Vornado Realty Trust is close to securing construction financing of $350-700 million for its mammoth 59th Street mixed-use development, a loan that will likely become the benchmark for future deals of this size and nature. The project is the first large, high profile New York city development to be financed post-Sept. 11. The guarantee provided by Vornado and the loan pricing will set the stage for future big city projects, market players said.
The New York-based real estate investment trust accepted proposals back in October and is expected to make a decision any day. With leases already signed with major tenants, including Bloomberg, Vornado has to start building. "As you approach the physical structure requirement, that's when you need capital," one lender said. Joseph Macnow, cfo and executive v.p., finance, at the REIT referred calls to a spokesperson who could not comment by press time.
Specifics of the deal, most notably the size of the guarantee the REIT will provide, are among the issues holding it up, bankers said. Proposals call for guarantees of anywhere from 30-50%, bankers said. But some lenders may ask for guarantees of 100%, one added. Because of the guarantee issue, lenders are wary of taking on the entire deal, he explained, adding that financing will therefore be arranged through a club.
The loan size has not yet been determined and will depend on how the development is broken down, bankers said. The project is comprised of office and retail space but there is also some condominium space, which may be financed on its own, one banker explained. "Condominium sales are not typically what banks do, so they may have to finance elsewhere." But lenders agreed that loan size will most likely be about $600-650 million.
Pricing will not play that much of an issue in the deal. "Vornado has enough clout with its relationship banks to not get robbed," one lender noted. Moreover, with a dearth of loans in the market, bankers are eager to meet their budgets. "We have to see how hungry the bank market will get." But pricing will have to reflect the risk associated with the development, bankers said.
Terrorism insurance also plays a role in the project. Vornado CEO Steve Roth has been saying that it will take Congress about six months longer to debate the issue. Lenders, however, said they were not going to wait for Congress to tackle the issue, which does leave an overhang. "People are looking to see what happens," said one banker.
Wells Fargo, Fleet Securities and Bank of New York are the reported frontrunners for the mandate, bankers said. UBS Warburg, Banc of America Securities and HypoVereinsbank submitted proposals while PNC Bank, Dresdner Bank Real Estate, Commerzbank and Scotia Capital are reportedly mulling secondary roles. The club deal will likely include about 10-15 participants, bankers said. The loan would have a four-year term.
Lenders are looking back to the last loan of this nature to hit the market, the Times Square development completed by Boston Properties. Major tenant Arthur Andersen seemed high quality at the time. But now, after the Enron debacle, it is having cash flow problems. While Bloomberg's cash flow does not seem to be susceptible to the same issues, it is still cause for hesitation among lenders. The Times Square financing was completed in a solid market and still called for a full guarantee on about half of the $500 million loan to cover the space not leased to Arthur Andersen.