Deutsche Bank priced $734.6 million in securities backed by a first mortgage loan that is secured by the Grace Building, a midtown Manhattan high-rise office building, according to a pricing term sheet.
The loan has a seven-year term and offers interest-only payments thorough the life of the loan, based on a fixed interest rate of 3.61%. German American Capital, Bank of America and JP Morgan are listed as the loan sellers.
On offer was $520.6 million of class A notes, rated triple-A which priced at a spread of swaps plus 75 basis points.
Also offered are $74 million of double-A minus rated class B notes that priced at swaps plus 90 basis points.
The double-B- rated class F notes, sized at $115 million, priced at swaps plus 265 basis points and the single-B rated G notes sized at $25 million priced at swaps plus 315 basis points.
Grace Building’s largest tenant is Home Box Office, (guarantor is Time Warner), which leases 20.7% of the net rentable area.
Morningstar, which rated the notes, highlighted in the presale report that that the transaction is exposed to some rollover risk because HBO’s lease expires on Dec. 31, 2018.
HBO’s guarantor, Time Warner, reportedly plans to consolidate operations from numerous locations throughout New York City into the Hudson Yards project around the time HBO’s lease expires, which could mean that HBO will not renew its lease.
However, Morningstar thinks that the rollover risk is mitigated by a 24-month notice requirement associated with HBO’s seven-year renewal option. “This two-year period will provide the borrower ample time to find suitable replacement tenants in the event HBO opts to vacate,” the presale report states.
Additionally, a lease rollover could end up generating additional income. “HBO’s current weighted average base rental rate in the building is 16.2% below the weighted average of the appraiser’s concluded market rate for this space,” the report stated.