RFR Holding Plans to Resolve Debt Issues Without Selling Its Class A Buildings

Ah, 2024: You haven’t been pretty. 

The headlines have been filled with the shaking out of distress that’s been kicked down the road for just a tad too long, the added pressure of elevated interest rates resulting in defaults, special servicing transfers, and the handing back of keys on even marquee addresses.

Commercial real estate heavyweight RFR Holding is one firm which has featured prominently in the annals of this particular year with at least five prominent loans going into special servicing or facing foreclosure over the summer, but the company says it plans to resolve its debt problems without selling or surrendering any of its signature properties.

With lower interest rates likely just around the corner, New York City-based RFR expects refinancing and recapitalization opportunities “to preserve and enhance long-term value in our trophy properties,” according to an Aug. 26 statement to Commercial Observer from Aby Rosen, who runs the company with Michael Fuchs.

And those properties put the “Oh!” in trophy. The Chrysler Building and the Seagram Building, two brand names in the New York City skyline, are among the high-profile skyscrapers owned and honed by RFR, as was the Lever House, the 1952 office building of glass and steel that inspired the last century’s International Style of architecture. Lever House’s Casa Lever restaurant was also a power lunch spot for years before Rosen and Fuchs sold the building in 2020. It was not unusual, either, to see the odd Picasso or Warhol at Lever House or the Seagram Building, the fruits of Rosen’s collection habit.  

According to its website, RFR owns seven residential properties, eight hotels, 20 retail properties and 30 office buildings. One of the latter received a recapitalization — like Rosen implied — just this week, when SL Green (SLG) Realty stepped in to buy the $244 million loan on 522 Fifth Avenue. The move was part of a broader recap as RFR starts to renovate the aging building, Rosen’s reps said in a statement to CO.

There’s no denying that a common challenge RFR and other commercial real estate investors face is replacing low-interest loans originated before the surge in borrowing costs starting in 2022 and secured by office buildings and retail stores. Among other signs of stress, RFR has run into debt payment and interest rate cap problems with loans on several of its commercial properties in New York City:

>A special servicer in August took over a $180 million commercial mortgage-backed securities (CMBS) loan tied to 17 State Street after RFR failed to pay up, according to Morningstar. RFR acquired 17 State Street, a cylindrical office landmark in Lower Manhattan, in 1999.

>Also in August, Blackstone and Rialto Capital filed foreclosure proceedings against RFR retail properties at One Jackson Square and 219 East 67th Street after RFR defaulted on $22.4 million of loans, according to court records.

> Citibank and J.P. Morgan Chase took action — again, last month — to foreclose on a $180 million loan tied to RFR’S 23-story office building at 475 Fifth Avenue. RFR bought the century-old Midtown building in 2022 for $291 million and financed the acquisition with $260 million in loans.

It would be a grueling summer for any real estate developer after all that.

Rosen and Fuchs are from Frankfurt, Germany, and have been friends since childhood. After Rosen earned a law degree and Fuchs an M.B.A., they formed RFR in 1991 and started acquiring distressed properties from the Resolution Trust Corporation as it liquidated assets of financial institutions sickened by the savings and loan crisis of the late 1980s.

Few acquisitions heightened RFR’s profile more than its 2019 purchase of half the ownership of the Chrysler Building, an Art Deco landmark that may be the most recognizable high-rise on the New York City skyline. Austrian real estate conglomerate Signa Holding bought the other half of the ownership and, together with RFR, paid $151 million for the building. 

That price was $650 million lower than the previous owners had paid — largely because the Cooper Union school owns the ground beneath the Chrysler Building, and the annual lease payments by the building’s owners soared from $7.8 million in 2008 to $32.5 million in 2019. They’re headed even higher. The annual ground lease payments are expected to hit $41 million in 2028 and rise as high as $55 million before the lease expires in 2049.

The 94-year-old Chrysler Building is showing its age, as The New York Times put it in July, citing complaints by people who have worked there, including elevator malfunctions, poor cell phone connections, a dearth of natural light and pest infestations. While there had been an initial idea of converting the Chrysler into a hotel, the idea seems to have been quietly abandoned as too expensive to pull off. The Chrysler Building’s website in July was also listing more than 650,000 square feet, or over half the office building, as immediately available, according to the Times. Rosen declined to respond to specific questions from CO about the Chrysler Building or any other individual RFR properties.

Signa Holding at the end of 2023 became mired in bankruptcy proceedings, and a judge has ordered the company to sell its 50 percent stake in the Chrysler Building, raising questions about its future ownership. RFR, which operates the Chrysler Building, previously has indicated interest in boosting its ownership stake in the famous high-rise. But, these days, its appetite for office investment appears sated. 

An acquisition timeline on the company’s website shows RFR acquired 16 office buildings totaling 5.2 million square feet from 2017 to 2022, the last a pivotal, pandemic-driven year. In early 2022, after the COVID-19 outbreak had vacated offices nationwide, the Federal Reserve began raising interest rates to tame rising inflation. The Fed rapidly raised its target range for the federal funds rate, which banks charge each other for overnight loans, from 0.25 to 0.5 percent in March 2022 to 5.25 to 5.5 percent in July 2023.

Lower interest rates would be a step in the right direction for RFR. At its meeting Sept. 17 and 18, the board of the Fed is expected to trim interest rates by a quarter or a half percent, then reduce them further by year’s end.

More forbearance from lenders would help RFR, too. The company recently won a short-term extension until November to pay off a $222 million CMBS loan linked to 285 Madison Avenue, a prewar office building the company bought in 2012.

Fundamentally, a “flight to quality” pervades the New York City office market and “RFR has significantly benefited, given our concentrated presence in the Grand Central area, which is currently the strongest office submarket in Manhattan,” Rosen said in the statement. (After declining an interview request from CO, Rosen delivered a 320-word written statement instead.) 

“Our focus on top-tier assets has enabled us to achieve premium rent and occupancy levels, as evidenced by the successful lease-up of the Seagram Building at record rates and the recent sale of 980 Madison Avenue to Bloomberg at a record price per square foot,” Rosen said. However, the rise in interest rates has introduced “new challenges in managing capital stacks, even for properties that are healthy and well leased.”

RFR sold 980 Madison in June to media mogul and former New York Mayor Michael Bloomberg’s charity for $560 million. 

RFR has geographically diversified itself beyond New York, too, with properties in such cities as Miami, Seattle and Stamford, Conn. The company plans to develop a 1,049-foot tower with hotel rooms and residential units in Downtown Miami. “Our planned developments in Miami are in line with our core strategy of delivering irreplaceable real estate assets that align with our long-term value creation goals,” Rosen said.

A recent report by brokerage Avison Young shows clear evidence of a flight to quality in the New York office market. The Manhattan office vacancy rate in the second quarter was 19.6 percent, down a tick from 19.7 percent in the April-June period last year. Avison Young noted that “outperforming” Class A properties represent just 15 percent of Manhattan’s office space inventory but had captured 42 percent of year-to-date lease transaction activity, measured by square footage. 

There has been a rush among hedge funds, private equity firms and other financial service providers to lease Class A office space in Manhattan, brokerage Marcus & Millichap noted in a second-quarter report. “A tightening labor market … may further motivate similar companies to leverage updated, high-quality spaces to recruit and develop talent,” the brokerage reported. The demand should benefit owners of that high-quality space such as RFR — even more than any shift in borrowing costs.  

“It’s a headquarters city. There’s always going to be decision-makers who want to work here,” David Perlman, managing director and head of the New York office of Thorofare Capital, said of New York’s pull. “The thing that would make the biggest difference is people going back to work in the office. … Interest rates are important, but they’re not as important as getting people back to the office.”

The Fed may soon start to lower the cost of borrowed money, but the relief will be incremental, said Bob Knakal, chairman and CEO of BKREA, a commercial real estate capital markets brokerage in New York City. “Even if the Fed cuts interest rates 25 or 50 basis points in September, which is what the expectation is, it’s not going to really do a heck of a lot for folks,” Knakal said. “Because, if you have 3 percent or 3 and a half percent debt, even if rates come down half a point, you’re still going to be above 6. That is a massive, massive issue.”

Refinancing is a challenge not only because interest rates are elevated but also because a down payment is usually required. “To refinance, you have to put fresh capital in,” Knakal said. “Do you believe in the future of that building enough? Or do you want to buy someone else’s building? That’s a difficult thing for folks to figure out.”

Getting a loan extension is less expensive than refinancing, but for companies like RFR, an extension doesn’t happen free of charge, said John Vavas, a New York-based attorney at the Polsinelli law firm who focuses on commercial real estate finance. Borrowers encounter “myriad financial hurdles to satisfy in order to extend. You’ve got an LTV [loan to value] test. You’ve got a DCR [debt coverage ratio] test,” he said. “Even if you have the unilateral right to extend subject to those conditions, you’re probably going to need to put equity into the deal.”

Whether RFR might seek debt relief by selling a trophy asset, such as its half ownership of the 1.26 million-square-foot Chrysler Building, is unclear without knowing who’s the majority owner of the asset. 

“If you want to handicap what they are likely to do, you need to know what the capital stack looks like and what the equity stack looks like,” said Knakal, who has helped RFR buy and sell properties. “I don’t know RFR well enough to know which buildings they have a majority of their money in and which buildings they have partners in.”

Short of selling assets, another possible option for RFR is converting buildings to new uses. 

“The conversions of 222 Broadway, 623 Fifth Avenue and 95 Madison Avenue were announced in Q2, adding to a growing list of lower-quality [office] buildings to undergo conversion to residential or other use,” according to a second-quarter report on the New York office market by brokerage JLL (RFR does not own any of the cited addresses). “With an increase in conversions and a slowing of the development pipeline, the total New York office inventory is expected to decrease over the coming years.”

But not every office building is a good candidate for conversion, said Vavas, who has worked on two office building acquisitions for conversion in the last two months. “It’s all about light and air,” he said. “Free-standing office buildings that have four sides exposed seem to convert better than low-rise, mid-block buildings.”

Whether RFR can navigate the current threat landscape by converting buildings, refinancing, recapitalizing, or selling them — or a mix of each approach — will depend largely on the experience of the company’s leaders, Rosen and Fuchs.

“They’ve been around for a long time,” Thorofare’s Perlman said. “They’ve been through many cycles, and they know what to do. Aby’s a smart guy. He’s committed to the city, and he’s not fleeing New York. He has assets elsewhere, but, for the most part, his bread and butter is in New York.”