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Historic Grand Central office tower makes up latest SASB deal

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The owners of a historic art deco office building in Midtown Manhattan are joining the rush of sponsors who are setting a brisk 2019 pace for “single-asset, single-borrower” commercial mortgage securitizations.

According to presale reports, New York City real estate developer and manager Savanna Capital Partners is tapping investors to help finance a new $242 million, two-year mortgage (with three one-year options) for a 39-story office/retail building within the Grand Central submarket area.

The owners are sponsoring the COMM 2019-521F Mortgage Trust, which will market six classes of principal and interest notes. The $108.59 million Class A notes tranche within the capital stack has preliminary AAA ratings from S&P Global Ratings and Morningstar Credit Ratings.

The deal will also include a pair of Class X bond tranches that will provide interest-only proceeds tied to the notional balance of two subordinate note classes.

The single-property transaction will back a loan originated by Deutsche Bank, secured by the 495,636 square-foot office building at 521 Fifth Avenue, according to presale reports. Originally constructed in 1929 (and designed by the same architects of the Empire State Building), the building has undergone more than $5 million in renovations since 2018 – and is at the center of plans for nearly $16 million in further external and internal improvements the new owners will fund.

The property has a mixed rent base of office and retail tenants, with 92.8% occupancy. Both ratings agencies report existing tenants pay below market rates for the lower Fifth Avenue office and retail market, although rents have declined across the Manhattan submarket this year (down 18.1% from the first quarter of 2018).

Both agencies noted concerns of the below-market rents (22.6% below market value) for existing tenants, along with the forthcoming completion of 18.2 million of competing new-construction office space planned to go online in the midtown Manhattan submarket this year. But the Grand Central submarket had the strongest level of office leasing activity in the first quarter (1.1 million square feet) compared to other Manhattan markets, and S&P assumed only a 9% vacancy rate for 521 Fifth Avenue for the life of the loan.

The property mainly benefits from its proximity to transit hubs Grand Central Terminal, Penn Station and the Port Authority Bus Terminal.

Savannah purchased its 50.5% majority share of the property previously held by SL Green Realty Corp. in a $381 million deal that closed in May. SL Green had placed the CBRE Group-managed property on the block in January as part of plans to divest holdings to finance share buybacks.

Savannah is contributing $157.1 million of equity into the purchase, but the interest-only mortgage is still a highly leveraged at a loan-to-value ratio estimate of 95.3% by S&P and 91.3% by Morningstar.

The deal will add to the bulge of SASB deals that saw record issuance of $7.6 billion in 11 deals in May, according to Deutsche Bank research report. Volume in single asset deals of $15.7 billion is 16% ahead of the 2018 year-to-date pace of $13.5 billion and more than double $7.6 billion in 2017. SASB deal volume is also outstripping conduit CMBS deal activity so far in 2019 ($14.3 billion), according to Deutsche.

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