National Real Estate Investor - September 9, 2009
How long does it take for a borrower to secure a first mortgage on 21 stories of the New York Times Building? After countless rejections by lenders, about six months, according to Ben Harris, managing director and head of domestic investments for W.P. Carey (NYSE: WPC). The New York investment firm announced today that it has closed a $120 million non-recourse loan on the landmark tower with the Bank of China.
“Overall, it’s very telling that W.P. Carey got the loan from the Bank of China,” notes Victor Calanog, chief economist with New York-based research firm Reis. It is telling because the China Investment Corp., a $300 billion sovereign wealth fund, is reportedly considering large investments in U.S. commercial real estate via the U.S. Public-Private Investment Program, or PIPP. China’s foreign reserves now stand at $2 trillion.
The deal began in early January when the financially troubled New York Times Co. announced plans to raise up to $225 million in cash by selling its portion of the 52-story Manhattan skyscraper in a sale-leaseback. At the time, industry watchers indicated that the plan had perhaps come too late for the beleaguered owner of The New York Times and the Boston Globe. The conventional wisdom was that even if willing buyers were to step forward, debt financing was largely unavailable.
Then in March, W.P. Carey closed the $225 million sale-leaseback in an all-equity deal that included two of its publicly held, non-traded REIT affiliates. The transaction with the Times Co. encompassed approximately 750,000 sq. ft. of rentable space. The leaseback terms include a 15-year lease period with a rental payment of $24 million for the first year, and escalating rents throughout the remainder of the lease.
Despite the deep pockets of W.P. Carey’s lender, securing a non-recourse loan in the current debt-restricted climate was not easy. “Typical commercial mortgage loan-to-values were 80% to 90% on assets like this in the heyday, and this is a 55% loan-to-value mortgage,” says Harris.
While specific details of the loan were not disclosed, Harris acknowledges that it falls within the range that W. P. Carey is seeing in today’s debt market of five to 10-year terms with interest rates based on spreads of 350 to 450 basis points over U.S. Treasuries.
Steve Kohn, president of Cushman & Wakefield Sonnenblick Goldman, which served as the exclusive advisor to W.P. Carey on the deal, agrees. "For a single lender, a loan of this size required us to focus on larger life insurance companies and major off-shore banks,” Kohn maintains. “Most lenders today need to syndicate loans over $50 million."
While the financing would likely have been easier to secure a couple of years ago and brought in much higher proceeds, W.P. Carey feels fortunate that it was able to acquire the Midtown Manhattan office space for approximately $300 per sq. ft. Excluding this deeply discounted sale, New York office properties on average traded for $800 to $900 per sq. ft. in the first quarter, according to Reis.
“The Bank of China is showing a very savvy strategy to come into the marketplace today and take advantage of a very thin competitive set where they can dictate terms and get great loans,” says Harris of W.P. Carey. Since September of 2007, the company has closed approximately $400 million in financing.
Calanog believes that many of the distressed sales over the past six months are the result of owners unable to cover debt service, many of whom have been weeded out of the market. Going forward, he says, there may be more pressure on U.S. buyers competing with foreign investors like China. Why? The Chinese investors are willing to accept less of a discount.
“If the Chinese can allocate their money wherever they want and they choose to invest in U.S. properties,” Calanog concludes, “that is a signal at least in the near term that values may actually increase and maybe they’ve bottomed out now.”
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