Goldman Sachs, Deutsche Bank Lead $525M Debt Package on Dallas Mixed-Use Purchase

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Crescent Real Estate has secured $525 million in debt to fund its purchase of The Crescent, a 1.3 million-square-foot, mixed-use, office development near Downtown Dallas, according to analysis from S&P Global Ratings

A $465 million, three-year, floating-rate and interest-only, commercial mortgage-backed securities (CMBS) acquisition loan from Goldman Sachs and Deutsche Bank, as well as $60 million in mezzanine debt, were used to acquire the property. It’s unclear who provided the mezz loan. 

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The total cost of the purchase was just over $697 million, and Crescent Real Estate, which has been managing the property since the mid-1990s, contributed $172.3 million in equity in the deal, per S&P. Crescent bought the mixed-use assemblage from J.P. Morgan Asset Management, and this marks the third time it has owned the property — it sold it to J.P. Morgan in 2004 — according to a report from Commercial Property Executive.

Rumors of Crescent Real Estate’s interest in reacquiring the development began swirling in December 2020, according to the Dallas Business Journal

The CMBS first mortgage includes two 12-month extension options, giving it a fully-extended maturity of April 9, 2026, per S&P. It is secured by the firm’s fee simple interest in three contiguous, office high-rises and also a three-story “retail and office atrium building” located on Crescent Court in Uptown Dallas. The loan is line to be securitized in the CRSNT Trust 2021-MOON single-asset, single-borrower (SASB) deal.

S&P noted the loan’s “moderately low” debt service coverage ratio of 1.39x, which it said could further decline should rates increase. To protect against that risk, Crescent struck up an interest rate cap with Goldman set at a 3 percent strike price for the loan’s initial three-year term. The securitization is consistent with the main principles of the Federal Reserve’s Alternative Reference Rates Committee’s guidelines for Libor fallback language, S&P noted. 

Built in 1986, The Crescent is a massive, mixed-use office and retail property that includes the collateral in this CMBS deal, as well as the 226-key Hotel Crescent Court and Japanese restaurant Nobu’s Dallas outpost. Crescent Real Estate is the owner of the hotel and it sold the last stake it had in the broader development to J.P. Morgan in 2011, according to the Dallas Business Journal

Altogether, it spans more than 1.3 million square feet, with about 88 percent of it being office space, 7 percent being retail, and the remaining space food and beverage (4.3 percent) and storage space (1.1 percent). It also has 3,659 subterranean parking garage spaces and 88 surface parking spaces. 

The three Class A office towers and the atrium building were renovated in 2018. About $48 million was poured into making the buildings more energy efficient, upgrading the elevators and lobby and parking garage, and adding a patio and green space in a small lot between the office towers and the hotel, per S&P. 

About 86.4 percent of the property is leased out to 115 tenants, a granular roster that S&P said benefits the asset, according to this month’s rent roll. It is mostly home to asset managers and financial services, and investment firms and legal tenants.

Law firm McKool Smith is the largest tenant at the property, situated in nearly 6 percent of its net rentable area (NRA), and the five largest tenants make up only 22.4 percent of NRA and roughly 19 percent of base rents. Luxury department store Stanley Korshak leases out more than 55,000 square feet and is the third-largest tenant at the location; it renewed in the summer of 2020. Rather than pay a base rent, Stanley Korshak’s rent is calculated at 6.5 percent of gross sales, which, after four years of relative stability, fell to around $20 million in 2020 due to COVID-19.

Despite the asset’s granular lineup of tenants, the scheduled rollover throughout the full life of the loan was deemed a risk by S&P, as a little more than 56 percent of NRA and about 57 percent of gross rent will expire. The loan, though, included $25 million in upfront tenant improvement and leasing commission reserves.