Nightingale, a private New York investment firm, and WCP, an investment arm of the Republic of Kuwait, are tapping the commercial mortgage bond market to finance Centre Square, a 1.65 million square foot office complex in Philadelphia.
A joint venture between Nightingale and WCP obtained $300 million of financing on the property, which is well known for the Claes Oldenburg Clothespin sculpture in its front plaza. A $240 million first mortgage and a $60 million mezzanine loan; both pay only interest, and no principal for their entire, extended five-year terms.
The first mortgage is being used as collateral for bonds to be issued through Citigroup Commercial Mortgage Trust 2017 1500. S&P Global Ratings expects to assign an AAA to the senior, $108.75 million tranche of notes to be issued.
Constructed in 1974, the property is located on an entire city block and immediately west of historic City Hall in the Market West submarket. According to S&P, it is the only office property with both a public parking garage and direct mass transit access onsite. At street level, the property features a recognizable 45-ft. tall steel sculpture named "Clothespin."
The property consists of two high-rise multitenant office towers adjoined by a three-story atrium at street level and a 450-stall subterranean parking garage. The East Tower is 36 stories and the West Tower is 43 stories.
Among the strengths of the deal, according to S&P, is the fact that the property is home to the corporate headquarters five tenants that together account for 32.3% of the net rentable area: Radian Guaranty (9.9%), Saul Ewing (6.4%), Public Health Management (7.5%), Dilworth Paxson (4.7%), and Obermayer Rebmann Maxwell (3.8%). Additionally, Comcast was headquartered at the property between 1991 and 2007 and still leases 5.1% of the net rentable area.
Also, the sponsors plan to invest $17.2 million to enhance the property’s its retail offerings, lobby, and other common areas.
Among the major risks to the transaction is that fact that it is highly leveraged. S&P puts the loan-to-value ratio at 93.8%, based on its valuation. (The LTV based on the appraiser's valuation is much lower, at 67.4%.) After taking into account the $60 million loan held outside the trust, S&P’s puts the LTV even higher, at 117.2% from 93.8%.
The rating agency also noted that the property has historically underperformed in its submarket. In 2011, occupancy dipped to 67% compared to the 10.7% overall submarket vacancy, according to CBRE-EA. However, an additional 400,000 square feet was leased following an ownership restructuring in 2014, and the property is currently 91.2% leased.
S&P's presale report does not indicate when the joint venture acquired the Centre Square, or what kind of financing was in place previously. However, Nightingale reportedly acquired the property from 6, Chicago-based Equity Commonwealth in July for $328 million.