1 | JANUARY 13, 2017 It was a snowy start for some confer- ence-goers jetting down to South Beach for CRE Finance Council’s 2017 annual confer- ence. Storm Helena’s wrath left most Northeast attendees stranded in air- port terminals on Saturday or delayed on Sunday. No time was wasted upon eventual arrival how- ever, with executives making the most of the panels, parties and (ever- so-slightly) warmer weather. Most of the executives that Commercial Observer Finance spoke with agreed that the mood this year was far better than that of last year’s conference, with everyone seeming fairly—dare we say it—opti- mistic about what lies ahead in 2017. While uncertainty still surrounds several events—the President-elect’s potential policy changes, risk retention structures and rising interest rates—nobody appears to be heading for the hills. Instead, industry folks are calmly preparing for what may come and talking pos- sible eventualities through with peers. Perhaps some conference attendees were inspired by the hats that CCRE gave out, which read “Make CMBS Great Again” (and were spot- ted on the heads of several executives at the parties on Monday night). “A stimulative economy will help the the CMBS market,” said David Eyzenberg, the founder of investment bank Eyzenberg & Company . “A rising interest rate environment is usually based on hyper inflation or general inflation or an improving econ- omy, and in this case it’s an improving economy.” Indeed, sources told COF that there would not be a slowdown in new issuance CMBS deals during the first quarter, even as originators start to experiment with how to abide by the risk retention rule from the Dodd- Frank Wall Street Reform and Consumer Protection Act. For example, now that the risk retention rules have been implemented and the indus- try waits with bated breath for some regula- tor feedback, the next question is which of the potential structures makes the most sense for the CMBS industry—horizontal, vertical or The Insider’s Weekly Guide to the Commercial Mortgage Industry FINANCE WEEKLY “The city is the backstage on which we live out the theater of life, so we want to have a nice stage set. We feel really good about every project that we do, and we love New York City.” —Stephen Glascock from Q&A on page 13 3 Experts Question CMBS Deal Structuring Under New Regs 5 Mesa West’s Russell Frahm Talks Friendly Competition 5 CapStack CEO David Blatt on What the Incoming Admin Should Do 10 Sam Chang Picks Up Club Quarters Hotel With $72M Financing Package In This Issue The LEAD 2017 Will Be the Year of Quiet Optimism CREFC Conference aendees toast to a busy 2017. L-shaped. Erin Stafford, the managing director of global CMBS at DBRS, said the rating agency already has a very active pipeline for 2017, and that issuance volume will likely return to nor- mal. Stafford also said Silicon Valley is an area to watch, with rents quadrupling in the area and spilling over into Oakland, Calif. “At some point that bubble may burst again,” she said. In terms of asset classes, all eyes remain focused on the retail and office sectors this year. The tidal wave of store closures among traditional anchor tenants such as Sears and Macy’s, combined with an increasing con- sumer preference for e-commerce, are leading the repurposing of spaces with entertainment venues or upscale food markets. With regard to New York City office space specifically, the allure of the West Side and Lower Manhattan means that some Midtown East properties could be struggling for tenants when leases expire. Financiers are approaching hotel lending with caution, and underwriting is being tai- lored to 2015 levels, meaning that originators are not projecting future growth in the sector. Too many new hotels are coming online all over the country, which coupled with home- stay competitors like Airbnb, will drive down demand and pricing power for hotel operators. Several conference-goers that COF chatted See CREFC... continued on page 7 CREFC 2017
Transcript
1 | JANUARY 13, 2017
It was a snowy start for some confer-ence-goers jetting down to South Beach for CRE Finance Council’s 2017 annual confer-ence. Storm Helena’s wrath left most Northeast
attendees stranded in air-port terminals on Saturday or delayed on Sunday. No
time was wasted upon eventual arrival how-ever, with executives making the most of the panels, parties and (ever-so-slightly) warmer weather.
Most of the executives that Commercial Observer Finance spoke with agreed that the mood this year was far better than that of last year’s conference, with everyone seeming fairly—dare we say it—opti-mistic about what lies ahead in 2017.
While uncertainty still surrounds several events—the President-elect’s potential policy changes, risk retention structures and rising interest rates—nobody appears to be heading for the hills. Instead, industry folks are calmly preparing for what may come and talking pos-sible eventualities through with peers.
Perhaps some conference attendees were
inspired by the hats that CCRE gave out, which read “Make CMBS Great Again” (and were spot-ted on the heads of several executives at the parties on Monday night).
“A stimulative economy will help the the CMBS market,” said David Eyzenberg, the founder of investment bank Eyzenberg & Company. “A rising interest rate environment
is usually based on hyper inflation or general inflation or an improving econ-omy, and in this case it’s an improving economy.”
Indeed, sources told COF that there would not be a slowdown in new issuance CMBS deals during the first quarter, even as originators start to experiment with how to abide by the risk retention rule from the Dodd-Frank Wall Street Reform and Consumer Protection Act.
For example, now that the risk retention rules have been implemented and the indus-try waits with bated breath for some regula-tor feedback, the next question is which of the potential structures makes the most sense for the CMBS industry—horizontal, vertical or
The Insider’s Weekly Guide to the Commercial Mortgage Industry
FINANCE WEEKLY
“The city is the backstage on which we live out the theater of life, so we want to have a nice stage set. We feel really good about every project that we do,
and we love New York City.”—Stephen Glascock from
Q&A on page 13
3 Experts Question CMBS Deal Structuring Under New Regs
5 Mesa West’s Russell Frahm Talks Friendly Competition
5 CapStack CEO David Blatt on What the Incoming Admin Should Do
10 Sam Chang Picks Up Club Quarters Hotel With $72M Financing Package
In This Issue
The LEAD
2017 Will Be the Year of Quiet Optimism
CREFC Conference attendees toast to a busy 2017.
L-shaped. Erin Stafford, the managing director of
global CMBS at DBRS, said the rating agency already has a very active pipeline for 2017, and that issuance volume will likely return to nor-mal. Stafford also said Silicon Valley is an area to watch, with rents quadrupling in the area and spilling over into Oakland, Calif. “At some point that bubble may burst again,” she said.
In terms of asset classes, all eyes remain focused on the retail and office sectors this year. The tidal wave of store closures among traditional anchor tenants such as Sears and Macy’s, combined with an increasing con-sumer preference for e-commerce, are leading the repurposing of spaces with entertainment venues or upscale food markets. With regard to New York City office space specifically, the allure of the West Side and Lower Manhattan means that some Midtown East properties could be struggling for tenants when leases expire.
Financiers are approaching hotel lending with caution, and underwriting is being tai-lored to 2015 levels, meaning that originators are not projecting future growth in the sector. Too many new hotels are coming online all over the country, which coupled with home-stay competitors like Airbnb, will drive down demand and pricing power for hotel operators.
Several conference-goers that COF chatted
See CREFC... continued on page 7
CREFC 2017
2 | JANUARY 13, 2017
MeridianCapital.com
Ronnie Levine | Senior Managing Director212.612.0153 | [email protected]
“The orange swan has arrived and things have changed,” announced one participant in the industry leaders roundtable at CRE Finance Council’s 2017 annual conference in Miami. He
was, of course, referring to our President-elect, who was fodder for some lively chat-
ter as day two of the conference began.The lenders jumped in to opine on whether
having a businessman in the White House would have a positive or negative impact on the commercial real estate market. But, the jury was firmly out. While some lenders described feeling a “collective optimism,” about Donald Trump’s taking the helm in the oval office, oth-ers weren’t quite as convinced.
Interestingly, one lender told the audience that he had taken the time to research how many commercial mortgage-backed securities loans list Trump as the borrower—and found the number to be more than a dozen. So, one thing is for sure, the individual said: “It’s pretty unusual to have a CMBS borrower as president.” (Conference rules prohibit members of the press from directly quoting panelists.)
“He’s a real estate guy, so we can guess what he is going to do. But any disruption presents opportunity,” another executive noted.
Given risk retention’s implementation last month it was, unsurprisingly, the topic du jour. When the conversation turned to improved underwriting standards as a result of increased regulation, lenders noted that the deluge of legacy CMBS loans maturing this year and subsequent need for refinancing could throw a wrench in the works. “There will be a lot of product, a lot of originators and a lot of stress on underwriting,” said one lender.
Because of the risk retention rule, CMBS orig-inators will now have to hold on to 5 percent of the risk in a securitization. As the industry patiently waits for the regulators to weigh in on different risk retention structures, panelists were asked whether they believe the vertical, horizontal or L-shaped variation will ultimately come out on top.
“We were surprised how the impediments to doing vertical disappeared over the year,” said one industry expert. “It’s great for the industry that vertical deals got done so we can see what a risk retention deal looks like.”
Don’t hold your breath if you’re expecting to see horizontal or L-shaped structures appear in the market before the summer, partici-pants agreed—and each structure has its pros and cons to consider. Horizontal deals almost resemble a covered bond (a debt security chiefly issued in Europe that is similar to an asset-backed security, except for the fact that it stays
Experts Question CMBS Deal Structuring Under New Regs, Lament Uncertainty
CREFC 2017
on the issuer’s balance sheet), noted one lender, but present risk for the issuer. The L-shape structure, on the other hand, makes more sense for an investor as the risk is shared between deal parties. For this reason, “the market will likely gravitate [to the L shape],” remarked one executive.
The uncertainty is undoubtedly weighing some market participants down. “It’s like star-ing at the ocean from 50,000 feet and trying to find an island of certainty,” lamented one orig-inator. “Lawyers aren’t able to tell their clients which structures work. What we really need right now is regulatory certainty.”
Another lender agreed. “The decline in vol-ume of CMBS is caused by the uncertainty. The best thing for CMBS is to turn the clock for-ward—let’s get some deals done. The uncer-tainty is what causes the biggest problem for this industry.”
When the fog lifts and steady deal flow returns, the other looming question to contend with will be how CMBS will compete with other sources of financing going forward. The indus-try is specifically concerned about whether or not CMBS lenders will be able to recapture what nonregulated or insurance companies absorbed in terms of product. Ultimately, “the lowest capital option will win, it’s just the way of the
world,” one panelist said. The increased com-petition may not be the worst thing, however. “Look at how the market has picked up the slack among the maturities on the legacy portfolios—it is so much more resilient that you’d expect.”
Chatter gradually returned to Trump as the panel drew to a close. “In the three months since the election, the only thing we know is that there’s a lot we don’t know. And maybe that Twitter is difficult to pry away from him,” mused one lender. “Our expectation for the next four to eight years should be for really unexpected events to happen repeatedly,” agreed another.
On a positive note, while we wait to see what comes down the pipeline in 2017, now is the time to reform and establish good habits, the roundtable agreed. “The industry should think about long-term consequences and not go quar-ter by quarter. We need to establish predictable norms in the borrowing and lending commu-nity, and regulation will help us do so,” one lender said.
“Once the machinery gets worked out secu-ritization will be very compelling, as it once was,” another executive said. “The new begin-ning will be when we turn the corner on regu-lation and put fear behind us.”—C.C.
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Among chatter about regulatory issues, David Blatt, the chief executive officer of investment bank CapStack Partners spoke to Commercial Observer about how he has
been increasingly work-ing with nonbank lenders as they become a more via-
ble source of capital for borrowers. He also pointed to how an investment in infrastruc-ture could be the most realistic and impactful way that the new president could spend our dollars.
Commercial Observer Finance: What are you focused on at CapStack Partners?
Blatt: We’re an investment bank focused on the real estate and hospitality sectors. We source debt and equity and also do contract under-writing and diligence as well as syndicating
participations on behalf of lenders. We mostly work with nonbank lenders.
Do you feel that nonbank lenders, like the ones you say you’re working with, will be busy in 2017 as banks pull back?
The nonbank lending space is very strong and very well capitalized. I think it will con-tinue to grow in 2017. Any changes the new administration makes won’t happen any time soon—nonbank lenders are going to be around for a while.
What deals have been keeping you busy as of late?
Our specialty is getting involved in complex transactions. We did an international deal with a group that bought a portion of retail in ski villages. There were seven locations across five states and two locations in Canada. [ACORE Capital] provided the $103 million loan. It was complex because each state has its own laws, and we had to structure a blanket loan across two countries.
How is your team structured?It ’s small. We have five people. We
work on huge deals, and I deliberately
designed CapStack to be deal-focused and client-facing.
What will you be keeping an eye on in 2017?The new administration is talking about
a $1 trillion commitment to infrastructure. I’m following that closely because people are missing how it will directly impact real estate classes and locations. Look at the Second Avenue subway, for example. It will have a huge impact on rents east of Second Avenue.—D.B. and C.C.
On the second day of CRE Finance Council’s industry leaders conference in Miami, Commercial Observer Finance
met with Mesa West Capital’s Russell Frahm to discuss what it’s like to
be a nonbank lender when alternative capi-tal is in such high demand.
Commercial Observer Finance: How much debt did Mesa West place in 2016?
Frahm: We did roughly $2.5 billion, which was a little more than the year before. And that’s what we’re hearing from a lot of guys in the business: that they saw a little year-over-year growth but nothing crazy [or unsustainable]. In 2017, we’re hoping to do anywhere from $2.5 billion to $3 billion.
What’s your lending sweet spot?Our average deal size is about $70 million,
but the range in size is anywhere from $30 million to $300 million.
So many of the conference attend-ees are nonbank lenders. Are you seeing more players and more competition in the market?
Yes. And there are a lot of smaller funds
doing deals in the $5 million to $20 million range. [Because of our deal size] we’re com-peting with Blackstone Group, ACORE Capital and Starwood Property Trust, among many others.
What’s new for Mesa West?We just closed our fourth fund, which has
$900 million in equity.
What region do you cover?All of the New York office does deals in
New York, but I also focus on the Southeast. I try to come down to Atlanta and South Florida at least once a month, because being a New York guy, the big players down here will forget about you if they don’t always see you. And a lot banks have offices down there.
The only problem with the Southeast is getting volume. Generally, the deal size is smaller. We will continue to pursue deals in those markets but will likely be more selec-tive on deals outside of major “central busi-ness districts.”
What’s your favorite type of deal to do?Multifamily, but it’s hard to find. I like
doing transitional multifamily in New York City, too. We can do more leverage than a bank as they are generally sizing off in-place cash flow. Banks come in at 50 [percent loan-to-value], but we can do deals at 65 [percent] as we underwrite our exposure on a stabilized basis. Cash flow will drive pricing on a deal, but we are a transitional lender and nearly all of our deals have a value-add component to them. I did about $200 million in multifam-ily deals in New York in 2016.—Danielle Balbi
Mesa West’s Russell Frahm Talks Friendly Competition and Lending Sweet Spots
Russell Frahm.
CapStack CEO David Blatt on What the New POTUS Should Do for CRE Finance
Following last week’s headlines surrounding Macy’s store closures and layoffs, there is no doubt that retail is on the brains of many as we begin the new year.
At CRE Finance Council’s 2017 industry lead-er’s conference at Loews Miami Beach Hotel, Morningstar Credit Ratings’ top structured finance analysts Lea Overby and Steve Jellinek said that they expect more bankruptcies in the already-struggling retail sector.
The two pointed to the consolidation of elec-tronics retailers and sporting goods stores as internet sales are increasing, and the contin-ued woes of the Macy’s and Sears of the world. There is, however, a silver lining for mall oper-ators across the country.
“The [departure] of Sears and Macy’s stores might have a net benefit,” Jellinek said. Anchor tenants tend to pay lower rents, so when those retailers vacate they present the opportunity for their space to be tenanted by other stores that may be more profitable. Jellinek pointed to potential for entertainment centers, restau-rants and higher-end grocery stores like Whole Foods to swoop in—and Class A and B malls will be the primary beneficiaries of that trend.
On a macroeconomic level, Morningstar analysts are also keeping an eye on nation-wide increases to the minimum wage, which could have a negative impact for both retailers and hotels.
When taking a look at the New York mar-ket, Overby and Jellinek noted the trend of Manhattan office users moving west, toward Hudson Yards, and downtown, which will likely result in “extended weakness” in other former office hot spots, like Midtown East. But at greater risk are submarkets in the greater tri-state area.
“Hudson Yards and Downtown are more of a threat to the Stamford and Greenwich, Conn. and New Jersey markets than to any [submar-ket] in New York City,” Overby said.
As the office sector struggles, Morningstar is also keeping an eye on how the rise of cowork-ing space providers adds another element of
risk to the market.“[Coworking companies] have the classic
problem of mismatched debt and mismatched income,” Overby said, referring to the operat-ing business-like structure of those coworking space providers.
From the rating agency’s perspective, deals with exposure to coworking spaces need to be underwritten with a greater requirement for debt service coverage ratios and increased reserves, Jellinek said (see story on page 11).
With regard to CMBS issuance volume for 2017, Overby said that the “new issue” is what the upside for risk will be now that risk reten-tion is in full swing.
In the past, originators have toyed with three different risk-retention compliant structures: retaining a 5 percent horizontal strip of a deal, holding onto a 5 percent vertical piece of risk or doing a little bit of both by maintaining an L-shaped portion of a conduit on their balance sheets. It seems that the vertical strip is gaining popularity, as all of the new CMBS deals com-ing to market in 2017 are using that structure.
But even as the CMBS wheelers and deal-ers learn to navigate the new regulatory rules, Overby expects CMBS issuance to remain flat in 2017, with both risk retention and interest rate volatility holding new issuance back.
—D.B. and C.C.
Morningstar Analysts Talk Risk Retention, Retail and Coworking
with were in Miami to meet with the nonbank lenders who played a far more significant role in the market in 2016. “The nonbank lending space is very strong and very well capitalized,” said CapStack Chief Executive Officer David Blatt. “I think it will continue to grow in 2017. Any changes the new administration makes
won’t happen any time soon—nonbank lend-ers are going to be around for a while.”
Traditional bank lending hasn’t gone away by any means, however, said attendees and panelists alike.
But even with the cautious optimism of market participants, it doesn’t seem like any CRE finance firms will be venturing into new territory.
Brian Ward, the CEO at Trimont Real Estate Advisors, said that his firm, for one, will continue with its core services. “We’re purposely staying away from B-piece investing, even though it’s tempt-ing when you see others getting into it,” he said. “We want to stick to what we do best—we’re not chasing the next big thing.”
and hit the lowest level since 2009 in the process,” said Sean
Barrie, an analyst with Trepp. “However, the rate increased in
nine of the last 10 months and ended 2016 with another sharp
increase. The delinquency rate for U.S. commercial real estate
loans in CMBS was 5.23 percent as of December, an increase of
20 basis points from November. Well over $100 billion in CMBS
came due in 2016, but a number of loans could not land refinanc-
ing and delinquencies bubbled up from March onward. $1.7 bil-
lion in CMBS became newly delinquent in December. To boot,
only $150 million in loans were cured last month and $422 mil-
lion in previous delinquent loans were paid off at par or with
a loss. With a cascade of loans from the 2007 vintage coming
due in 2017, it is hard to see the rate going down any time in the
near future.”
The Takeaway
Office Loans Top Delinquencies in December
Top 10 Newly Delinquent Loans
Loan Name Current Balance Property Type City State Delinquency Status
CMBS Deal
Skyline Portfolio - B Note $98.4 million Office Falls Church Va. 7 GECMC 2007-C1
The Mall at Stonecrest $93.9 million Retail Lithonia Ga. 5 BACM 2005-1
950 L'Enfant Plaza $90 million Office Washington D.C. 5 MSC 2007-HQ11
Lakeforest Mall - A Note $80.3 million Retail Gaithersburg Md. 7 BSCMS 2005-T20
The Plaza at PPL Center $67.4 million Office Allentown Pa. 5 JPMCC 2007-CB18
777 Scudders Mill Road - Unit 3 $60.7 million Office Plainsboro N.J. 1 BSCMS 2007-PW15
777 Scudders Mill Road - Unit 1 $59.1 million Office Plainsboro N.J. 1 BSCMS 2007-PW15
PNC Corporate Plaza $57.3 million Office Louisville Ky. 7 WBCMT 2007-C30
777 Scudders Mill Road - Unit 2 $53.2 million Office Plainsboro N.J. 1 BSCMS 2007-PW15
1 Allen Bradley Drive $51.7 million Office Mayfield Heights Ohio 7 LBUBS 2006-C3
Delinquency Rate by Property Type
Property Type
December 2016
November 2016
October 2016
September 2016
June 2016
December 2015
Industrial 5.62 5.68 5.54 5.28 5.95 5.73
Lodging 3.57 3.63 3.43 3.25 3.27 2.82
Multifamily 2.72 2.50 2.41 2.33 2.35 8.28
Office 7.13 6.57 6.44 6.33 5.76 5.79
Retail 6.37 6.18 6.19 5.89 5.72 5.76
Source:
5.175.23
Percentage 30+ Days Delinquent
4.35
4.154.22 4.23
4.35
4.60
4.764.68
4.78
4.985.03
10 | JANUARY 13, 2017
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Coworking is poised to play an increasingly significant role in the commercial real estate industry and will pose challenges to underwrit-ing and valuation standards in the commercial mortgage-backed securities market, analysts at Morningstar Credit Ratings wrote on Thursday.
As of November 2016, coworking companies leased approximately 1 million square feet back-ing 1.1 percent of the $139.32 billion in outstand-ing CMBS.
While few CMBS loans have coworking expo-sure at the moment, economic uncertainty could mean that corporate tenants will switch to coworking space to manage expenses and space. Morningstar analysts are particularly focused on office tenants that signed inxpen-sive, 10-year leases after the financial crisis and could face hefty price increases at the time of lease renewal. Analysts found that leases on 182.2 million square feet of office space, backing $75 billion in CMBS, expire through 2018. If only 1 percent of those tenants switched to coworking, the amount of coworking space in CMBS would double.
“In today’s fast-changing and uncertain busi-ness environment, flexibility and agility are priceless,” analysts wrote. “As companies of all sizes are tightening expenses and space, we expect coworking to expand because of enduring trends that are shaping workplaces.”
The growth of coworking space will likely be uneven, adding an extra layer of risk.
“We believe growth will come in fits and starts, as factors such as unpredictable reve-nue streams, lack of long-term commitments
and economic uncertainty will play a role,” analysts wrote. “Additionally, fixed costs can be high because coworking providers usually rent their space upfront and must build out the space and amenities before they can lease space to tenants.”
As the coworking space evolves, underwrit-ing and valuation standards must also evolve in order to protect investors from cash flow volatil-ity. While larger and better-capitalized compa-nies will account for a larger part of the sector, investors may experience some bumps as smaller players come and go. To counteract this volatility, lenders may seek additional security in cowork-ing space-backed CMBS loans as a protection mechanism.
Morningstar identified six coworking compa-nies that are among the top five tenants for CMBS collateral. WeWork, perhaps the best-known company, currently operates 128 coworking locations in 39 cities. WeWork has become one of New York City’s largest occupiers of commer-cial real estate, leasing 2.8 million square feet as of January 2016 according to Newmark Grubb Knight Frank—a massive increase from the 42,000 square feet it leased in 2010.
As previously reported by Commercial Observer, WeWork’s growth has had its share of industry speculation, but CMBS exposure to the company is small. It leases roughly 500,000 square feet in eight properties that back $514.1 million in loans. But, as the company leases more than 40 percent of the space at six proper-ties backing CMBS loans any problems could be magnified due to concentration risk.—C.C.
Hotelier Sam Chang is so happy with his summer purchases of two Club Quarters hotels from Rockwood Capital that the two sides have done it again.
Chang’s McSam Hotel Group sealed a $95 million deal this week for the 289-key Club Quarters Hotel Wall Street at 52 William Street at Pine Street, Chang told Commercial Observer Finance. The acquisition was funded with a $60 million loan from Aareal Capital Corporation and a $12 million loan from NorthStar Realty Finance.
“We bought two in Midtown,” Chang said. “We like it so much we bought a third Downtown…We like the concept. It’s a steady cash flow.”
The 20-story hotel is 119,467 square feet and was erected in 1901, according to CoStar Group. Rockwood purchased it in July 2006 for $92.1 million, prop-erty records indicate. The Bailey Pub & Brasserie occupies a 10,700-square-foot retail space in the hotel.
In August, McSam Hotel Group paid $253 million for Club Quarters Hotel at 25 West 51st Street and Club Quarters Hotel Midtown at 40 West 45th Street from Rockwood Capital, as Commercial Observer previously reported.
JLL’s Jeffrey Davis negotiated the sale for Rockwood, and Chang had no brokers in the deal. Davis declined to comment.—Lauren Elkies Schram
The Club Quarters at 52 William Street.
Hallmark Building’s $64M Loan Ships to Special Servicing
Sam Chang Picks Up Club Quarters Hotel Wall Street With $72M Financing Package
The $64 million note backing The Hallmark Building in Dulles, Virginia has been sent to spe-cial servicer LNR Partners for imminent default, according to data provided by Trepp. The loan comprises 5.53 percent of the Bank of America-sponsored CMLT 2008-LS1 transaction.
The loan was transferred on Dec. 29, 2016, according to a source familiar with the asset. The reason for the transfer is potential vacancy issues, according to this month’s special ser-vicing commentary. Watchlist comments from December last year note that the borrower, BECO Management, had submitted a hardship letter along with a request to be transferred to special servicing as they would not be able to pay off the loan before its maturity in June 2017.
The debt service coverage ratio, per the ser-vicer’s analysis in September 2016, was at 0.88—a dip from 1.07 12 months earlier. The decrease was attributed to a decrease in the property’s total income, with occupancy at 83.8 percent as of September 2016. “Despite active marketing to prospective tenants to replace vacant space, prop-erty has still remained below market average,” wrote Trepp analysts.
The Hallmark Building is a 334,079-square-foot office building located at 13873 Park Center Road in Dulles, Va. The property was built in 1985 and appraised at $80 million in 2007. Its largest tenant is the Federal Aviation Administration, which leases 30,126 square feet.
Officials at BECO Management did not respond to a request for comment by press time.—C.C.
Morningstar: Coworking Set to Grow, Challenges Underwriting
Commercial Observer FInance: What have you been up to?
Glascock: We finished up 155 East 79th Street recently. It’s a 14-story building with seven duplex apartments. It’s a very nar-row building, so we decided to create each apartment with two floors and have a con-nected staircase. So, it’s almost as if each apartment is a townhouse. Then we have 360 East 89th Street, which is the project we are working on as we speak. We dedicated a lot of space to the amenities in the build-ing and created a vertical village. There are common areas, everything from WeWork-style spaces for people who want to work at home to a common library area.
You began your career in Germany, right?
Yes. I was in Germany during high school as an exchange student and then returned after college for a year, working at an archi-tecture firm. When I came back to the U.S., I worked in California at Skywalker Ranch—George Lucas’ pre- and post-production facil-ity for many of his films. I worked there for a year, designing. When [Lucas] was originally building the facility they needed a firehouse because it was so far away from everything else, and there was no water for fire hydrants. So, he created his own firehouse, and I worked on creating the design for it. It was a really fun experience.
Did you meet him? I did meet him. He’s a very nice guy.
Which areas of Manhattan appeal to you most as a development firm?
Chelsea, the Upper East Side and the Upper West Side. Chelsea is where our first project was, and I’ve always loved the mix of office space, industrial space and residential neighborhoods.
Our passion is building properties that are well designed and fit into the neighbor-hood around them. I think every building we have built is an opportunity to contrib-ute in a positive fashion to the community. It’s such a shame to see buildings go up that don’t take that opportunity to be a positive addition in terms of architecture and the design. The city is the backstage on which we live out the theater of life so we want to have a nice stage set. We really feel very good about every project that we do, and we love New York City.
How do you finance your projects? Our projects are pretty simple and straightfor-
ward in the way we structure them. We have a group of investors who have been with us since the beginning, and we characterize them as friends now, so we have an investment club. For the projects that are less than $100 million, we work with that group of investors to finance the project. We also go out and get a construction loan—it’s typical that the equity part is from us plus this investment group. Then if a project is more than $100 million, we go to institutional investors and work with them.
How have you found the environment for construction loans?
It’s definitely tighter. Banks are very selective in the projects they are choosing—they’re look-ing for good track records and good sponsors. We closed on a $67 million construction loan in September 2016 with Bank of the Ozarks on the 207 West 79th Street project [a 71,000-square-foot condominium development that includes 5,000 square feet of retail space], and we were very happy to do the deal with them. They’re very active in the market and are being very smart in filling a spot where a lot of other banks have pulled back.
What’s on the agenda for this year? The project at 39 West 23rd Street is one that
we’re about to start construction on, and that will be a 24-story development project. We are still in discussions regarding The construction financ-ing, and a lender hasn’t been selected yet.
We used to only do new construction con-dominium projects, but we have started a new platform to acquire and redevelop projects. The first building we purchased was down at 50-58 East Third Street in the East Village and that is a 71-unit property. We closed on that early in 2016. Our goal is to acquire two new projects every year. We’re busy, but it’s a good busy.
Stephen GlascockPresident and Managing Partner of Finance and Construction at Anbau
Stephen Glascock
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