10/17/2008

Another Macklowe Building Under Pressure

Developer Harry Macklowe is facing a debt squeeze on yet another Manhattan office building.

The 536,000-square-foot property, at 1330 Avenue of the Americas, has seen its cashflow fall because of a decline in the occupancy rate. That has forced the developer's company, Macklowe Properties, to tap reserves set up to cover loan-payment shortfalls. But now the company is burning through the reserves, putting it under pressure to raise more equity.

Macklowe is quietly holding discussions with potential partners, according to market players. The amount of equity being sought is unclear. The company is apparently conducting the talks directly, without using a broker. A Macklowe spokesman declined to comment.

Macklowe bought the property for $498 million from German syndicator Deka Immobilien at yearend 2006, as the market was peaking. Reflecting the high leverage available at the time, the company lined up a $500 million mortgage package via Deutsche Bank to finance the deal. But property values have since sagged in Manhattan. That factor and the relatively low vacancy rate have driven down the building's value by as much as $150 million, according to some local real estate players.

The loan package matures in January. But Macklowe has three one-year extension options that can be exercised under certain conditions, giving the company some breathing room. The immediate problem is that the reserves are being depleted faster than expected.

When Macklowe acquired the property, the occupancy rate was 90.3%. But it was known that lead tenant Covington & Burling would vacate 129,000 sf, or 24% of the entire building, when its lease expired in June 2007.

Macklowe was forced to pledge significant reserves, in part to cover the risk of finding a new tenant. The company put up $39.1 million to cover debt service, $18.3 million for tenant improvements and leasing commissions, and $19.7 million for property expenses.

But even though the 40-story property, formerly known as the Financial Times Building, boasts a strong track record and location, a new tenant hasn't been lined up. In June, with the occupancy rate at 69%, S&P downgraded some classes of a securitization that included a senior portion of the building's mortgage, noting that the building's performance wasn't meeting the agency's expectations. As of last month, the monthly cashflow from the property equaled only 45% of the amount needed to service loan payments, down from 56% in September 2007, according to a report from the securitization's servicer. The loan is on the servicer's watch list of problem loans.

Macklowe is seeking a hefty rent of $70/sf for the vacant space. But the company is facing a softening market, which is being made worse by the fact that financial companies are consolidating nearby, creating more vacant space. That space is already built out for corporate tenants, providing stiff competition for Macklowe's building, which sits between West 53rd and West 54th Streets on the east side of Avenue of the Americas.

The financing package on the building consists of a $240 million senior interest-only mortgage, pegged to Libor plus 159 bp, and $260 million of mezzanine debt. Deutsche securitized the senior mortgage in May 2007 via a $2.5 billion pooled offering (COMM, 2007-FL14). Deutsche placed all of the mezzanine debt with high-yield investors. The buzz is that BlackRock Realty Advisors holds the first-loss mezzanine tranche, but that could not be confirmed. A BlackRock spokesman didn't return a call seeking comment.

The property, which was constructed in 1965 and renovated in 2007, is the latest problem in a long list of woes for Macklowe. The company paid $7 billion for eight Manhattan office buildings early last year, at the top of the market. It financed the purchase with a giant debt package arranged by Deutsche. The one-year package had no extension options, and Macklowe was unable to refinance when the debt matured in February. Macklowe not only lost control of the eight buildings, but also the company's crown jewel, the General Motors Building, which had also been pledged as collateral. After the debacle, Harry Macklowe turned over control of the company to his son, Billy Macklowe.

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