11/18/2011

Vornado Seeks to Refinance Manhattan Mall

Vornado Realty is shopping for a mortgage of up to $350 million on the mixed-use Manhattan Mall.

The New York REIT is seeking a floating-rate loan that could be fully prepaid at any time. The three-year assignment is being pitched to banks and insurance companies.

Vornado, which isn’t using a broker, tends to ask lenders for quotes based on varying levels of leverage. In this case, $350 million is evidently the upper end of the amount under consideration. But even at that threshold, the leverage would be low. The property’s value is roughly $650 million at a 6% capitalization rate, based on annualized net income of $38.8 million in the first half of this year.

Despite its name, Manhattan Mall consists mostly of office and showroom space. The 1.1 million-square-foot building is at 100 West 33rd Street, on the site of the former Gimbels department store, near Herald Square.

Vornado acquired the property in January 2007 for $688.8 million from HRO Asset Management of New York. It financed the purchase with a $232 million floating-rate loan from Credit Suisse, for a loan-to-value ratio well below 40%. Credit Suisse securitized the loan in 2007 via a $1.3 billion pooled offering (Credit Suisse Mortgage Capital, 2007-TFL1).

Vornado has exercised all three one-year extension options since the original two-year term expired, and the loan is now scheduled to mature in February.

The interest-only mortgage is pegged to 55 bp over one-month Libor. That means the current interest rate is a microscopic 0.74%. Lenders are likely to demand a higher spread now because Libor has plummeted in the intervening years.

The 13-story building, at 100 West 33rd Street, encompasses 847,000 sf of office space and 243,000 sf of retail space. The office space is 93.6% occupied, and the retail space is 99.4% leased. Major office tenants include advertising agency Draftfcb (274,000 sf until 2023) and Bank of America (110,000 sf until May). The average office rent is $47.88/sf. Almost two-thirds of the retail space is occupied by JC Penney (154,000 sf until 2029). Retail rents average $87.08/sf. Sales approach $800/sf, according to the International Council of Shopping Centers.

Property owners often seek maximum prepayment flexibility when they plan to sell, but that’s unlikely to be the case with Vornado. The REIT owns multiple properties in the local Penn Plaza submarket, including Hotel Pennsylvania. Manhattan Mall occupies the eastern half of the block stretching from West 32nd Street to West 33rd Street, between Sixth and Seventh Avenues, while Hotel Pennsylvania occupies the western half.

Vornado plans to demolish the 1,700-room hotel and replace it with a 70-story office tower. Manhattan Mall “is critical for them and the tower they’ll eventually build on the Hotel Pennsylvania site,” said one lender, referring to construction issues and the 250,000 sf of air rights that Vornado inherited when it bought Manhattan Mall.

The building, constructed in 1910, served as the flagship store for Gimbel Brothers until 1986. Then the owner — a partnership led by Sumitomo Life Realty and including Larry Silverstein, Elie Hirschfeld, William Zeckendorf Jr. and Melvin Simon — conducted a $400 million renovation and opened an A&S department store. A&S closed in 1995. Two years later, a Lehman Brothers partnership acquired the property for $135 million after the Sumitomo team defaulted on a $197 million loan. The Lehman team then spent more than $75 million repositioning the property as Manhattan Mall, which initially consisted mostly of retail space. It sold the property to an affiliate of HRO in 2004 for $400 million.

Separately, Vornado has lined up more than $300 million of mortgage financing from HSBC, DekaBank and United Overseas Bank on the nearby office building at 11 Penn Plaza (see article on Page 8).

CORRECTION (12/2/11): This article has been corrected. The original version incorrectly reported that Abe Hirschfeld was a member of the partnership that owned the building at 100 West 33rd Street in Manhattan in the 1990s. Hirschfeld’s son, Elie Hirschfeld, was in the partnership.

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