The $1.3 billion refinancing this week of One Bryant Park, a Midtown Manhattan office tower, may be the first deal of its kind.

The New York Liberty Development Corp. Wednesday plans to issue $650 million of refunding Liberty bonds on behalf of the owners of the building, Bank of America Merrill Lynch and the Durst Organization. The refunding will be the first for Liberty bonds. At the same time, $650 million of commercial mortgage-backed securities will be marketed to refinance outstanding loans and pay for additional costs and fees.

The LDC is a subsidiary of the Empire State Development Corp.

One Bryant Park LLC owns the LEED-certified building. The corporation is 50.01% owned by an affiliate of Durst and 49.99% owned by Bank of America.

The fixed-rate tax-exempt bonds and fixed-rate taxable CMBS are secured by a leasehold mortgage on the building—a 51-story Class-A glass and steel office tower located a block away from Times Square on the corner of 42nd Street and Sixth Avenue overlooking Bryant Park. Construction began on the 2.35-million-square-foot building in 2004 and was completed last year.

The ESDC holds title to the building and land underneath and leases it to One Bryant Park under a 99-year term. This arrangement allows One Bryant Park to make payments in lieu of taxes on the property that are lower than property taxes would be for 20 years. At the end of 20 years, One Bryant Park has the right to purchase the title for $10, according to the preliminary official statement.

The Durst Organization is a commercial real estate developer in Manhattan with a portfolio of more than eight million square feet of office space. The building serves as Bank of America's headquarters for operations in New York City and houses several of the Charlotte, N.C.-based firm's businesses, including global corporate and investment banking.

Durst spokesman Jordan Barowitz and Bank of America spokeswoman Danielle Robinson declined to comment for this article. Bank of America Merrill Lynch and JPMorgan are underwriting the debt.

Winston & Strawn LLP is bond counsel and Chatham Capital Advisors LLC is financial adviser.

The federal Liberty bond program is an $8 billion private-activity bond program established by Congress following the Sept. 11, 2001, terrorist attacks.

This deal has been structured as a CMBS transaction and Fitch Ratings and Standard & Poor's rated it using structured finance analysts rather than municipal bond analysts. Moody's Investors Service does not rate the deal.

The four tranches of debt have been preliminarily rated according to their priority of payment under CMBS criteria, rather than municipal bond criteria. Unlike municipal bonds, CMBS ratings are preliminary until the deal closes.

Fitch and Standard & Poor's each assign a preliminary AAA to the CMBS certificates, which have a senior lien on the loans that secure the debt. Fitch and Standard & Poor's preliminarily rate the three tranches of Liberty bonds AA, A and BBB-minus. Standard & Poor's ratings on the Liberty bonds were unavailable at press time.

"The CMBS bonds are senior, and the Liberty bonds are junior for both payments and losses, so payments of principal and interest are distributed on a sequential basis," said Fitch analyst Eric Rothfeld. "If the loan were to default and losses were incurred, they would work reverse because of the payment priority, the ratings are different."

The use of Liberty bonds on a CMBS deal is one reason the transaction is unusual.

"You have two loans and one mortgage and they're cross defaulted," said Fitch analyst Jeff Watzke. "We deal with that all the time—with two loans—but just having the Liberty bond financing has allowed them to get the tax exempt status, a lower cost of funding, and some other benefits as well."

The triple-A CMBS certificates pay interest only for the first 10 years with an anticipated repayment date in 2020. At that time, the debt will either be refinanced or hyperamortized. That debt is expected to be repaid in 21 years, according to Fitch's rating report.

The Liberty bonds will begin amortizing in 2040. The first tranche, Class 1, consists of two series that are preliminarily rated AA by Fitch. The first series has a par amount of $100 million and matures in 2042. The second series has a par of $251.6 million and matures in 2046. The second tranche, Class 2 bonds, is preliminarily rated A by Fitch, has a par of $87.1 million, and matures in 2047. The third tranche, Class 3, is preliminarily rated BBB-minus by Fitch, has a par of $211.3 million, and matures in 2049.

"The servicing structure of all the classes are very similar to a traditional CMBS deal," Rothfeld said.

A single-asset securitization such as this is more susceptible to a single event risk related to the market, owner, or largest tenant—in this case, Bank of America—Fitch said in its rating report.

The firm invested $260 million on infrastructure and $206 million to build out the space. Bank of America's lease expires in 2028, at which time it has a 10-year renewal option and two five-year renewal options. If the firm doesn't renew the lease in 2028, it has to give two and half years notice.

"If they were to leave, we felt that the notice period should be sufficient to lease the majority of that space," Rothfeld said. "Given their significant investment in the space, it also lessens the likelihood that they would leave."

The recession has hurt the commercial real estate market but there are signs that it's coming back. According to a report this month by real estate firm Cushman & Wakefield, May was the strongest month for new commercial leasing activity since 2006. Manhattan Class-A office space vacancy declined to 12% in May from 12.5%.

The vacancy rate for Class-A office space in midtown declined to 13.2% in May from 13.9% in March. That is still considerably higher than when the market was at its peak in January 2007, when Midtown's vacancy hit a low of 5%.

"Without question, the Midtown Manhattan office market has stabilized," said Ken McCarthy, Cushman & Wakefield managing director of research for the New York metro region, in a press release.

One Bryant Park has an average gross rent of $81.50 per square foot compared to average asking rents of $65.44 per square foot in the Times Square submarket, according to data cited in the Fitch report.

"This building commands higher rents than other buildings in the submarket because of its asset quality," Rothfeld said. Bank of America's lease is "consistent with or probably below what this building could command."

The Liberty bonds being refunded were sold in 2004 as variable-rate debt through the New York City Industrial Development Agency. When the IDA approved the original sale, Bank of America agreed to occupy at least 1.1 million square feet of the tower, consolidate 2,995 jobs in the building, and create 2,800 jobs. In return, the IDA agreed to sales and real estate tax breaks worth $38.5 million and energy benefits worth $3.5 million over 35 years.

In late 2007, the issuer approved the refunding of the bonds, but that deal was put on hold in 2008 due to poor market conditions. IDA spokesman Kyle Sklerov referred questions about why the borrower was refinancing through LDC to the borrower. IDA and LDC split the refinancing fees, Sklerov said.

"One of the things that differentiates this from other Liberty bond deals in general and a lot of other deals is the fact that the building's built," said Frances Walton, LDC treasurer and ESDC chief financial officer. "It's a fantastic piece of real estate in a central location in Manhattan."

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