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This $600M CMBS helps finance 20 Times Square. Just the land.

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Mark Siffin, chairman and CEO of Maefield Development, a private real estate company, is tapping the commercial mortgage bond market for $600 million to help finance a 16,066- square-foot parcel of land on the northeasterly corner of Seventh Avenue and West 47th Street in Times Square, New York.

Just the land.

Not what Moody’s Investors Service is calling the “improvements,” a newly constructed, 42-story building with 250 linear feet fronting Times Square that houses 74,820 square feet of retail space; 18,000 square feet of state-of-the-art digital signage directly facing 7th Avenue; and a 452-room, full-service luxury hotel branded as an EDITION Hotel by Marriott. These are being financed separately.

In April, Siffin obtained a$750 million mortgage and a $150 mezzanine loan from three lenders, Natixis Real Estate Capital, Column Financial and China Merchants Bank. A $600 million portion of the mortgage, which pays only interest, and no principal, for its five-year term, is being used as collateral for a transaction called 20 Times Square Trust 2018-20TS.

Moody’s expects to assign an Aaa rating to the senior, $114.82 tranche of notes.

While the improvements are not included as collateral for the loan, the borrower, which is also the ground lessor, will have recourse to them in the event a default occurs on the ground lease.

Construction of the retail component and signage component are complete. The hotel component is expected to open for business in July 2018. According to the borrower, the total project cost of construction was approximately $1.2 billion.

Moody’s cites as positive features of the transaction the asset's prime location, priority of the ground lease payment, quality of the non-collateral real estate improvements, and strength of sponsorship.

The property is located diagonally from Duffy Square, which, according to the Times Square Alliance, has annual pedestrian counts of over 50 million. The rating agency notes that Times Square generates 11% of New York City’s economic output despite representing only 0.1% of its land area. More than $3.4 billion in direct spend are generated annually on entertainment and retail goods within the district.

Offsetting these strengths are the high leverage and interest-only mortgage loan profile, the single-asset concentration, and the “transitional” nature of the non-collateral improvements – cash flows are not yet “stabilized.”

“As new construction, there is a lack of operating history and a lack of demonstrated capacity to generate income,” the presale report notes. Construction of the retail component and signage component are complete and the hotel is expected to be fully completed in July.

As of March 31, however 5% remains of the budgeted development cost. The leasehold mortgage is expected to include a construction reserve for all outstanding work to be completed for approximately $60.8 million, reflecting the construction progress through March 31, 2018.

The rating agency puts the loan-to-value ratio at 139.1%, which is higher than the average ratio of 98.8% for large loan transactions it has rated 2017 and higher than 108%, the average for transactions it has rated in 2018.

After taking into account the mezzanine loan, the LTV, as measured by Moody’s, increases to 167%.

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CMBS Commercial mortgages