Morgan Stanley and Barclays Bank are marketing $550 million of bonds backed by a mortgage on Merchandise Mart, a 24-story, four million square foot art deco landmark in downtown Chicago.
Built by Marshall C. Fields in 1930 as a wholesale design center and owned by the Kennedy Family for over half a century, it was sold to Vornado Realty Trust in 1989 for $369.1 million. Over the past five years, as demand for showroom space subsided, Vornado made $188 million in capital and tenant improvements, transforming much of the building into office space.
In September, the borrower refinanced the property, obtaining a $675 million mortgage from Morgan Stanley and Barclays that allowed it to cash out $100 million in equity, recouping some of its investment. A further $43 million in capital improvements are planned or in progress for 2016.
The $675 million loan pays only interest, and no principal, for its five-year term. It is split into two parts, a $550 million loan that serves as collateral for the securitization trust, and a pari passu companion loan to be held outside the trust.
Morgan Stanley Capital Barclays Bank Trust 2016-MART will issue four tranches of notes with preliminary ratings from DBRS. The senior, $374 million tranche, is rated ‘AAA.’
Among the deal’s strengths, according to DBRS, is the building’s location along the Chicago River with excellent views, access to transportation and amenities. It benefits from strong occupancy, historically averaging a reported 95.1% since 2006, a diverse tenant mix and limited near-term rollover.
Also, the loan does not encumber the property too heavily, resulting in a loan-to-value ratio of 41.2% and a debt service coverage ratio, as measured by DBRS of 1.39x.
However, the rating agency warns that “in order to continue to attract office users, the property will continue to have to overcome its reputation as a tired designer mart.”