Brookfield Asset Management is tapping the commercial mortgage bond market to refinance its purchase of a portion of the New York Times Building, which occupies an entire block on Eighth Avenue in Midtown Manhattan between West 40th and West 41st Streets.
The New York Times developed the property, completed in 2007, in a partnership with Forest City Realty Trust. The Times occupies the second through 27th stories of the building; Brookfield now has a leasehold interest in the rest, after acquiring Forest City for $6.8 billion in early December.
Brookfield subsequently obtained $750 million of loans on the property from four banks: Deutsche Bank, Bank of America, Barclays and Citigroup. This financing includes a $515 million first mortgage, a $120 million B note, and a $115 million mezzanine note, according to rating agency reports.
The first mortgage has an initial term of two years and can be extended by one year up to five times for a total extended term of seven years and pays a floating rate of 1.856796% over one-month Libor. It is being used as collateral for a mortgage bond offering called NYT 2019-NYT Mortgage Trust.
The collateral is 100% occupied by 13 tenants, most prominently ClearBridge Investments and the law firms Covington & Burling and Seyfarth Shaw.
The property has been appraised, on an as-is basis, at $1.01 billion. However, Morningstar values it 30% lower, at $705 million, assuming net cash flow of $44.2 million a weighted average cap rate of 6.27%. This results in a loan-to-value ratio of 73%, based on the debt held in the securitization trust alone, though this is still “comparatively low” for a securitization of a single loan on a large building. After taking into consideration debt held outside the trust, this rises to 106%.
Fitch puts the in-trust LTV slightly higher, at 83.9%, and the all-in LTV at 122.2%.
And, while Morningstar normally applies a penalty to a loan that is only secured by a leasehold interest, it reduced the penalty in this case because Brookfield has an option to purchase the fee interest from New York City for $10 after 2032. (In the meantime, it must pay the city ground rent in lieu of taxes.)
While both Morningstar and Fitch consider the building to be a trophy asset in a prime location, both cite tenant concentration as a concern. “Property quality, location and tenancy notwithstanding, there are risks that may create volatility for cash flow,” Morningstar states in its presale report. It notes that leases covering nearly two-thirds of square footage will expire during the fully extended term, and there is significant rollover exposure in 2023 and 2024.
Fitch notes that the five largest tenants account for 99.1% of the net rentable area and 88% of the base rent.
Fitch is also concerned about the lack of control over the property’s condominium regime. The retail and office condominiums that serve as collateral only account for 42.9% of the condominium regime and four of the nine condominium board seats. “Most unit owner and board member decisions require a 75% vote, to the sponsors have blocking rights over those items,” the presale report notes. “However, the sponsor does not have control over the condominium regime and does not have blocking rights for decisions that require a simple majority vote.”
Both Morningstar and Fitch expect to assign a triple A rating to the senior tranche of securities to be issued in the deal, which benefits from 46.6% credit enhancement.
