As most of our readers know how vigorously we have been following the story of the decline of commercial real estate values, loans blowing up and unwinding, and the “new” role of Special Servicers (MylesTile even had an Advisory Council Breakfast Seminar, on November 10, 2011, on the topic).

Here’s the conclusion to one of the Big Apple’s biggest real estate debacles, since the crash of 2008.

Just recently, Kushner Cos. completed a restructuring of its debt on Manhattan’s 666 Fifth Ave. with Vornado Realty Trust, salvaging an investment made in a record- setting deal at the peak of the property market. This story is quite telling, as it provides a vivid road as to the anatomy and chronology of how these twisted, complex deals get resolved.

By way of some history, by 2008, the skyscraper was plagued by falling reserves and departures of tenants such as Citigroup Inc., which vacated about 80,000 square feet that August. Cash flow fell to 69 percent of debt service for the year’s third quarter.

To The Rescue: Vornado, which has stakes in more than 19 million square feet of New York office buildings, is injecting $80 million of equity and will jointly own the Midtown skyscraper with Kushner, the companies said in a statement today. Kushner will contribute $30 million.

Kushner Cos, run by 30-year-old Jared Kushner — who is famous for marrying Ivanka Trump (daughter of “The Donald”), bought the 39-story tower in January 2007 for $1.8 billion, then a record for a single U.S. building. Perhaps that should have raised red flags, right off the bat.

Real estate investment trusts including Vornado, SL Green Realty Corp. and Brookfield Office Properties Inc. are now taking stakes in Manhattan properties purchased in the years leading up to the 2008 financial crisis, when overvalued mortgage securities contributed to bank failures, a seizure in credit markets and a plunge in real estate values.

The Devils In The Detail: 

• Under the refinancing agreement, the tower’s senior debt is reduced to $1.1 billion from almost $1.22 billion, with the difference pushed into a “hope certificate,” along with unpaid interest on the senior mortgage, to be settled with higher income once empty offices are rented, according to a person with knowledge of the transaction.
• The equity contributions will cover the costs of leasing the 30 percent of the building that’s vacant and reworking the space to suit tenant needs.
• The transaction values the building at $835 a square foot, not counting the subordinated debt, Goldfarb said. With the hope certificate, also called a “B-piece,” the value is $915 a square foot, he said.

East Side Tower: In October 2011, Boston Properties Inc., a Vornado rival, sold the 44-story 2 Grand Central Tower, on East 45th Street on the East Side, for about $630 a square foot, according to property- data provider Real Capital Analytics Inc. A 50 percent stake in Park Avenue Plaza, a two-building complex at East 52nd Street, went for $944 a square foot.

When the re-leasing of 666 Fifth Ave. is complete, the building will probably be worth more than $1,100 a square foot, said the person familiar with the deal. Filling the tower should be easier now that the “precarious” state of the tower’s financing is resolved, Goldfarb said.

Midtown Manhattan office prices fell 4 percent in November 2011 after several months of little change, Green Street Advisors Inc., a real estate research firm in Newport Beach, California, reported on Dec. 6. Values in Midtown are up 80 percent from a bottom in mid-2009, the firm said.

Vornado acquired a 49.5 percent stake in 666 Fifth as part of the deal, according to the statement. The companies will jointly oversee leasing, which was hindered by uncertainty over the building’s capital structure, the person said.

 About three-quarters of the debt on the tower was sold as commercial mortgage-backed securities.

• The remaining $285 million is held by AREA Property Partners LP, Starwood Capital Group LLC, Colony Capital LLC and Paramount Group Inc. 
• Each party’s percentage of the loan is being reduced proportionally, the person said.

“This was one of the most complicated restructurings I have ever done, and that’s over a good 30 years, because of the multiple parties who had a stake in the outcome,” said Jonathan Mechanic, chairman of the real estate department at the law firm Fried Frank Harris Shriver & Jacobson LLP, who represented Kushner Cos.

The debt holders are willing to be patient and wait for their return, he said in an interview. They are “very bullish on the re-leasing of the building,” Mechanic said.

Largest Restructuring: Robert Verrone, principal of Iron Hound Management Co. of Short Hills, New Jersey, who advised Kushner, said the deal was “probably the largest restructuring of a single asset ever done in the CMBS world.”

The debt was sent last year to special servicer LNR Property Corp., triggering negotiations to restructure the building’s financing. Special servicers represent the interests of investors in securities backed by mortgages. Vornado has a partial interest in LNR.

Deal Delays: The refinancing was completed about five months after the parties agreed in principle to recapitalize the tower. The transaction was held up by the complexities of dealing with the multiple parties who held parts of the building’s financing.

• Maturity of the $1.1 billion of senior debt is extended by two years to 2019.
• The interest rate averages out to 4.5 percent, reduced from 6.3 percent.

Tags: Kuschner, New York Real Estate

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