http://therealdeal.com/2016/07/18/na...nding-drought/
Navigating the construction lending drought
Trophy office buildings and luxury condos are becoming harder to finance, but some are tapping into the right formulas
July 18, 2016
By Kathryn Brenzel
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In November 2014, after more than a decade of political disarray and public disappointment, the first World Trade Center tower finally opened, giving New Yorkers a sense that the sprawling commercial complex was becoming a reality once and for all. Things came more into focus this year, when the transit hub opened in March, followed by the topping out of 3 World Trade Center in late June.
And yet, a crucial piece of the development project — 2 World Trade Center— is still missing.
Just six months ago, Silverstein Properties was seeking to close on $2 billion in debt to construct the 2.8-million-square-foot, 1,270-foot-tall tower designed by Bjarke Ingels, when the developer was struck by a deal-killing blow: Its anchor-tenants-to-be, Rupert Murdoch’s 21st Century Fox and News Corp., announced in a joint letter that they were pulling out of their agreement to lease 1.3 million square feet on the lower levels of the building.
“We won’t start that building without some level of preleasing,” the firm’s CEO, Marty Burger, told The Real Deal. “We need either an anchor tenant or enough tenants to get to the preleasing level that will make lenders comfortable.”
It’s an improbable set of circumstances: One of the city’s most notable developers can’t get one of the city’s most well-known commercial office projects off the ground.
As lenders become all the more sensitive to which deals make sense on their books, both commercial and residential developers have become entangled in a game of survival of the fittest. The majority of banks and other financial firms have become increasingly selective about the kinds of projects they are willing to finance.
Because of that, the ability to successfully build a new condo or office tower typically depends on a confluence of circumstances involving generous amounts of equity and well-established reputations on the part of developers. In the case of office construction, there’s a rough formula for securing financing — one that includes a high demand for space, street-level retail and a hefty helping of recourse, which provides the lender with collateral in the event of nonpayment.
But even some of the most seasoned developers in the city are struggling to get the financing they need to complete these projects, especially when some banks are capping their exposure at $50 million.
Though Silverstein’s executives remain adamant that they will find a replacement tenant soon, the company’s predicament encapsulates the many challenges of building new large-scale office buildings in the city. In order to get the necessary construction financing for such projects, the sponsors behind them often need to show that up to 50 percent of the project’s rentable space is preleased, according to industry sources. Yet, on the whole, the appetite to finance new trophy office buildings is waning, with lenders more eager to fund the redevelopment of existing buildings. Gregg Gerken, head of the U.S. commercial lending group at TD Bank, said that very little spec office development is being done in New York right now and that developers are curbing risk for lenders by having their projects 35 to 50 percent preleased before beginning construction.
Silverstein’s Burger declined to specify what level of preleasing 2 World Trade Center would require before the company can continue building. Its previous anchor tenants, Fox and News Corp., had pledged to take nearly half the 2.8 million square feet of space.
Well-positioned rivals
As a case study of what kind of projects have been able to secure construction financing, WTC’s competition to the north, Hudson Yards, has managed to find tenants for its project 30 Hudson Yards. Related Companies TRData LogoTINY and Oxford Properties Group in December secured $5 billion in construction financing from a group of banks and EB-5 investors well after the developers had an anchor tenant lined up for the building. The office building’s tenants include Wells Fargo, Nieman Marcus and Time Warner, the latter of which is taking 1.3 million square feet of the total 2.6 million square feet. When asked why Hudson Yards might have an advantage over 2 WTC, Gerken noted that including ground-floor retail is attractive to tenants and also to lenders, since owners can often charge tenants more for it than office. The project also benefits from a planned 960,000-square-foot residential tower, 15 Hudson Yards.
One exception to the preleasing rule is SL Green Realty Corp.’s proposed skyscraper One Vanderbilt on the corner of 42nd Street and Vanderbilt Avenue. The 1.6 million-square-foot office tower is expected to cost just north of $3 billion, and SL Green has said that it’s close to closing on a $1.5 billion construction loan before the end of the summer.
The company also plans to team up with a joint-venture partner, who will cover 50 percent of the required equity. The only announced tenant so far is TD Bank, which is taking 200,000 square feet in the building — or less than 13 percent of the available space. SL Green’s reputation is a help in its quest for financing: The REIT currently holds interest in 121 Manhattan buildings across 47.7 million square feet.
In addition to the company’s extensive portfolio, the tower’s proposed location gives it an edge. It’s a new office building in Midtown directly next to Grand Central Terminal, a quality that few buildings can boast. The building has been billed as a game changer for Midtown East, the first of more development to breathe life back into what was once a more vibrant commercial corridor. In May 2015, the City Council approved the first phase of a planned 73-block rezoning that will allow for taller buildings in the area. In exchange, developers are expected to improve public space and infrastructure. In 2014, SL Green unveiled plans for $210 million worth of improvements to Grand Central Terminal.
“To have a humongous new office building in Midtown is extremely rare,” said Mark Edelstein, chair of the real estate finance and distressed real estate practices at Morrison & Foerster. “I think that’s a building that will get built regardless and the tenants will come along the way.”
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