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Denver office tower secures $277.1M Morgan Stanley CMBS

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The distinctive Wells Fargo Center in downtown Denver – known as the “Cash Register Building” because of the crescent-moon geometric design of its upper floors – is being collateralized in a new $277.1 million CMBS deal structured by Morgan Stanley.

According to presale reports on the large-loan, single-borrower deal, the 52-story building is securing a portion of a new $327.7 new $327.7 million non-recourse, first-lien loan to a fund owned by Boston-based private real estate investment company Beacon Capital Partners.

Beacon has also taken out a $50.6 million subordinate B note that is not part of the collateral, and is expected to sold to a third-party investor, according to Kroll Bond Rating Agency and Moody’s Investors Service.

The proceeds were used to retire existing debt of $282.2 million, establish reserves of $38.2 million and provide a $46 million return to Beacon Capital, which has spent approximately $78 million in improvements and renovations since 2012.

The transaction itself includes six tranches of senior and subordinate term notes, including a $122 million Class A note offering with preliminary triple-A ratings from the agencies. Two interest-only tranches – also triple-A – will also be marketed.

The loan was underwritten by Morgan Stanley in late November, and is interest-only for its two-year period along with three one-year extension options. The loan has a coupon of Libor plus 1.469%, while the external B note carries a rate of Libor plus 3.25%.

The new loan carries significant leverage, with a loan-to-value ratio of 106% alone based on the property’s assessed value, according to Moody’s. Inclusive of external debt encumbering the property outside of the trust, the total debt ratio of 142.7% (adding up to $9.74 million of issuer-estimated debt-service coverage).

The building has 1.2 million square feet of office space, 10,274 square feet of retail space as well as a 12-story garage, all within the Denver central business district.

Wells Fargo is the primary tenant, and has occupied the building since 1983. Wells recently renewed its lease through December 2028, but effective January is downsizing its space to 244,893 square feet from 389,403 square feet. A portion of the newly available space will be taken up by a new tenant, Whiting Petroleum, which will occupy three floors totaling 54,066 square feet, or 4.5% of the net rentable area of the building.

One of the primary risks for the owner’s net cash flow and debt service coverage is the large volume of flexible workspace taken up by WeWork, responsible for 12% of the base rent. Moody’s notes this “is of particular concern given the company’s recent financial challenges and its failed IPO.”

While short-term users of WeWork space invites potential vulnerability in the event of a downturn, the WeWork space’s utilization rate is above 75%. In addition, “roughly” 60% of the space leased to WeWork is occupied by enterprise tenants of companies with more than 500 employees – which “typically take longer leases (3-4 years) as well as generate more demand.”

Also offsetting the WeWork lease exposure is the inclusion of an upfront leasing reserve of $15 million to address the potential occupancy and cash-flow volatility of the WeWork tenancy.

Both agencies note the renovations to the Wells Fargo Center add to the building’s existing aesthetics, which include commissioned sculptures and painting by Puerto Rican artist Enoc Perez which “echo the distinctive geometric character of the building designed by renowned architect Philip Johnson,” known for the famed Glass House in New Canaan, Conn., and the original AT&T Building at 550 Madison Avenue in New York.

The LEED-certified building, with its external red granite and glass façade, also features an eight-story atrium that includes five 86-foot-tall LED panels for content display, Kroll’s report noted.

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CMBS Morgan Stanley