02/17/2012

How CMBS Shop Snagged Trophy Office Loan

When developer Sheldon Solow began his search for a $625 million mortgage on his office building at Nine West 57th Street in Midtown Manhattan, the assignment seemed tailor-made for an insurance company: Extremely low leverage on a trophy property in a premier city.

Yet Deutsche Bank ended up the winner, providing a rare example of a commercial MBS shop walking away with the type of loan that has been the domain of portfolio lenders since the market crash.

How did Deutsche pull it off? A confluence of events worked in its favor, according to people familiar with the matter. Among them: an aggressive loan quote; an ability to fund the mortgage in time to meet the approaching maturity date of the existing loan; and wariness among insurance companies about Solow’s combative reputation, leasing strategy and insistence on the option to put mezzanine debt on the property down the road.

The bottom line: That unusual combination of factors suggests that Deutsche’s victory doesn’t mean CMBS shops have suddenly become competitive with insurers for loans on trophy properties.

“But it’s good for CMBS to show that they can win one, anyway,” said one securitization lender. “It’s an upbeat sign for the market.”

For his part, Solow ended up with a rock-bottom 3.787% rate on his five-year loan, which enabled him to take $125 million of cash out of the building after paying off the existing $500 million of debt. And Deutsche this week successfully executed the securitization, structured as a single class of triple-A bonds. The securities were priced to yield a skimpy 2.15%, comfortably below the loan rate (see Initial Pricings on Page 10).

Solow’s 50-story tower is widely considered one of New York’s premier properties. With its sloping smoked-glass facade, it stands out amid a sea of office buildings. And its prime Midtown location and spectacular unobstructed views of Central Park from the upper half of its floors has enabled Solow to charge perhaps the highest rents in the country. The tenants include buyout firm Kohlberg Kravis Roberts, fashion and cosmetics firm Chanel and hedge fund operators Apollo Management and Och-Ziff Capital.

Solow, who built the tower in 1972, solicited loan bids from insurance companies late last year. AIG proposed a 5% rate, market players said. Other insurers weighed in at around the same rate.

But several factors tempered the interest of life companies.

One was Solow’s ironclad insistence on premium rents. That has resulted in gross rents as high as $168/sf. The weighted average is $143/sf — almost double the $74/sf average for the surrounding Plaza District submarket. The downside is that the tactic has held the occupancy rate to only 56.2%.

While the leased space produces a healthy cashflow, Solow’s contrarian strategy didn’t sit well with some insurers, who pointed out that the developer could quickly fill the vacant space at lower rents. “His approach to leasing the building — or not leasing it, as the case may be — figured into our assessment,” said one insurer dryly.

Some insurers said they were scared off by Solow’s penchant for taking disputes to court. A New York Times profile described him as “a highly litigious developer with more than 200 lawsuits to his credit.” Given that reputation, some insurers said, it was an easy decision to move on to other lending opportunities.

But perhaps the biggest drawback for insurers was Solow’s desire for the flexibility to arrange mezzanine debt in the future. “There is a resistance among insurers to allowing mezz to be added during the term of the loan, when they will have no control over who the mezz lender will be,” said one market player. “When there is mezz behind a lifeco loan, it was usually done when the senior loan was originated, and the insurer approved of the mezz lender.”

The demand seemed strange because Solow is known for employing low leverage. But the flexibility was important because when he wanted to put additional debt on Nine West 57th Street during the downturn to raise cash for another property, he was prohibited from doing so by the loan documents — even though the loan-to-value ratio was less than 25%.

With the Feb. 1 maturity looming, Solow decided to widen his search, bringing in CMBS veteran Mike Offit as an advisor early last month. Offit, who was a top executive in Deutsche’s CMBS group in the 1990s and now runs a consultancy in New York, solicited proposals from three CMBS shops: Deutsche, J.P. Morgan and UBS.

Deutsche offered the lowest rate — well below the more-typical range of 5-6% on recent large CMBS mortgages. Deutsche presumably felt it had the leeway to go that low because the entire loan would qualify for a triple-A rating, thanks to the low leverage. The balance equals only 25% of the $2.5 billion appraised value, as determined by Cushman & Wakefield on Jan. 1. Also, on Jan. 24, eight days before Deutsche originated its loan, Goldman Sachs and Citigroup placed comparable 4.5-year, super-senior bonds from a $1.2 billion multi-borrower deal at a yield of 2.188% — or 1.6 percentage points lower than the Solow loan coupon. That cushion indicated that Deutsche would make a profit on its financing.

Deutsche’s loan permits Solow to add mezzanine debt that would lift the total loan-to-value ratio to 35%. That could result in significant additional borrowing authority if the vacant space is leased, which would substantially increase the building’s value.

One other factor contributed to a CMBS execution: The fast turn-around time. “Solow took this right up to the wire,” said one person familiar with the matter. “He didn’t leave enough time for the balance-sheet guys to put together a syndicate, which they would have had to do, given the size of the loan.”

CMBS shops, by contrast, can turn around even a large loan in short order — within a few weeks in Solow’s case.

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