In the first quarter of 2018, Robert Schiffer, a managing director at SL Green Realty, will do something he’s never done before: fly to China to raise EB-5 financing — more than $200 million, to be exact.
If it’s successful, the trip will mark the final leg in the New York real estate giant’s two-year effort to fund its 1,401-foot-tall Midtown office tower One Vanderbilt, which is scheduled for completion in 2020.
With a projected cost of more than $3.2 billion, it is one of the most expensive skyscraper developments in the city’s history, up there with One World Trade Center, which cost $3.8 billion, and 50 Hudson Yards, which is expected to cost around $4 billion.
But while 1WTC is owned by a public agency, the Port Authority of New York and New Jersey, and 50 Hudson Yards secured a big anchor tenant when it inked a 20-year lease with BlackRock for 850,000 square feet, One Vanderbilt doesn’t have either of those advantages. Though TD Bank and Germany’s DZ Bank have agreed to lease a combined 235,000 square feet at the 1.5 million-square-foot tower, there have been no other reported leases for the 84 percent of space that remains.
That creates notable challenges at a time when institutional lenders and investors are sizing up New York’s construction market in anticipation of a sudden decline.
ING Real Estate Finance’s Craig Bender said his team decided not to get involved in One Vanderbilt’s financing after eyeing the prospectus, in part because it “struggled with the lack of pre-leasing.”
Here’s how SL Green overcame these hurdles on the 58-story project with the help of an army of banks, a Korean pension fund and even personal investments from its top two executives.
Banking on a big loan
The publicly traded real estate firm had decided by early 2016 that it would aim high for a $1.5 billion construction loan — a daunting task in a lending market that was pulling back from ground-up developments.
The company didn’t make things easier by choosing to move forward without a debt broker, a decision that stemmed from disagreements over fees. During early negotiations with several intermediaries, which Schiffer declined to name, SL Green insisted that commissions be tied not just to the initial loan amount but also to any changes to the debt during construction.
If the lenders decided to raise interest rates or reduce the loan amount at any point between the mortgage closing and the project’s completion, for instance, the broker would receive less.
“No one wanted to do that. The brokers said it’s the same amount of work for us no matter what,” Schiffer noted.
“So we said, look, we know that we can get a $1.2 billion loan on a five-year term done at 400 over Libor,” he added in reference to the benchmark rate based on what banks charge each other for short-term loans.“We can do that in our sleep. The question is: Can we push the envelope?”
In February 2016, SL Green sent out marketing books asking for a term sheet on a $1.5 billion construction loan to several major lenders, including Wells Fargo, JPMorgan Chase, Bank of America, Deutsche Bank and Bank of China, among others.
By June, the developer had decided on Wells Fargo as a lead arranger on the five-year construction loan, which comes with two 1-year extension options. As the two firms searched for other banks to join a syndicate, they faced an obstacle: The borrower knew it wanted to bring on an equity partner, but it hadn’t found one yet, so any loan document would need to account for that uncertainty.
“Early on, SL Green made it clear that they wanted flexibility over the capital structure,” said Robin Lidington, a vice president in Wells Fargo’s commercial real estate group who helped negotiate the loan. She noted that the bank “had to get comfortable” with that demand.
Bryan Czop, a vice president at Wells Fargo Securities who also worked on the deal, said that “every lender has their one or two sticking points” — such as how much recourse should be included in a loan of that size.
SL Green and Wells Fargo managed to iron out that and other kinks pretty quickly, and Bank of China, TD Bank, JPMorgan Chase and Bank of New York Mellon agreed to join the syndicate.
Then came the really hard part: The five banks agreed to take on $300 million each, but only wanted to keep $200 million on their books, Schiffer said. This meant they would have to find more institutions to take on the remaining $500 million.
“It was challenging just because of timing,” Schiffer said.
It took a while for additional lenders to go through their credit approval processes, which added to the uncertainty. Schiffer said he grew concerned that if the five original lenders were unable to syndicate the remaining $500 million with other banks, they might change the loan terms. But the money came in on time and the mortgage closed on Sept. 28.
At the time of the loan’s closing, 12 lenders were involved, but that number grew to 18 as the leading banks passed on more pieces of the debt to other firms, Czop said. Wells Fargo, for one, ended up with about $170 million on its balance sheet.
The loan carries a floating interest rate of 350 basis points over Libor. It also comes with personal recourse — which industry sources say is typically between 20 and 30 percent for a project of that size. This means that if SL Green were to default on its loan, it would not only risk losing the project to foreclosure but could also be forced to cough up $375 million on top of that.
“If they had a building that was 80 percent leased, they likely wouldn’t have to do recourse,” said Christopher Delson, an attorney at Morrison & Foerster who represented TD Bank and JPMorgan in the debt deal.
Equity partners welcome
The $1.5 billion construction loan still left SL Green roughly $1.7 billion short — a large sum even for a major real estate investment trust. About three weeks after sending out its loan brochures, the company began looking for an equity investor to buy a 49 percent stake in the tower for more than $800 million.
“If SL Green wanted to own it outright, they are one of the few companies that can do it,” Delson said, referring to the REIT’s deep pockets. But bringing in outside partners has several potential advantages for the firm and its shareholders, he noted, such as lowering risk and upping the return on every dollar invested.
If all goes as planned, One Vanderbilt would follow in the footsteps of other big developments with incredibly intricate capital stacks. Related Companies, for example, brought in Oxford Properties as a partner for its Hudson Yards development in 2010 and later sold stakes in individual towers to other firms. And Brookfield Property Partners sold a 44 percent stake in its Manhattan West project to the Qatar Investment Authority in 2015.
SL Green reached out to the usual suspects, including Chinese, Japanese and Middle Eastern firms and sovereign wealth funds, for an equity injection. But the developer soon learned that the appetite for a $800 million-plus investment in a single skyscraper was limited, Schiffer said.
So SL Green decided to lower its expectations and sell a smaller stake — a move that quickly paid off.
On Jan. 26, 2017, SL Green announced that the National Pension Service of Korea had bought a 27.6 percent stake in the tower. The Texas-based investment and development firm Hines, which Schiffer said played a key role in bringing the pension fund into the project, took a 1.4 percent stake. Those investments will pump about $525 million of equity into the project, according to the developer’s announcement.
The construction loan, equity injection and planned EB-5 funding — which Schiffer called “relatively inexpensive capital” — bring SL Green to more than $2.2 billion, leaving the developer with a tab of roughly $1 billion.
Schiffer said the company does not plan to raise any more outside financing beyond EB-5 and will likely fund its share of the cost through a combination of its cash reserves and corporate credit facilities. That draws attention to one additional layer in the capital stack: SL Green’s CEO, Marc Holliday, and president, Andrew Mathias, both own small stakes in the project, according to a filing with the Securities and Exchange Commission.
Holliday paid $1.44 million, which entitles him to between 1.5 and 1.8 percent of profits. Mathias paid $960,000 for a stake that could net him between 1 and 1.2 percent of profits. The move was designed to “further strengthen the alignment of the interests” between the executives and the company, per the SEC filing.
SL Green expects One Vanderbilt to bring in $198 million a year in net operating income once the tower is built and fully leased, according to its base case calculation, Holliday said during a January 2017 earnings call. That figure assumes an average rental income of $155 per square foot.
For comparison’s sake, the owners of 1WTC — which is almost twice the size of One Vanderbilt but sits in a neighborhood with lower average rents — estimated in 2014 that the tower would generate $197 million in annual income once it was 95 percent leased, according to the Wall Street Journal.
If SL Green chose to sell One Vanderbilt after completion, a cap rate of 4 percent (the going rate for trophy tower sales) would value it at about $5 billion — nearly 60 percent more than the amount it cost to build.
But there are still uncertainties facing the tower’s funding. At the time of publication, federal lawmakers were still debating the future of the EB-5 visa program, which is set to expire on Jan. 19, barring a reauthorization.
And then, of course, there is the inevitable chance of construction delays and cost overruns — especially on a site as heavily trafficked as the corner of 42nd Street and Vanderbilt Avenue.
“Big projects just attract complications,” Delson said.