Fitch warns Midtown loans face default

Fitch issued warnings about loans backed by One Park Avenue (left), 575 Lexington (source of building photos: PropertyShark)

Fitch Ratings warned today that loans backed by One Park Avenue and 575 Lexington Avenue are expected to default due to declining cash flow, amid a general downgrade of a package of commercial mortgage-backed securities issued by Banc of America Commercial Mortgage.

The building loans represent 5.9 percent and 5.2 percent, respectively, of the CMBS.

“Both of these loans had reserves set up at issuance,” said Adam Fox, senior director at Fitch Ratings. “The original plan was that the reserves would last until your tenants left.”

According to Fitch, the 2007 acquisition of One Park Avenue by Murray Hill Properties was underwritten with the expectation of re-signing below-market leases at higher rents. The building is facing the December 2009 loss of one tenant that comprises 19 percent of the building’s net rentable space.

The 924,000-square-foot building, located between 32nd and 33rd streets, was acquired for $550 million from SL Green. Tenants in the building include Coty Beauty, Equinox Clubs and American Media.

Fitch said the deal was structured to include an $18 million debt service reserve, to cover interest shortfalls during the first three years of the loan. As of June 2009, the reserve balance was only $4.5 million, and the loan is scheduled to mature in March 2012.

Norman Sturner, a partner at Murray Hill Properties, said he was reviewing the downgrade and did not have any immediate comment.  

The other building, 575 Lexington Avenue, at 52nd Street, was acquired by developer Larry Silverstein and the California State Teachers Retirement Fund in October 2006, for $400 million. The building featured tenants such as Weill Cornell Medical College, the law firm of Boies, Schiller and Flexner and BT Radianz.

The 575 Lexington Avenue loan was written based on a coverage ratio of 1.14 and occupancy percentage of 94 percent, but at the end of 2008, the coverage ratio was 0.69 and the occupancy rate was only 90 percent. The building’s original $10 million debt service reserve fund remains intact and the loan, like the one for One Park Avenue, is scheduled to mature in March 2012.

“575 Lexington Avenue is a well positioned asset that benefits from a premier Midtown location and a stable roster of corporate and retail tenants,” a Silverstein spokesperson said. “We are current on our loan obligations.”