Vornado Realty Trust and Stellar Management are tapping the commercial mortgage bond market for a cash-out refinancing of Independence Plaza, a three-building, 39-story residential development in Manhattan’s TriBeCa neighborhood.

It’s the second CMBS refinancing this week of a large trophy asset with a loan that lets the borrower lock in a relatively low interest rate (4.2455%) for a long term, in this case seven years. That’s undoubtedly attractive for Vornado, a real estate investment trust, and Stellar, one of New York’s largest apartment building management companies. Less so for mortgage bond investors, as those interest payments will look increasingly less attractive as prevailing interest rates rise.

The two sponsors obtained a $675 million mortgage from four banks: Goldman Sachs (40%), Bank of America (20%), Deutsche Bank (20%) and Societe Generale (20%). Proceeds will be used to repay $551.6 million in existing debt, distribute borrower equity of $112.8 million and pay estimated closing costs of $10.6 million, according to Fitch Ratings.

The loan, which pays 4.2455% interest, and no principal, for its entire term, is being used as collateral for a transaction called Independence Plaza Trust 2018-INDP. Fitch expects to assign an AAA rating to the $321.1 million senior tranche of notes to be issued, which benefit from 52.4% credit enhancement. It will not rate any of the subordinate tranches of notes to be issued.

Fitch Ratings

The property is already fairly highly leveraged, with a debt service coverage ratio and loan-to-value ratio, as measured by Fitch, of 0.76x and 115.6%, respectively. And those metrics could deteriorate, as the borrower is permitted to obtain up to two mezzanine loans, which could have a combined LTV of up to 66% (on top of the LTV of the first mortgage) and a debt service cover ratio of 1.08x.

The big selling point appears to be the gradual upgrading of Independence Plaza’s 1,327 residential units as they are converted from affordable housing to free market. The property was initially developed in 1975 with Public Housing Funds and operated under the Mitchell-Lama program. When Stellar acquired the property in 2004, the units were placed in the Section 8 voucher program or the Landlord Assistance Program. As units roll over they are renovated and are available at market rent.

Currently nearly half of the units (49%) are occupied by low-income tenants, of which 26% are Section 8 and 23% LAP. According to an appraisal by Cushman & Wakefield, the Section 8 rents are approximately 11.9% below the market rents. And the LAP units are approximately 71% below-market rents.

Stellar and Vornado have invested approximately $95 million since the latter's acquisition of the property; $58 million was dedicated to renovating the 51% of units now paying market rents and $36 million to bring common areas and amenities up to market standards.

The property has a commercial component that is 95.6% leased, including ground-floor and lower-level retail, two parking garages, a school, cell towers and building laundry services. Vacant retail space of 13,475 square feet has been held off the market in order to complete renovations on storefronts and mechanical systems.

Of potential concern, Independence Plaza will experience a material commercial tenant rollover in 2018 when the Board of Education (6.1% of commercial square footage) expires in August and Best Market (7.2% of commercial square footage) expires in September. The next major lease expiration is tied to the Patriot Parking lease for both garages and will occur in 2024.

The borrower is permitted to voluntarily prepay the mortgage loan, in whole, but not in part any time after the monthly payment date of June 2023.

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