Brooklyn's Biggest Deal Also Its Biggest Financing Challenge

470 vanderbilt1 Brooklyn's Biggest Deal Also Its Biggest Financing ChallengeThe year’s largest office lease deal in Brooklyn was made possible by an intricately designed and, to some analysts, baffling  form of asset financing.

When the New York City Human Resources Administration inked a 20-year deal to occupy 400,000 square feet of space at 470 Vanderbilt Avenue, a former tire factory – among other things – located across the street from Atlantic yards, building landlord GFI Development Company had to devise a new way to bring in $44 million needed to convert a “raw” space into a functional building, complete with elevators and furniture.

“The building needed a huge capital investment both on the face of the building and inside,” said Peter Hennessy, 50, president of the New York Tri-State region for Cassidy Turley, who represented HRA in the deal.

In a typical transaction, a landlord and a tenant would each devote a certain dollar amount per square foot towards improvement and installations costs.

HRA, a city agency that provides public assistance to families and individuals, requires in its leases that all tenant improvements be funded by the landlord, Mr. Hennessy said.

Working with Lance Capital and CGA Capital, GFI set up a “TI loan” – or tenant improvement fund – worth $44 million. And this fund would be backed not by a physical asset, but by the rent flow from HRA.

“That rent is absolute. [HRA has] to pay no matter what,” said Richard L. Podos, chief executive of Lance LLC.

The rent comes at a bargain to HRA. The company will be paying below $20-a-square-foot for the first few years of its deal with GFI, a source told The Commercial Observer. The city agency will eventually pay GFI’s normal $32-a-square-foot asking price as it nears the end of its 20-year lease, the source added.

And with that rent virtually guaranteed to GFI, Mr. Podos said he and his partners had the capital to create “a bond that we’re able to sell in the private placement market to major institutional investors.”

“In this case [they are] mostly life insurance companies who want to invest in the city of New York bonds,” he added.

The bonds mature in seven years and have a rate of 5%.

To help secure the deal, GFI and HRA refinanced its existing bank loan and increased the lending facility on the property to $130 million, according to the company.

In the end, the TI deal not only stabilizes GFI’s plans to convert 470 Vanderbilt into an operational office building, it also allows the firm to proceed with its plans to build a 350-unit rental building next to project.

“It was a very unique deal structure, it is the first time the city has done it. Now I think that they got it done successfully, I expect to see them replicate it,” said Steven Hurwitz, vice president of acquisitions and developments at GFI.

The experience left Mr. Hurwitz better prepared to handle a deal of this nature the next go-around.

“This was super challenging,” Hurwitz, 33, added. “This was the most challenging deal of my career.”

In 2007, GFI paid $45 million to the The Carlyle Group for the ground lease to the 650,000-square-foot property.

The building has since become a city agency magnet. It signed the New York City Housing Authority to a 62,000-square-foot lease in 2009.

The building currently has 70,000 square feet available at the top four floors of the property – in addition to 15,000 square feet of retail space at the ground floor.

The asking price is $32 per square foot, Mr. Hurwitz said.

HRA will be ditching three of its current offices for the move, including offices at 330 W. 34th Street and 2 Washington Street. All told, the company will be shrinking its total office space by 95,000 square feet – saving an estimated $7 million per year, said an HRA spokeswoman.

The agency is expected to move into 470 Vanderbilt in winter 2012.

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