Macklowe last year for $1.1 billion, and the overall occupancy in its eight midtown properties fell from 99.8 percent at the end of the second quarter in 2008 to 91.6 percent by June 30, 2009. It also reported a $23 million loss from the suspension of the planned construction of a tower at 250 West 55th Street.
Despite the losses at the end of 2008 and the beginning of 2009, Boston Properties CFO Michael LaBelle said in the second-quarter-earnings call that the company plans to pay down $100 million of the $500 million in securitized debt that will come due next year. Three of the properties it bought from the Macklowe portfolio, 2 Grand Central Tower, 125 West 55th Street and 540 Madison Avenue, account for $272 million of Boston’s total securitized debt obligations in 2010.
Boston Properties assumed Macklowe’s $200 million mortgage with Wells Fargo when it bought the 23-story office building at 125 West 55th from Deutsche Bank in August 2008. Goldman Sachs and Meraas Capital own $63.5 million of mezzanine debt on the property, which was 100 percent leased as of June 30. A $158 million payment is due in March, when the first mortgage matures. A $114 million payment on 2 Grand Central, which is 95 percent leased, and a $240 million payment on 540 Madison are also due next year. The $963.6 million mortgage on the most high-profile trophy Boston snagged from Macklowe, the GM Building, does not come due until after 2013. It is 97 percent leased.
Boston Properties spokeswoman Arista Joyner would not comment on details of the three mortgages, and referred The Commercial Observer to Mr. LaBelle’s comments in the transcript of the 2009 second-quarter-earnings call.
As of June 31, the company had taken care of all its 2009 maturities, Mr. Labelle said. “We are now focusing on our 2010 exposure, where we have some secured mortgages coming due, totaling about $800 million,” he said. “Five of these mortgages relate to joint venture properties, and our share of the total exposure is just over $500 million.”