Anatomy of a deal: Inside Related/Oxford’s unusual financing of Hudson Yards
For better or for worse, every big-name New York City developer is defined by their most recent marquee project. Bruce Ratner’s Forest City Ratner propelled Brooklyn into a new phase with Atlantic Yards; Gary Barnett’s Extell Development is redesigning the white glove with One57, and Harry Macklowe is trying to erase the past with 432 Park Avenue. For Stephen Ross’ the Related Companies, the narrative of the past few years has been dominated by Hudson Yards.
The 13 million-square-foot project – developed jointly by Related and Oxford Properties Group — hit a milestone in April, when Barry Sternlicht’s Starwood Property Group led the origination of a $475 million construction loan to allow for the development of the joint venture’s first tower – the 1.7 million-square-foot Tower C, better known in industry circles as the South Tower. Starwood provided $350 million in funding, while Oxford, the trade union United Brotherhood of Carpenters and Joiners, and luxury retailer Coach – which also purchased its commercial condominium in the building — coughed up the balance.
“The team at Starwood showed impressive deal acumen proving to be both sophisticated and flexible,” Related president Jeff Blau said in an April statement.
Just how sophisticated the transaction, was, however, is still coming to light. Speaking to representatives from Related and Oxford’s legal team, the Metropolitan Transportation Authority, and industry observers, The Real Deal examined the anatomy of the deal, one of the most intricate in Manhattan’s history, according to Schulte Roth & Zabel’s Jeffrey Lenobel, who advised the Related-Oxford joint venture.
“There’s been nothing like this since Stuy Town,” Lenobel told The Real Deal, referring to the scale of the Hudson Yards project and comparing it to Tishman Speyer and BlackRock’s $5.4 billion acquisition in 2006 of the sprawling East Side housing complex.
Build it and they will come
Three aspects of the South Tower financing really stood out, Lenobel said. First, all construction loan proceeds – including an extremely rare construction mezzanine loan — came in prior to the equity money.
“I’ve been doing this for 37 years and never seen this happen before,” he said. “The basic theory of construction lending is that there should always be enough money left over to finish the construction. The borrower has to put in additional equity if the loan ever goes out of balance.”
But given the attention focused on this project, and as the viability of successive phases of Hudson Yards would depend on the success of the South Tower, Starwood felt confident that Related and Oxford would deliver. Indeed, shortly after the deal with Coach in April, the joint venture signed French beauty titan L’Oreal to a $417 million lease for 402,000 square feet, and German software giant SAP to a 115,000-square-foot, $136 million lease , as The Real Deal reported. Last week, Fairway Market committed to take 45,875 square feet on the ground floor, leaving the tower more than 85 percent leased.
“Starwood’s thinking was, ‘if they [Related/Oxford] screw up the first one, they screw up the entire project, so how can they not finish the building?’” Lenobel said.
“People here are looking to a single lender to fill all their needs,” Stuart Silberberg, an executive at Starwood, said during a mezzanine finance panel in May. That’s a niche we’ve played in a couple times.”
A spokesperson for Starwood declined to comment for this story.
Joanna Rose, a spokesperson for Related, deferred to the company’s release about the financing deal, but declined to comment further. Representatives from Oxford did not respond to multiple requests for comment.
The benefit to Starwood of doing things in reverse was that their money would stay in the project longer and at higher interest rates, Lenobel said. It also helped them stand out in a competitive bidding process, he said, one that included a consortium of banks with a “slug of 100 million bucks each.”
This deal structure also reassured the MTA — which owns the land under the project and leased it to the developers in a deal that is worth north of $1 billion — said the city agency’s attorney, Meredith Kane, a partner at Paul, Weiss, Rifkind, Wharton & Garrison.
“As a ground landlord, we’re concerned that once a building is started, it is finished,” Kane said. “The fact that the loan came in first gave us a level of comfort. No lender wants to leave their money in the building.”
The second atypical aspect of the financing deal was that rather than being financed through senior debt – which is almost always the case — about 40 percent of the $475 million construction loan (or $190 million) was secured through mezzanine financing.
Mezzanine financing is considered much riskier for the lender, as in the event of a default, the debt is repaid only after all senior obligations have been satisfied.
A mezzanine lender’s usual recourse in the case of a default is to take control of the project or seize the equity stake, Lenobel said. “To come in at this point when there is still construction to happen and still equity to be advanced is highly unusual.”
Mezzanine construction loans – which require an intrepid lender but pay off in higher interest rates – were more commonplace in 2006, Lenobel said, “when capital stacks were at their peak.”
Indeed, since the collapse of Lehman Brothers in 2008, such loans have been few and far between, said Richard Abramson, co-chairman of the real estate department at Cole, Schotz. Abramson, who was not involved in the financing deal, said that was how lenders like Starwood are “filling the void.”
Coach double dips
Finally, Coach was both a lender on the debt and an investor on the equity side. The luxury retailer paid $750 million for its 738,000-square-foot condo at the tower in April. Representatives from Coach did not respond to multiple requests for comment.
“One of the difficulties was that the initial lenders couldn’t grasp that someone on the equity side was also a lender,” Lenobel’s colleague, Fonda Duvanel, who also advised the joint venture, said of Coach’s involvement.
“The magnitude of their purchase gave them a seat at the table,” she added.
“I have not seen a structure where the tenant has gone in and put up equity,” Abramson, the Cole, Schotz attorney, said. “These lenders want a cushion normally. They want to make sure that they have substantial skin in the game.”
The project required all parties to put all hands on deck, and then some. Both Related and Oxford hired several people to work on the project full time, Duvanel said, and top executives from both developers were always in the loop.
“It was Blau and Ross every day,” Duvanel said, referring to the Related president and chairman Stephen Ross, respectively. And Oxford had top representatives coming down from their Toronto headquarters for regular meetings with the MTA.
“The closing cocktail party had 250 people!” Lenobel added.
That the MTA had structured the lease with so much flexibility built in allowed Related the latitude “to exercise the creativity that it did,” Jeffrey Rosen, the MTA’s director of real estate, told The Real Deal.
The MTA softened the developer’s financial burden by creating a ground lease that is “severable” — that is, it turns into multiple ground leases, which makes it easier to secure financing.
“Someone taking space in Tower C doesn’t want to be responsible for someone defaulting in Tower D,” Rosen said, adding, “professionals take pride in intricate financial structures, just like an architect takes pride in his designs.”