The mega-financing that demonstrates lenders’ belief in New York’s future

The $1.25 billion debt package lined up by the backers of the redevelopment of New York’s historic Terminal Warehouse from a roster of blue-chip lenders demonstrates that, despite lender squeamishness around office and retail, there is ample capital for landmark construction schemes in the city.

L&L Holding Company, the privately owned New York developer, and listed real estate company Columbia Property Trust sourced the financing package from private equity lenders Blackstone Real Estate Debt Strategies and Oaktree Capital Management, following a process that was overseen by broker CBRE, Andrew Staniforth, a senior vice-president at L&L, told Real Estate Capital. The lending duo was soon joined by private equity firm KKR, US property company Paramount Group and investment bank Goldman Sachs in the lending deal.

“We engaged with a broad network of lenders for the construction loan and eventually narrowed it down to Blackstone and Oaktree, negotiating a full term sheet with them. The excitement of the people who received the book lingered and lasted and this brought back Goldman, KKR and Paramount into the mix,” Staniforth said.

This level of interest was a surprise for the partners, however, given negative sentiments around the office and retail sectors as well as the outlook in the late fall for New York. This level of lender participation was not a foregone conclusion, particularly at the time that CBRE released the details of the proposed financing of the revamp of the 1.2 million-square-foot nineteenth century property to prospective lenders, Staniforth explained.

“We were biting our nails about how the market would receive what we were doing because we were circulating the books at the height of the pandemic,” Staniforth said. “In the papers, you were reading that New York is dead, that office was dead.”

Loan structure

Vehicles managed by Blackstone led the $974 million senior loan and loan, with Goldman and KKR participating in the latter. Meanwhile, funds managed by Oaktree led the $274 million junior mezzanine financing in partnership with Paramount Group.

“It is an amazing feat to be able to line up $1.25 billion of debt and speaks broadly to what is happening in New York,” Staniforth said. He noted that the size of the loan meant that more nuance was needed in putting together the financing package. “We thought that splitting it up this way was the best of all worlds.”

Three factors were key in attracting the lender group for Terminal Warehouse. The partners completed numerous covid-safe tours and found that prospective lenders liked the fact that any space would be delivered in 2023 – which the backers hoped would provide ample time for a recovery from the pandemic.

Additionally, the “authenticity of the planned” redevelopment – retaining elements of the historic building – and what Staniforth characterised as “no regret air” and other wellness features helped the lenders to get comfortable with the idea of backing a massive, complex redevelopment.

“The selection came down to finding the lenders which truly understood what we were trying to do and be a partner with us. We had to make sure our values were aligned on what we saw for the building and what we saw New York becoming, with a flight to quality and a flight to authenticity,” Staniforth said.

Road to redevelopment

The partners acquired the building in 2018, taking ownership of a full block at 261 11th Avenue between 27th and 28th Streets. At the time of the acquisition, the property – with views of the Hudson River – was tenanted by a mix of self-storage, office and industrial occupiers.

L&L had a different vision for the property, obtaining permission from the New York Landmarks Commission to carve out roughly 200,000 square feet from the centre of the building to bring more light and air into the property and add six stories of glass and concrete office space overlooking the Hudson River.

“This building will have what we are calling ‘no regret’ changes. No one will ever regret having better air quality. Tenants in the market, in a post-covid world, will need these things,” Staniforth said.

The partners see a clear way to differentiate the 1891 vintage building, including a 670-foot train tunnel that was the location of the Tunnel nightclub in the 1980s and 1990s, through its natural, structural features. A major focal point of the preservation and redevelopment plan will be the building’s historic timber – a feature that was a key point in the partners’ pitch to the lenders who walked the property, Staniforth said.

Some of this wood dates back to 1512, according to a recent dendrochronologist from the Tree Ring Research Laboratory at Columbia University’s Lamont-Doherty Earth Observatory. This kind of specificity is important to telling the story of the building’s past and creating the sense of authenticity for lenders and future tenants, Staniforth explained.

Next steps

Soft demolition began before the loan was closed, with the partners cleaning out storage space, completing any necessary abatements and preparing for structural demolition. The partners have two cranes on site and have already started to work on the parts of the building on the west side that will get the overbuild of new space, Staniforth said.

Bigger picture, the financing is a window into New York’s next chapter, he argues.

“In any sort of downturn or correction, people look to quality. Post-covid, I believe tenants and lenders will look at authenticity. If we are looking ahead to a hybrid home-office model, tenants will want their buildings and space to speak to their culture,” Staniforth said. “If you see 500-year-old timber next to exposed brick next to arched windows, that speaks to culture, values and history and we believe we will see that more in office developments.”