Early this year, the outlook appeared grim for the owners of 280 Park Ave. Vacancy rates were ballooning, and cash reserves were dwindling. But Broadway Partners and Investcorp Real Estate Group still had to service huge debt they’d taken on when they bought the 1.2 million-square-foot, two-tower property at the height of the market in 2007.
Cue the cavalry. In May, SL Green Realty Corp. and Vornado Realty Trust rode in and jointly recapitalized the property, for which the duo—Manhattan’s two largest commercial landlords—held $400 million in debt. They also agreed to inject $150 million for building improvements to help lure new tenants. After contributing so heavily to the cause, the white knights owned a majority stake in 280 Park.
“We are filling a capital void,” said Andrew Mathias, president of SL Green Realty Corp., referring to the number of recapitalizations in which his firm has been involved over the past few months. Several more are in the pipeline, he adds.
Nearly three years after the collapse of Lehman Brothers—and property values—New York’s real estate market is finally picking up the pace of picking up the pieces.
In some cases, investors are infusing fresh capital or converting their debt to equity. In others, lenders are finally selling off their loans, at a discount, to investors who are interested in taking over struggling properties.
The figures are striking. Through July of this year, a third of all commercial real estate deals in the city by dollar volume were recaps, $5.4 billion worth of them—more than double the $2.6 billion recorded in all of 2010, according to Cushman & Wakefield Inc.
In fact, recaps have accounted for seven of the 10 largest office transactions in Manhattan so far this year, says Helen Hwang, executive vice president of the New York Capital Markets Group at Cushman & Wakefield. The average transaction in that select set was worth more than $250 million, and the bulk of the deals were for Class A office space.
One of those top-ranking deals took place in April, when Brookfield Office Properties stepped in to recapitalize 450 W. 33rd St., another building that Broadway Partners had purchased in 2007. There, the latter was facing a $517 million loan, scheduled to come due in mid-2012. In return for agreeing to take responsibility for the debt, Brookfield picked up a majority stake in the 1.6 million-square-foot tower.
Other big properties that have undergone recaps this year include 230 Park Ave., 1515 Broadway and 11 Madison Ave.
Deep-pocketed investors aren’t the only ones moving properties onto firmer financial ground—but not without some cost. Increasingly, banks are showing a willingness to take losses, especially now that prices have recovered a bit from their lows, by selling off loans for some fraction of their face value.
“In some instances, banks are willing to take as much as a 50% discount on the original loan’s value,” said Jerry Swartz, president of HKS Capital Partners, a newly formed real estate financial advisory firm based in Manhattan.
His firm is negotiating with a lender to buy a $12 million construction loan for as little as $7 million.
“Today, people have to be creative,” says Joe Berko, president of Berko & Associates, a Manhattan-based real estate investment firm.
He cites a distressed $56 million development in which the equity partners are willing to take a 40% discount on their capital investment in order to maintain the original sponsor as the property’s manager.
Some experts think that after more distressed properties become stabilized, a second wave of recaps will arrive, with some owners selling entire or partial building stakes in order to redeploy their assets.
“Many big-ticket properties will continue to be recapitalized, because fewer investors can [afford to] or want to handle them on their own,” says Steven Kohn, president of Cushman & Wakefield Sonnenblick Goldman.
The recent recapitalization of 1633 Broadway, a 2.5 million-square-foot office tower, arose from the fact that the owners wanted to move on. Mr. Kohn helped orchestrate a complex deal in which Paramount Group Inc., which already controlled 51% of the property, partnered with Beacon Capital Partners and SL Green to acquire the 49% interest long held by Merrill Lynch and Morgan Stanley.