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CMA
July 24, 2020  

Barclays to Securitize Large NY Office Loan

Barclays is poised to securitize a roughly $500 million mortgage it has agreed to originate for Sotheby’s on its headquarters building on the Upper East Side of Manhattan.

Depending on when it prices, the commercial MBS offering could be the first single-borrower transaction backed by a newly originated loan since the market froze up amid the coronavirus outbreak in mid-March. Since then, issuers and investors alike have focused on conduit deals, in which the risk to bondholders is spread among multiple loans.

Barclays’ planned bond offering could reignite the single-borrower sector, where issuance had been skyrocketing before the pandemic. “I’m actually surprised [single-borrower deals] didn’t lead the way back [post-Covid], given the reputation of the offerings, the ease of analysis and the comfort of having one, typically strong sponsor,” a market pro said.

The floating-rate mortgage on the Sotheby’s property would have an initial term of two years and three one-year extension options. Barclays is expected to close on the debt package within the next week or so, then securitize the loan soon after. As previously reported, Sotheby’s hired Newmark early in the year to line up the financing.

Newmark initially solicited proposals for some $650 million of debt. While the senior mortgage Barclays plans to write is substantially smaller, the word is that a mezzanine loan of $120 million to $150 million also is in the works. It’s unclear whether the U.K. bank intends to originate the subordinate piece, then place it with a high-yield investor, or if Sotheby’s is separately dealing with another lender.

Sotheby’s came to preliminary terms with Barclays in May, according to the Commercial Observer, though details about the loan haven’t previously been reported. The deal apparently took extra time to sew up because of the market turmoil triggered by the public-health crisis.

The collateral property is a 506,000-square-foot building at 1334 York Avenue. The auction house has been at that address for more than 40 years. The building dates to 1921 but has been renovated multiple times — including in 2000, when Sotheby’s spent about $150 million to expand it from four to 10 floors and make other improvements.

The granite- and glass-sheathed building stretches along York Avenue from East 71st to East 72nd Street, one block from the FDR Drive. It contains auction and showroom space, as well as the company’s offices. There’s also a small street-level retail component.

Sotheby’s sold the property to New York-based RFR Holding in late 2002 and leased back all of the space. The sale price was $175 million. A few months later, RFR sold a 90% interest to German fund operator Sachsenfonds. Sotheby’s reacquired the property in 2009 for $370 million. It mulled another sale-leaseback transaction a few years later, but a deal never materialized.

The auction house was a public company until last October, when BidFair USA, an entity controlled by French-Israeli telecommunications entrepreneur Patrick Drahi, took it private in a deal that valued the business at $3.7 billion.

A portion of the proceeds from the new loan would be used to retire about $450 million of existing debt, which was originated in conjunction with the BidFair transaction. That financing package includes a $252 million mortgage originated by BNP Paribas. The structure and holder of the additional debt is unknown.

The few single-borrower CMBS deals that have priced since the pandemic represented efforts by issuers to revive earlier transactions that were shelved amid the market turmoil. In some cases, issuers have sliced large loans into smaller pieces to make them more easily digestible by bond buyers.

A case in point is a $375.2 million offering that Citigroup, Barclays, Deutsche Bank and Societe Generale priced on July 10 (BX 2020-VIV2). The collateral was one slice of a $3 billion mortgage the banks originated in February on two Las Vegas casino resorts owned by a joint venture between a Blackstone unit and MGM Growth Properties. In early March, Citi, Barclays, Deutsche and SocGen began marketing a single-borrower transaction backed by a $2 billion chunk of the debt, but shelved the campaign as the market froze up. The banks earlier securitized a $562.4 million piece of the same debt package via a stand-alone deal that priced in May (BX 2020-VIVA).