The Georgetown Co. and Table Holdings, a company controlled by Bill Ackman, CEO of Pershing Square Capital Management, are tapping the commercial mortgage bond market to refinance the redevelopment of a 513,638-square-foot office and automotive retail showroom and service center building in Manhattan.
The property underwent a $275.2 million redevelopment from an eight-story industrial building into a 10-story mixed-use building. Along with the new automotive retail showroom space on the lower fiver floors, there is new Class A office space on the five upper floors that will serve as the new global headquarters for Pershing Square.
The sponsor, Georgetown Eleventh Avenue Owners, has obtained $410 million of fixed-rate loans from Société Générale. A portion of this, a $187.5 million mortgage that pays only interest of 4.53032%, and no principal, for its entire term, is being used as collateral for a transaction called SG Commercial Mortgage Securities Trust 2019-787E.
The property is also encumbered by two loans with pari passu, or equal payment priority, totaling $105 million and a $117.5 million subordinate B note that also pays only interest and no principal.
The building is 88.4% leased to five tenants as of December 2018: Nissan Automotive, Jaguar Land Rover, Spaces Pershing Square Capital Management, and Dwight Capital. Nissan Automotive and Jaguar occupy the car showroom space, which is 52.1% of the net rentable square footage and 45.7% retail rent, according to Morningstar Credit Ratings. The office space is 47.9% of the total square footage and 41.7% of office rent. Of the office space, 59,636 square feet is vacant, representing 11.6% of the net rentable area.
The borrower has the right to convert all or a portion of the collateral to a commercial condominium form of ownership, which may limit use and improvement of the collateral, according to Morningstar. Following a conversion, the borrower is permitted to release the retail condominium unit from the lien of the mortgage loan, subject to the satisfaction of certain conditions.
In its presale report, Morningstar notes that a 10-story, mixed-use building in Manhattan with a considerable amount of automotive showroom and servicing space is unusual for a large stand-alone CMBS transaction and "raises questions about possible alternative uses should tenants leasing the automotive-related space leave or cease paying their rent and replacement tenants fail to materialize."
However, the rating agency takes some comfort from the fact that the 787 Eleventh Avenue is well-situated in the heart of ‘Automotive Row’ along with 20 other automotive dealerships. "The corridor and its concentration of dealerships is the result of a favorable rezoning by New York City so that property owners can operate showrooms and service centers at the same location," the presale report states.
Moody's Investors Service also sees property’s zoning status, which is " is highly coveted by automotive dealerships," as a strength. "Due to the lack of available space, new entrants are electing to construct space in order to have showroom frontage along the prime automotive corridor," it states in its own presale report.
The high credit quality of the automotive tenants and the length of their leases is also mitigating factor. Nissan carries a credit rating of ‘A’ (S&P) and has two 10-year lease renewal options with 24 months’ notice. Jaguar-Land Rover does not have a credit rating, but its lease allows for two five-year options with 24 months’ notice. "The length and terms of these leases contribute significantly to the long-term sustainability of our underwritten cash flow and reduce the risk of the non-conventional space going dark or vacant," Morningstar notes. "In addition, none of the other tenants has a lease that expires during the loan term."
Morningstar’s underwritten net cash flow of $23.5 million is based on the leases in place and a 12.5% economic vacancy rate, which is equal to the property’s physical vacancy rate. It gave credit for the long-term lease with Nissan by underwriting the net present value of the rent steps through the 10-year loan term.
Morningstar’s capitalization rate is 6.5%, which resulted in a value of $361.2 million, or $703 per square foot. The appraiser’s as-is value is $650.0 million, or $1,265 per square foot. Based on the issuer’s net operating income of $24.2 million the implied capitalization rate is 3.72%. Morningstar’s underwritten value was 44.4% below the appraised value.
Moody's noted that there is no stabilized revenue or expense history available for review, since the property was only recently redeveloped. It puts the LTV, based on the senior mortgage, at 106.4%, after taking into account the subordinate debt held outside the trust, the LTV is 149.2%
Both Morningstar and Moody's expect to assign a triple A rating to the senior tranche of securities to be issued in the transaction, which benefits from 53.438% credit support. Morningstar also expects to assign an AAA rating to a subordinate tranche with 44.378% credit support; however, Moody's is rating it AA3, which is the equivalent of three notches lower.
Société Générale is expected to retain an eligible vertical interest of approximately $9.4 million in the transaction in order to comply with U.S. risk retention rules.
