Earlier this year, after the REIT defaulted on a $450 million loan on the St. Regis hotel, Vornado Realty Trust described the retail portion of the hotel as “non-refinanceable.”
Credit Agricole, the company’s lender, apparently doesn’t like that notion. Last week, the French bank granted Vornado and his partners a five-year deferment of the loan in exchange for repaying most of the principal.
As borrowers and lenders face maturities on $1.5 trillion in commercial real estate, it’s the latest big piece of real estate to get a second life for mortgages.
For the banks and CMBS special servicers who oversee these loans, they can avoid the mess of foreclosures. Owners can get on with their lives and keep fighting, but at a cost because they’re at the mercy of their lenders.
“It’s not going to be easy for anyone,” said Michael Cohen, principal at CMBS consultancy Brighton Capital Advisors.
For property owners who want to extend the due date, the cost is high, Cohen said.
“They’re going to take a shower,” he said.
Aby Rosen’s RFR was extended earlier this year on a $1 billion mortgage on the Seagram Building at 375 Park Avenue after Rosen went to the market to try to refinance the loan . GFP Real Estate has gained more time on a $120 million loan for the 42-story Dumont Building at 515 Madison Avenue. Earlier this month, Tishman Speyer extended a $485 million mortgage on its 300 Park Avenue office building.
While some lenders hope to rip off the Band-Aid and repossess the property as quickly as possible, others see a light at the end of the tunnel. In the best-case scenario, borrowers can get their debt under control and face a better refinancing market at the end of the new term.
But another scenario is that the office market gets worse and after a few years the banks start repossessing those same properties.
“The only benefit to the lender is getting paid back,” Cohen said.
What’s the bet?
The effort to extend repayment terms is reminiscent of the “extend and pretend” deals that have drawn so much criticism after the financial crisis, when many lenders were accused of dragging their feet to avoid writing down the value of their loans.
But with many borrowers who got deferrals now writing checks to reduce principal or replenish reserves, today’s deal feels more like a restructuring.
In the case of the St. Regis retail store, which Vornado co-owns with Crown Acquisitions and the Qatar Investment Authority, the borrower agreed to write a check for $95 million, reducing the balance to to $355 million. The partners defaulted on the loan late last year.
At the Seagram Building, the special servicer of the CMBS loan collected $15 million in principal, and RFR agreed to pay an additional $40 million over the next two years.
Tishman Speyer and its partners at 300 Park Avenue, the National Pension Administration of Korea, agreed to contribute more than $30 million to the reserve fund to cover expenses such as lease payments, according to people familiar with the matter.
At 515 Madison Avenue, GFP made a $5 million down payment on the loan and agreed to contribute substantial equity as a reserve fund for tenant improvements and lease commissions to fill vacant space in the building, special servicers show.
While Vornado’s loan was issued by a bank, the other three loans were CMBS transactions, which are generally more difficult to amend due to strict rules governing securitized loans.
GFP’s Jeff Gural said he didn’t even try to refinance the 515 Madison loan because he knew they couldn’t do it right now. He said it took some time to get in touch with Secret Service agents, but when he did, the talks went fairly well.
“Their first criterion is to invest money,” he said.
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The roughly 330,000-square-foot building is 83 percent occupied, but that number is expected to drop to 77 percent this year as tenants move out, according to special servicers.
Gulal believes he can improve the performance of the building when he needs to refinance the loan.
“My guess is that when the loan comes due, we only owe $85 million, hopefully with a full building, and the interest rate will be lower,” he said.
