Midtown Makeovers: Revamping Before Refi

By Cathy Cunningham

Like the cool kid at school, Hudson Yards is the name on everyone’s lips. Shiny new towers will shortly pierce the sky, and tenants including Blackrock, KKR and Time Warner have already preleased space in Related Companies and Oxford Properties Group’s behemoth development.

As the far West flourishes, it’s crunch time for Midtown. At an average age of 70 years, Midtown office properties must now compete with the flashy new ground-up construction that is underway. In order to attract tenants, they’ll have to look their best and defy their age. Further, as the tidal wave of commercial mortgage-backed securities loan maturities continues to roar through 2017, tenant-enticing renovations are especially critical if occupancy is to be increased before owners approach lenders to refinance.

More than $6 billion in CMBS office loans will come due in New York City this year, according to Trepp data. It therefore comes as no surprise that some jarring headlines have pertained to maturing CMBS loans on Midtown office properties. These loans were made during the boom, when Midtown was Manhattan’s crown jewel in terms of desirable office space and before Hudson Yards was even a sparkle in Related’s eye—but now those properties’ occupancy levels are being watched as loan maturities come around.

Even top-tier owners and developers are no exception to the rule. Chetrit Group, Edward J. Minskoff Equities and The Moinian Group had to line up a two-year extension on their $216.7 million financing package backed by 500-512 Seventh Avenue due to occupancy issues in December, as Commercial Observer previously reported. Occupancy in the 45-story, 1.2-million-square-foot office complex dipped to 67.5 percent last September, sending the property to special servicer LNR for maturity default. Luckily, the borrowers received a series of short-term extensions until managing to push the maturity back to November 2018, and they will use that time to increase occupancy and make capital improvements to the property, sources told CO at the time.

The plight of 500-512 Seventh Avenue is not singular. Owners will have to put money in to get their older office stock to compete.

“The key is that a lot of the properties are an older vintage, so they were built in the 20th Century and not well prepared for the needs of a 21st Century tenant,” said Scott Rechler, the chief executive officer and chairman at RXR Realty. “And so what we’ve done at 237 Park Avenue, 75 Rockefeller Plaza and 230 Park Avenue [the Helmsley Building] is take these older buildings and upgrade them so that they can be compelling to tenants.”

The loan on 237 Park Avenue comprises 22 percent of the Lehman Brothers-sponsored LBCMT 2007-C3 CMBS transaction and expires in June. Previously, the property had been on and off special servicer LNR’s watchlist, most recently hitting it in August 2015. Credit Suisse occupied 270,548 square feet in the property (23 percent of gross leasable area) but vacated upon lease expiration in 2014.

With the renovation underway, RXR has leased out 100 percent of the property, according to Rechler. “When we acquired 237 Park Avenue we capitalized the transaction with a loan plus equity, with the plan of repositioning it,” he said. “Now that the leasing is being finalized we are in the market for a loan and are going to be refinancing the property.”

“[237 Park Avenue] is a great example of what makes a building so much more attractive to office tenants, and RXR is a great example of a landlord who has both the willingness and the capital to do what it takes to be competitive at really top rents,” said Scott Singer, the president of the Singer & Bassuk Organization.

And, the capital improvements can only help when it comes time for refinancing. A lender who spoke to CO on the condition of anonymity said that for the most part, borrowers who are looking to refinance their Midtown buildings recognize the need for renovations and on average invest $20 million for properties that are 100,000 square feet to 300,000 square feet in size. But when it comes to actually financing those buildings, it’s important that the loan-to-value hovers in the 50 to 55 percent range on the first mortgage, and that the debt service coverage ratio is 2x or more.

“I’m looking at three comparative deals right now and most of them are walking distance from Penn Station and Grand Central Terminal,” the lender said. “Occupancies are greater than 85 percent on all three. You need the occupancy and you need the revenue in order to get a refinance done.”

Additionally, a critical component of a refinance is that a reserve account is established at the time of closing to fund future tenant improvement costs and leasing commissions, the lender said.

Meridian Capital Group has been actively brokering loans on behalf of sponsors that are working on upgrading their buildings to be more modernized and amenable to tenants that typically wouldn’t look at a historic or adapted building. “In terms of a lender going into a deal, they’re going to look at what the functionality of a building is today and what the business plan is of the sponsor to improve it if it needs to be improved or maintain it if it needs to be maintained and attract tenants,” said Tal Bar-Or, a managing director at Meridian. “It starts with the functionality of the building and goes back to the sponsorship being able to make the building appealing and achieve its potential.”

Published: February 2, 2017
Filed Under: Redevelopment

The RXR platform manages 61 commercial real estate properties and investments with an aggregate gross asset value of approximately $18.5 billion, comprising approximately 24.4 million square feet of commercial properties, inclusive of a multi-family residential portfolio of approximately 2,600 units under operation or development, and control of development rights for an additional approximately 3,700 multi-family and for sale units in the New York Metropolitan area. Gross asset value compiled by RXR Realty in accordance with company fair value measurement policy and is comprised of capital invested by RXR and its partners, as well as leverage.