Case Study: Financing Hudson Yards

Al Barbarino speaks with Jeff Blau, CEO and a partner at Related Companies, to get a behind-the-scenes look at financing the massive development on Manhattan’s far west side.

Related Companies is calling Hudson Yards the largest private real estate development in the nation’s history for a reason: because it is.

The 28-acre site that Related is developing from scratch with Oxford Properties Group will include 18 million sq ft of commercial and residential space, more than 100 shops and restaurants, roughly 5,000 residences, 14 acres of public open space, a 750-seat public school and a 200-room Equinox branded luxury hotel.

Jeff Blau
Jeff Blau

“The key to mixed-use development is to build as many different asset types as you can so then you create an environment that people want to be in because it’s fun and interesting,” says Jeff Blau, CEO and a partner at Related, who spoke to Real Estate Capital about the financing behind the project.

“You have retail and office and residential and cultural all mixed together, and you are able to build such a large quantity of square footage at the same time because they are not the same type of product.”

As a centerpiece of a five-acre outdoor plaza, the developers have also revealed plans for a somewhat curious structure called The Vessel, a 15-story, 2,500-step basket-like steel and concrete staircase which could be construed, based on renderings, as part art and part recreational amenity.

Blau called Vessel “a gift to New York City,” while Related founder Stephen Ross has referred to it as a “365-day Christmas tree.” A $150 million gift may seem like a bit of a splurge, but perhaps not so much when sized up against the sheer enormity of the massive Hudson Yards project, which will ultimately cost an estimated $20 billion, and for which Blau confirmed $14 billion in equity and debt has been secured.

“Everyone asks, “how in the world do you finance all of this?” and they think that there’s just one answer, but it’s really the opposite of that,” Blau says. “The way you get this to work is by breaking it down into smaller pieces, and you nibble away at it piece-by-piece, and you use multiple sources of capital, both debt and equity, in order to get it all done, because there really isn’t one big solution – though I wish there was sometimes (laughs).”

Blau spoke about the various aspects of the financing secured so far on each of the major elements of Hudson Yards, those that are complete or have begun to come out of the ground, giving insight into the financing options, the challenges, and why the ultimate suitors were selected.

Ultimately, the financing of the buildings includes a mix of banks, capital markets, private institutions, EB-5 and fund contributions, reflecting the necessity to tap multiple sources for a project that was not conceived with a giant cookie cutter.

“The plans change every day,” Blau says. “We have to be opportunistic and we have to respond to the market and move based on where capital is available, and where demand for product is. I think that’s one of the things we’re able to do well as a private company – be very responsive and quick in our decision-making.”

“We really do it building by building; it’s not that we seek to secure this much this month and this much that month,” he says. “We do all of our capital sourcing in-house here and the truth is we like to do a lot of repeat business because it’s a lot easier on everyone when you have a relationship and trust amongst partners.”

Hudson Yards

10 Hudson Yards

10 Hudson Yards is a 52-story, 895-foot office tower with commercial offices, ground-floor retail space and a direct connection to the one-million-sq-ft Shops & Restaurants at Hudson Yards.

Opened in May of this year, its tenants include Coach, L’Oréal USA, The Boston Consulting Group, German software engineering firm SAP, VaynerMedia, Intersection and Sidewalk Labs.

When discussing its financing, Blau called the property “a perfect case study for Hudson Yards,” in part because the plans changed when Coach decided that it would prefer to lease its space rather than purchase it, as originally planned, which led to the lease out of the rest of the property.

The building was initially funded with a $475 million construction loan led by Starwood Capital, equity financing from an undisclosed sovereign wealth fund, and JP Morgan Asset Management.

When the plans changed, the sovereign wealth investor, which had invested through an opportunistic fund, needed to exit. And, Blau notes, that as with all the properties, initial construction is usually taken out and replaced once a building has been stabilised.

By August of this year Related had recapped the building with a $1.2 billion securitised single-asset deal from Deutsche Bank and Goldman Sachs, while Allianz was brought in and acquired a 44 percent stake in the building.

It’s oft-repeated and widely understood that the commercial banks in particular are pulling back from construction lending as they continue to face increased scrutiny and regulations. Related has secured a billion in financing from the banks thus far on Hudson Yards, but the inability of single banks to write billion-dollar balance sheet loans as they did in their heyday has only further necessitated that Hudson Yards reach a wider array of financing sources.

“The regulations on commercial banks have certainly had a direct impact on us because they have pulled back significantly, especially on large-scale construction lending, and the amount they are willing to hold has been drastically reduced,” Blau says.

“When you need construction loans over $1 billion and up to two-and-a-half billion dollars, there are very few commercial banks – really none – that are willing to underwrite that. So we have done many deals outside of the banking system as a result.”

15 Hudson Yards

The first residential building to go up at the site, 15 Hudson Yards is one instance where Related went outside of the banking system, calling on the Children’s Investment Fund for a $850 million construction loan. The London-based hedge fund has gained a reputation as a one-stop-shop for writing large loans, and Related would later call them back for the financing of 35 Hudson Yards (detailed on next page).

Though unable to disclose details on pricing and specific loan covenants on the deals, when asked about the structure of the Children’s Fund Loan compared to that of a commercial bank loan, Blau notes that it’s much more flexible, but also significantly more expensive.

Related tapped designers who had worked on the High Line park, which is adjacent to the base of the 67-story building. It will offer 391 apartments, which will hold 285 market-rate condos and, according to an agreement with the city, 106 affordable rentals based on median incomes in the area.

“We had just closed two of the big bank deals at 20 and 30 Hudson Yards – and there was only so much capacity in the banking system,” Blau says. “And ultimately I think residential-for-sale is even more difficult in the banking system, so it was natural to go outside the banks for residential condominium at this size.”

The condo market is known to be heating up in major US cities, and while Blau acknowledges that the market moves in cycles, he says the regulatory environment in particular has made the banks more nervous about condo development.

30 Hudson Yards

In December 2015 Related and Oxford closed over $5 billion in debt financing for the flagship office tower at 30 Hudson Yards, and for the one million-square-foot Shops and Restaurants at Hudson Yards.

Deutsche Bank served as lead arranger and administrative agent, Bank of China, Crédit Agricole, and Industrial and Commercial Bank of China served as joint lead arrangers, and The Bank of Nova Scotia served as documentation agent for The Shops and Restaurants lender group.

The large bank financing does speak to the commercial banks’ ability to still finance large construction projects, albeit in large groups, but the more unusual element to this particular deal was the decision to sell rather than lease the space – which in turn facilitated the huge bank loan, Blau notes.

“I don’t think there’s ever been anything like it; it’s very uncommon,” Blau says about the commercial condominium nature of the tower. “There are some buildings that have done this, mostly for nonprofits, because nonprofits typically own their space, but there’s not a lot of large-scale high-rise products like this. This was just one of the many tools that we decided to take out of the tool box.”

Wells Fargo purchased 500,000 sq ft for $650 million, Real Capital Analytics confirmed. Related confirmed that KKR purchased the 343,000 sq ft, Time Warner purchased 1.4 million sq ft, and Related itself purchased a 260,000 sq ft condo. The purchase prices could not be disclosed. The building, to open in 2019, will also house HBO, CNN, Warner Bros and Turner Broadcasting Oxford.

“We were able to avoid bringing a third party equity partner because we used the balance sheet of our tenants to provide the equity and as a result ended up with a 100 percent committed building, with every sq ft pre-sold to our tenants,” Blau says. “Based on that we were able to go to the commercial bank markets on a less risky transaction, and they were able to put together a syndicate to do about $1 billion [each].”

35 Hudson Yards

In July Related announced the $2 billion full capitalisation of this 1.1 million sq ft, 1,000-ft-tall mixed-use tower, which is also set to open in 2019. Its full capitalisation includes $1.2 billion in debt financing led by the Children’s Investment Fund. The property will contain an Equinox branded luxury hotel, office, residential and retail uses.

“We had such a great transaction with them on 15 [Hudson Yards], and the relationship was strong, so it was easy to roll right into 35 Hudson Yards, which we did right after the first building, and then we brought a life insurance company in on the equity,” Blau says.

“It’s actually a great opportunity for someone like Children’s to step in where the banks would historically have played,” he adds. “They’re able to charge a premium, not for taking more risk but just for providing large amounts of proceeds. We love that business; you get a premium because you’re able to write a big check, without doing anything that’s riskier.”

The tower will feature about 137 exclusive for-sale residences that start at 500 feet in the air. The Equinox hotel will comprise more than 200 rooms, a 60,000 sq ft Equinox flagship fitness club and spa, as well as its global office headquarters, as well as a SoulCycle, in addition to ground floor and second-floor retail.

55 Hudson Yards

The 50-story, 55 Hudson Yards, a mixed-use office and retail property, is the other major element under construction. It is being financed by Mitsui Fudosan America, which is also an equity partner. The financing, of an undisclosed amount, ultimately took the form of a preferred equity commitment.

Home to Boies, Schiller & Flexner, Milbank, Tweed, Hadley & McCloy LLP and Point72, the building is expected to open sometime in 2018.

As for the rest of the financing needed as Related works towards 2019, Blau says Related and its partners will continue to tap a combination of sources, using banks “to the maximum extent possible and then going outside of the banking system, which is really what ultimately happens given the size of these deals.”

One additional avenue that Related and Oxford will look to is EB-5, a governmental programme that encourages foreigners to invest in the US to create American jobs.

Related confirmed reports that they had raised over $600 million to help fund the project’s infrastructure in 2014, and that they are in the midst of raising another round of capital through this process to help build vertically.

“EB-5 is just another part of the puzzle here, and it will provide a critical component for us, just as the other sources of financing have,” Blau says.