Blackstone Leads $300M Recap of Liberty View Industrial Plaza in Brooklyn
Acadia Realty Trust, Madison Capital and Meadow Partners are also involved in financing the Sunset Park mixed-use development
The Liberty View Industrial Plaza in Sunset Park, Brooklyn, has been recapitalized, Commercial Observer has learned.
Blackstone (BX) Mortgage Trust is leading a $300 million debt package to owner Salmar Properties, who has been embroiled with the city in efforts to walk-back a manufacturing-focused leasing and usage requirement mandated years ago after the firm received hefty tax breaks to redevelop the massive warehouse.
The financing includes $216 million in initial funding from Blackstone, Madison Capital, Meadow Partners and Acadia Realty Trust and $84 million in future commitments from Blackstone, Madison and Meadow for tenant improvements, leasing commissions and additional capital expenditures, according to information provided by Madison. The deal closed on January 17.
Blackstone provided a $203 million first mortgage consisting of $135 million in initial funding, plus $68 million in future funding. Madison, Meadow and Acadia together contributed $81 million in initial funds, with Acadia providing $54 million through a preferred debt placement, according to Madison managing partner, Richard Wagman. Madison and Meadow have also committed almost $16 million in future proceeds.
A representative for Acadia declined to comment on the transaction.
The deal marks another splash for Blackstone in Sunset Park after the firm doled out $720 million last December to refinance Industry City. Liberty View, an eight-story, 1.3-million-square-foot former storage warehouse and fleet supply base for the U.S. Navy, sits next door to Industry City.
As part of the recap, Madison will assume the management and operation of the development — at 850 Third Avenue between 30th and 32nd Streets — from Salmar, who received approval from the city earlier this week to renege on the industrial-focused leasing requirement that it agreed to in 2011 after the firm proved the financial infeasibility of the business plan.
“This recap brings Madison Capital into the fold, managing the property, driving a lot of the initiatives and bringing in the active repositioning of the property,” Madison Capital managing director Jonathan Ratner told CO.
Salmar bought the asset — which is now valued at $300 million, according to Madison — for $11 million in 2011. This recap retired a $30 million loan that Salmar received from Goldman Sachs (GS) that year to fund its acquisition of what was then a vacant warehouse. Goldman provided financial analysis to help prove Salmar’s case to the city, that the asset’s sagging performance under the usage requirement had hampered its ability to cover its debt burden.
The building has already undergone a $130 million repositioning via Salmar, turning it into a mixed-use industrial space that has attracted tenants including Amazon (AMZN) — which inked a seven-year lease in 2015 for a 50,000-square-foot space — Kleinberg Electric, Postmeds and MKJ Communications. But Salmar has struggled to fill the asset in its entirety.
Those tenants currently make up only about 20 percent of the asset’s industrial space, according to Wagman. The firm is now looking to attract tenants to use the asset for light manufacturing, active warehousing, distribution and for focusing on new industry and innovation via the “makerspace” arena.
The ground and second floors of the building house several retail tenants as part of a small shopping center, including Bed, Bath & Beyond, Buy Buy Baby, Saks Off Fifth, Micro Center and Cost Plus World Market.
“The big picture is the Liberty View redevelopment was completed six years ago, has struggled to attract tenants and has been 70 percent vacant since it opened,” Max Padden, a vice president of real estate transactions services at the New York City Economic Development Corporation, told CO. “The retail was doing well, but the industrial portion was struggling to attract tenants. Our goal was to change the status quo and live up to the original promise [to the Sunset Park community].”
Madison will reposition the property and reintroduce it to the market, now with approval to add office tenants and make the development more profitable.
The city greenlighted the plan to convert a portion of the building’s industrial space into office use earlier this week. The move followed a long-standing lobbying effort by Salmar, who had argued last May that the industrial-focused leasing plan from 2011 was unfeasible and it was struggling to cover its debt obligations to Goldman Sachs. (Upon purchasing the asset in 2011, the firm, in exchange for $37 million in tax breaks from the city, agreed to a mandate included in the deed to reserve 85 percent of its rentable space for manufacturing tenants for 30 years.)
Ultimately, it was a two-year process for the EDC, with five or six months spent understanding the financials. Padden said Salmar’s original request was a blanket removal from the usage restrictions “and we said no, because it would not have been an equitable outcome. We did our own internal analysis on how it could be recapped; we understood it needed commercial; we extracted every concession we wanted; it was a tight deal.”
Padden said that base business systems essential for industrial tenants were never completed, so the development was in need of a substantial amount of capital to finish the work. He said that sagging performance had nothing to do with mismanagement or “incompetence” on the part of Salmar and that it was simply hampered by the previously flawed business plan that kept the owner from finishing up the work needed to usher in those critical manufacturing tenants.
Following the city’s move earlier this week, the owners received the go ahead to lease out over 268,000 square feet across the property to office tenants, under certain restrictions. A quarter of the office space approved in the revised agreement — just over 67,000 square feet — will be immediately leasable, while another quarter can be leased out after certain improvements are completed, which include items like the installation of approved fire alarms, sprinklers and new HVAC units. The remaining half of the office space will gradually become leasable as the industrial space is filled — to the tune of 0.7 square feet of office for every square foot of industrial space taken. The deal also dictates that the rent for industrial space across two floors will be capped at $18.50 per square foot, increasing at 3 percent per year through 2045.
Padden said the original industrial use requirement expired in 2045, and under the new plans, EDC was able to extend that an additional 27 years to 2071.
The asset “needed higher rents to justify the expenditure,” Padden said about the new, revised plans. “The idea is to use the [rents from] commercial space to offset the cost of improvements … and that money will be used to invest back into base needs and to get industrial tenants into the building at a lower rental rate.”
The original deed had provisions to allow Salmar to seek an expansion of the permitted uses if it couldn’t pay its debt service, Padden said, and if there was a foreclosure, the use restrictions would wipe out totally.
“[We really put a lot of effort in] negotiating this,” Padden said. “We held [Salmar’s] feet to the fire and told them that the usage restrictions were to remain in place no matter what.”
Wagman said: “Over 50 percent of the building will [continue to] be industrial, and we are able to offer 350,000 square feet of [rentable] multi-tenant office space that was previously not permitted at the building. We worked with the community and elected officials to provide an affordable pre-let industrial program at the building, and we’re excited to attract local and other national industrial businesses to the building and expand the industrial workforce in Sunset Park.”
The industrial space will total around 500,000 square feet, 175,000 square feet of which will be “affordable,” according to Wagman. He said his firm will work with the community to attract Brooklyn small businesses into the affordable space.
Padden said the changes to the agreement have had an immediate impact on leasing momentum. Already, the building has secured 75,000 square feet in new leasing, 45,000 of which is industrial.
“All those tenants were able to sign those leases due to the capital infusion,” Padden said. “Madison and Meadow wouldn’t have come in without the changes we agreed to…[Salmar] needed structural changes to make in financeable; they were breaking even. They could’ve sat it out for a few years and waited for the usage restriction to wear off, but that would’ve been a waste of time.”
The development has qualified for a range economic incentives through a variety of city programs, including Payment in Lieu of Taxes, the NYC Relocation and Employment Assistance Program and the Industrial & Commercial Abatement Program , and its location makes it an Industrial Business Zone beneficiary. These programs, along with Madison’s tenant improvement allocations, “[are] going to help on the affordable lease up of the space,” Wagman said.
The prospects for reenergizing the development look bright. The building features one of the largest contiguous floor plates in the city at 175,000 square feet, according to Wagman, who added that the unusually large floor plate “allows for a diversity of industrial and office tenants.”
“The cost to bring in new tenants was too high,” Padden said, adding that the EDC worked with industry professionals to learn more about the nature of the building. “With huge floor plates, narrow columns and low ceilings, this space is best suited for hybrid space, with a mix of nascent manufacturing companies who come in and want to have their whole operation there, so industrial space and also office for their HR and [other administrative departments].”
Other highlights at the property include a 3.2-acre rooftop farm concept from Brooklyn Grange, a 386-spot parking lot, multiple loading docks, 18 new elevators, three office lobbies and an on-site dining offering.