10/21/2011

Vornado Seeks to Refinance 350 Park Avenue

Vornado Realty is shopping for a $300 million mortgage on a premier Manhattan office building for a refinancing that will require it to put up a substantial chunk of equity.

The 583,000-square-foot building, at 350 Park Avenue, currently has a $430 million interest-only loan that Wachovia originated near the top of the market. Vornado presumably will have to make up the $130 million shortfall out of pocket.

The New York REIT is pursuing a fixed-rate mortgage with a term of 5-10 years. The company, which isn’t using a broker, is sifting through proposals from foreign banks and insurance companies.

Vornado bought the 30-story Midtown tower from the government of Kuwait for $541.5 million, or a whopping $929/sf, in December 2006. It financed the purchase with the five-year mortgage, which Wachovia securitized via a $7.9 billion pooled offering (Wachovia Bank Commercial Mortgage Trust, 2007-C30).

The purchase price translated into a skimpy 3.3% capitalization rate, reflecting the prevailing optimism that the bull market for real estate would continue. Likewise, the size of Wachovia’s loan was based on the lax “pro-forma” underwriting standards in vogue at the time. Moody’s estimated that the loan balance was 1.45 times more than the building’s valuation under the average historical cap rate.

The fully leased property’s in-place net operating income was $17.9 million. But below-market leases on 40% of the space were scheduled to mature within three years. Based on the expectation that the space would be re-leased at higher rents, net operating income was projected to rise to $28.6 million by 2010. The 5.5% loan, which matures in January, was underwritten on that basis.

The cashflow from the building wasn’t expected to cover the debt payments until 2010. For example, in 2007, the cashflow barely equaled three-quarters of the debt service. Vornado provided a $20 million guarantee to cover the shortfalls.

But the ensuing financial crisis and recession thwarted the optimistic forecasts for the building’s performance. Rents on new leases didn’t reach the forecast levels, and the occupancy rate slipped. The net operating income last year was $20.9 million — almost $8 million below the projection. As of midyear, 92.5% of the space was occupied. According to a servicer report, the debt-service-coverage ratio in the first quarter was 0.81 to 1. Vornado has continued to make up the shortfall, so the loan remains up-to-date on payments.

At the prevailing 4.5% capitalization rate for Manhattan’s choice office buildings, 350 Park Avenue is worth about $465 million at last year’s net operating income. That would put the current mortgage’s leverage at 92% — far too high to be fully refinanced under current lending standards.

But with Vornado pumping in more equity, the proposed loan would carry only a 65% loan-to-value ratio. That makes it appealing to portfolio lenders. One lender described the building as being “as good as it gets for a pure piece of New York real estate,” with a prime Midtown location — stretching from East 51st to East 52nd Street on the west side of Park Avenue.

Major tenants include Ziff Brothers Investments (261,000 sf until 2021), Tweedy, Browne Co. (32,000 sf until 2015) and MFA Financial (32,000 sf until 2020).

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