Pru Faces Maturing Loan on 11 Times Square

A Prudential Real Estate Investors partnership is preparing to start negotiations with its lending syndicate about a maturing $714 million construction loan on the overleveraged office building at 11 Times Square in Midtown Manhattan.

The 1 million-square-foot tower, which opened a year ago, is less than 60% occupied and can’t support a new loan of the same size, according to lenders.

A meeting with the bank syndicate, led by Bank of America and PNC, is scheduled this month. In return for extending the loan’s term or originating a new mortgage, the lenders would likely require the Pru team to pay down a significant amount of the debt — as much as $100 million, by some estimates.

Pru and its partner, SJP Properties of Parsippany, N.J., could seek to sell all or part of the building to retire debt. The duo has filed an application with the New York City Department of Buildings to divide the building into two office condominiums, according to The Real Deal, possibly presaging a sale of either or both.

The syndicate, which also includes Helaba Bank, MetLife, Wells Fargo and WestImmo, originated the loan in 2007 for the speculative office building. The Pru team exercised the one-year extension option on the four-year loan, putting the final maturity date in March.

The cost of developing the tower has been put at $1.2 billion. The property’s value is currently lower, because of the high vacancy level, but lenders described the building as “overleveraged” rather than “underwater,” meaning that the value exceeds the loan amount. However, because of the decline in value and the tighter loan-underwriting standards now prevailing, the building can’t support a loan of equivalent size.

The 40-story property is at 640 Eighth Avenue, between West 41st Street and West 42nd Street, directly across from the Port Authority Bus Terminal.

The Pru partnership has lined up an anchor tenant: law firm Proskauer Rose, which has leased 14 floors encompassing more than 400,000 square feet. But there are only a couple of other small tenants, and the overall occupancy rate remains below 60%.

The leasing agent for the building recently changed, with Jones Lang LaSalle replacing CBRE.

The existing loan originally was pegged to 145 bp over one-month Libor. After the Pru partnership violated a loan covenant in 2009, it was forced to accept an increase in the spread to 250 bp immediately, with a step-up to 290 bp in March 2010 and to 350 bp a year later.

While the concessions resulted in higher debt-service payments, they were nonetheless characterized as a relatively good deal, given the more-onerous terms that the Pru team would have faced if it refinanced with other lenders in the open market.

The same dynamics appear to be in place now. It’s viewed as unlikely that the BofA-PNC syndicate would try to foreclose or that other banks would step in.

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