Nightingale, Wafra Capital Talk 111 Wall Street and C-PACE Financing

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Elie Schwartz and Simon Singer’s Nightingale Properties first connected with Wafra Capital Partners and its vice president, Robert Rothschild, in 2017.

Just over two years later, in July 2019, Nightingale and Wafra Capital, an investment arm under Kuwait’s public pension fund, the Public Institution for Social Security of Kuwait (PIFSS), identified an opportunity at 111 Wall Street in Manhattan’s Financial District.

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The pair secured the leasehold interest in the 24-story, 1.1 million-square-foot property for $175 million in early 2020 and set out to completely gut renovate it.

After a long wait through the pandemic, the partnership finally gained full control of the property this summer, acquiring the fee interest for $220 million from Omnispective Management, and nabbed a $500 million loan package for the acquisition of the fee and to fund the redevelopment work. The loan package was very pandemic-esque, with five private lenders and debt fund vehicles combining to make it happen: SKW Funding, PIMCO, Oaktree Capital, Bain Capital and Austin-based Petros PACE, which supplied $89 million in Commercial Property Assessed Clean Energy (C-PACE) financing.

The building at 111 Wall Street is a “blank canvas,” as Schwartz referred to it, in many respects. Physically, it is poised to be transformed into one of Downtown’s premier office products and a bastion of energy efficiency and sustainability under New York’s Local Law 97, which was passed in 2019 as part of Mayor Bill de Blasio’s Climate Mobilization Act, a local “Green New Deal” that aims to significantly reduce emissions from large commercial buildings in the city. And, symbolically, it is the first building in the city to utilize C-PACE financing, serving as somewhat of a blueprint for how to structure and incorporate that clean energy-focused financing into the capital stack.

Schwartz and Rothschild spoke to Commercial Observer last week to talk about their partnership, 111 Wall and Manhattan’s Downtown market. The interview has been edited for clarity and length.

Commercial Observer: What’s the timeline for the completion of the renovation work on 111 Wall Street?

Elie Schwartz: We anticipate completion sometime between early to mid-2023.

Did you have any other plans in mind before settling on a big office redevelopment?

Schwartz: At one point in time, we considered going the route of multifamily, instead of going the route of office, but we quickly squashed that idea.

Why is that?

Schwartz: It’s just a very large building. The floor plates are 45,000 or 46,000 square feet. Practically speaking, it would be very difficult to divide that into really usable and viable multifamily units, so we elected not to go forward with that.

Why make the move on 111 Wall?

Schwartz: You had this beautiful, waterfront location, with unobstructed views of the skyline in Brooklyn and the water. It was something that had been untouched for so many years, and we were able to buy the leasehold at a very good basis. We felt confident in our ability to work out a lease extension or purchase the fee [interest] in the long run, not knowing at the time that we would get the fee. When [we and Wafra Capital] felt like we could do something special here, we elected to move forward with it. It was obviously prior to COVID, but I think, even through COVID, we feel very bullish and confident about what we’re delivering as a product. Just the fact the bones were solid and the location was amazing — what Wall Street adds — just made it something that we felt that if we were going to take on a really heavy project to gut renovate a building, this was a good one.

Robert Rothschild: The vibe for this building is to be something that is much more hospitality-focused than the traditional office building. We’ll have a coffee bar in the lobby — not just a Starbucks pop-up, but a real lobby coffee bar, something you’d see at a high-end hotel. The finishes are going to be much more in the warm tones than what you’d see in Midtown East — all stark white or gray. It’s something that we think is going to cater to the types of tenants that are in this market and differentiate ourselves from competition.

It took the JV a while to secure the financing to reposition 111 Wall, but considering the pandemic, what were some of the bigger hurdles in getting that deal across the finish line?

Schwartz: I think the easiest way to explain it is: patience, a lot of patience. But, we’re a very determined group, collectively, and, fortunately, because we’ve worked together so many times, we know how to deal with these types of situations. Through a lot of patience, we found a lender that believed in our story and our ability to execute on it. The biggest challenge was just showing the market that we have the ability to execute. We put a lot of money behind it, and putting your money where your mouth is is important. Being able to tell the story of what we’re going to do here, and showing people why this building is going to be different in the market than other ones and we’re going to make it stand out in a positive way, was a big part of the story.

Rothschild: The capital markets were pretty frozen for quite a bit of time, so we had to not only be patient but look for alternative sources of capital. [We put] a C-PACE loan on the project. That was the first-ever C-PACE loan done in New York City and the largest ever done in the state. Given the repositioning of this asset, and the Local Law [97] rules that are coming into effect, we were already planning to do all of these improvements to make sure we didn’t trip up any of those violations in the future. But at the same time, it was very important to get financing like the C-PACE loan to help us complete our capital stack. Now that the program is up and running in New York, we think we’re going to see a lot more developers using that type of financing.

You were initially seeking a larger financing package for the redevelopment and acquisition of the ground lease — $860 million, a little over a year ago. What happened or needed to happen for you to instead agree to the $500 million package you ultimately got, in terms of shifting the business plan or finding the right lending group?

Schwartz: One was that we put in more capital ourselves, so that bridged a significant portion of the delta; the other part of it was that we value engineered our improvements a little bit in order to make the project more cost effective and to move with the market. When COVID hit, we felt like the best thing we could do was lower some of our expectations on rental rates and etc. So, because we had recast our budget in that regard, we also decided to recast some of the improvements we were going to make, reducing some of the scale we were going to do.

It’s a very interesting group of lenders that came in and supplied that $500 million financing — at a tough time for the market. On a building that’d you’d expect a large, money-center bank to be involved in, how’d you ultimately settle on a group of private lenders and funds?

Schwartz: I think that for us it was about the certainty of execution. With all those names behind the loan, we felt very confident that one way or another, the loan would get closed. It’s a pretty impressive roster. We felt that, hypothetically, even if one piece of the puzzle were to fall out, one of the other parties would be able to step in and take over. That combination of strength gave us confidence to move forward with them.

Were there any institutional banks that came in, vying for a place in that financing?

Rothschild: There were a number of banks that we were talking to to put the loan together, but obviously the bank would want to be in the first-mortgage position. PIMCO came in with really aggressive terms and it was our decision to go with them. From our perspective, whether it’s a bank or a fund like PIMCO, we’re somewhat indifferent; it’s about relationships with our lenders and getting the best execution possible. PIMCO presented the most compelling terms.

The C-PACE lender in the deal, Petros, previously mentioned HVAC work and mechanical-electrical plumbing will be installed. What other energy reduction measures will be instituted at the property on the back of the C-PACE financing?

Schwartz: I think the largest of those is actually going to be smart glass, where you have auto-tinting glass on the whole building. That’s the largest single energy-saving improvement that we’re making. We’re actually going to be pulling the entire curtain wall off and putting in a whole new curtain wall with this floor-to-ceiling smart glass. That combination of taking advantage of the views and adding the efficient glass to the building is going to help the aesthetic and the energy efficiency.

We’re going to be Local Law 97-compliant when we’re done with this, so we’re doing all that work now, rather than in a few years. The whole building will be pretty efficient.

How common is the tinted, smart glass in Manhattan? Is it a feature that will become fairly prevalent?

Schwartz: We know that it’s going on at St. John’s Terminal for Google. And I believe 825 Third Avenue, as well, is where we saw the demo and how it works. We have not seen it extensively, but we view that as a plus. We’d like to be at the forefront of this type of technology, and we feel this is just one of many things that’s going to make 111 Wall a really attractive home for a number of tenants.

How much more costly is it to use that material in a development rather than more traditional glass?

Schwartz: The glass is more expensive just because of the technology that’s built into it and because the software to operate it costs money. The only other major cost associated with it is really just the cabling that’s involved, which is not an enormous number. The big number is in the glass itself and the technology.

How much of a selling point is that for prospective tenants?

Schwartz: We believe it’s a pretty big selling point, because it goes beyond just efficiency and comfort. Being able to regulate temperature more effectively is a big selling point on the comfort of the people in the building, but there’s an additional technological aspect: at a tenant’s election, you can have a built-in TV installed into the glass. You have see-through glass, but at the same time, if you’re in a conference room with windows, you can actually integrate a TV into the glass that’s translucent, if you really want to be able to streamline and modernize the space. You have these spectacular views, and then when you do have a meeting, with the flip of a switch or a button on an app, you can activate the TV screen and create a cool experience for your meeting, your customer or employees, or whatever it might be.

What types of tenants are you looking to put in 111 Wall, considering the building’s technological offerings?

Rothschild: St. John’s Terminal is kind of a case in point. Google pre-leased that building out of the ground, and part of their deal is they always knew the glass was going to be installed. So, tech tenants are going to be especially drawn to this, but, at the same time, [so will] hedge funds or quantitative or analytical companies that deal with presentations, charts, data and graphs and all the different things that [our building] will allow you to utilize the smart technology for. It’s certainly a selling point. As part of our show floor we’ll have it installed and we’ll have a demo to show how it works.

As the first group in the city to use C-PACE financing, what do you think it means for that type of financing going forward, that the first deal was on such a high-profile office development Downtown?

Rothschild: You’re going to start seeing more and more banks and mortgage lenders becoming more accepting of C-PACE onto their projects. Over the last few years, it’s mostly been private money lenders and some banks here and there, but given what’s going on in New York, with Local Law 97, the banks are going to be forced to accept this as a form of financing. I think we’re going to start seeing a lot more of this in New York and in other major cities as well.

Mansoor Ghori at Petros has said it wasn’t an easy task getting the seniors in the debt stack on board with the PACE financing. What were some of the biggest hangups and was there any risk that the PACE financing wouldn’t be included because of that?

Rothschild: I think it was really just an education process, because most of these lenders are focused on New York, and this one being the first one in New York, there were a lot of lawyers involved, dotting their i’s and crossing their t’s, making sure that everyone was protected and had the appropriate collateral and documentation. It was just a complicated transaction, but at no point did we feel there was a risk of any part of the capital stack not closing.

Where does the C-PACE financing fit in the capital stack, exactly?

Rothschild: It’s got slightly different security, so the way it works is it’s actually a tax assessment against the property, similar to how a real estate tax would be. So, it’s not a mortgage or a mezzanine loan or a UCC or anything like that, it’s literally a tax assessment against the property.

How important was it for you guys to acquire the ground under 111 Wall, as well, to assume full ownership and see out the vision?

Schwartz: It was a key piece. We originally had intended and hoped to get a long-term extension, but when the opportunity presented itself to just purchase the fee, we were very pleased. We were able to execute that pretty quickly. We signed our contract in June or July 2020 — in the middle of COVID — and we worked out our agreement with the seller to be able to close simultaneously with our construction [financing].

Was there any apprehension from the seller over holding onto the ground? How did that unfold?

Schwartz: The day we closed, I actually sent an email to the owner of the fee, just thanking them for their cooperation to that point and introducing ourselves as the new owners of the leasehold. To that extent, yes, we started the process of building a relationship immediately. The selling party were very wonderful people and they were very accommodating and easy to deal with. We went in with the intent of trying to negotiate a long-term extension, but, on a whim, we threw out that we’d potentially be interested in buying the fee, and they were open to it. We actually never submitted a proposal to extend the lease; we only submitted an offer to buy the fee. That’s how it came about.

While there are still so many questions shrouding the recovery of Manhattan’s office market, what do you feel a renovated 111 Wall will mean to Downtown?

Schwartz: We’re hoping we can make a pretty meaningful impact on the Downtown market. We certainly are hoping to semi-piggyback off the success of 100 Pearl Street, where they were very successful leasing it pre-COVID, but they’ve renovated it and now they’re in contract to sell that building at a meaningful number. We feel our project is at or above that caliber. Our renovation is far more extensive — and we have the views. We feel confident in our ability to land some solid tenants at the building. We have a number of discussions going on at the moment, and we’re hopeful that sooner rather than later we’ll have secured our first tenant.

Is there a profile tenant you plan to target first?

Schwartz: We had hired JLL to represent our interests here. They did a great job for us at 300 Lafayette Street securing Microsoft for our building, so it was a natural decision to engage them to represent us here as well. We’re going out to anyone in the market who we feel is a good fit for the building. There are, as you can imagine, a lot of people looking at the future, trying to figure out what that is. Employee well-being is a top priority among a lot of employers right now, and that’s a part of the reason why we’ve rolled out our extensive amenity package at the building, with features like smart glass and the latest in air filtration. We’re targeting anybody who’s conscious about that and wants to provide the best work environment for their employees. We’ve been having a lot of conversations.

Rothschild: The feedback so far has been very positive. Downtown attracts a certain type of tenant, and there are tenants that have only historically been interested in Midtown. But we’ve been able to get historically Midtown East tenants — even though they’ve never had an office Downtown — to at least come and tour and see our product. We’re hopeful that will lead to some strong pre-leasing in the future.

If you’re looking at Midtown East tenants, what’s the selling point to bring them Downtown?

Rothschild: It’s a value proposition. The rents in Lower Manhattan are significantly less than what the tenant would be paying on Park Avenue. But, we also have excellent transportation options at our building. We’re adjacent to the ferry that drops off on Wall Street that brings a large workforce in from Brooklyn and from other parts of the tri-state area.

With COVID there are fewer people taking the subway and more people looking for open-air transportation; the ferry will be an attractive means of transportation. Finally, the brand-new building, a never-before-worked-in space, fully reimagined — soup to nuts — with unobstructed views of Downtown Brooklyn and the bridges.

What are your thoughts on the Lower Manhattan office market in general?

Schwartz: During COVID, there was a point in time where it sort of dipped very hard, very quickly but recovered pretty quickly too; there’s been some good activity Downtown. Space that has come online for sublease has gone offline very quickly, so we feel pretty good about it. Over time, one of the major focuses is going to be not only the location but the quality of the product. [There’s been a] flight to quality, and I think what we’re delivering is going to be at the top of that chain. The quality will be as good as anything Downtown, if not better.