August 13, 2020

Square Feet: Unconventional Financing Aids Deal for Brooklyn Space

Mostly vacant for the better part of a decade, the 650,000-square-foot building has been a tire factory, a trade school and even hosted antiaircraft guns on its roof to protect the Brooklyn waterfront in World War II. Most recently, it warehoused data servers during the dot-com boom.

But late last month, the New York City Human Resources Administration signed a 20-year, 400,000- square-foot lease for six floors of the 10-story building — the largest deal in Brooklyn this year and the culmination of more than two years of negotiations. Along with a second, smaller deal, 470 Vanderbilt is now 85 percent leased. In conjunction with a residential tower that the developers hope to build on an adjacent parking lot, it could speed the transformation of the area, which lies between Fort Greene and Clinton Hill.

“The building is huge, an entire city block, and it has basically sat vacant and derelict for years,” said Steven Hurwitz, the vice president of acquisitions and developments at GFI Development, which acquired the ground lease in 2007 for $45 million from the estate of Sol Goldman. “This is a major turnaround for the building and the surrounding neighborhood.”

With some 1,800 full-time employees and 1,500 daily visitors, the Human Resources Administration “will mean more patrons for our businesses and an increase in foot traffic for the neighborhoods,” said Phillip Kellogg, the manager of the Fulton Area Business Alliance.

The H.R.A., which provides support to New Yorkers with social service and economic needs, is consolidating from three locations, shrinking its overall occupancy by 95,000 square feet. It will be vacating 271,000 square feet at 330 West 34th Street, 37,000 square feet at 2 Washington Street in Manhattan and 187,000 square feet at 210 Livingston Street in Brooklyn. Peter B. Hennessy, president of the New York tri-state region for Cassidy Turley, represented the housing authority in the deal and Gary Kamenetsky, a first vice president at CB Richard Ellis, represented GFI.

Construction at 470 Vanderbilt Avenue is expected to start by the end of the year with a move-in date of next winter.

The new lease will save the agency $7 million a year in rent. The deal “is an excellent example of the city’s ongoing, proactive space-efficiency efforts,” said Edna Wells Handy, the commissioner of the Department of Citywide Administrative Services, which negotiated the lease on behalf of the Human Resources Administration.

Other tenants include the League Education and Treatment Center, which recently signed a lease for more than 77,000 square feet at the site and is relocating from a smaller space in Dumbo, and the New York City Housing Authority, which moved into 62,000 square feet in 2009.

Still vacant is 70,000 square feet on the building’s upper floors. Unlike the base of the building, which has 75,000-square-foot floor plates, these floors are 20,000 square feet each. “We are already starting to get a lot of interest from smaller users that can feed off of the foot traffic from the H.R.A. and N.Y.C.H.A.,” said Mr. Hurwitz, who said the asking rent was $32 a square foot.

There is also 15,000 square feet of retail space on the ground floor, adjacent to the H.R.A. offices. With some 3,300 people coming in and out of the agency’s offices daily, as well as the 700 or 800 that work and visit the housing authority, “there will be close to 5,000 people in the building who will need to eat, so something like a cafeteria would make sense,” Mr. Hurwitz said.

Now that the office space is almost fully leased, GFI is turning its focus to building housing on the site. A uniform land use review procedure last year allows GFI to construct a 350-unit rental building next to the office space. It is looking for financing to start construction on the building, which would set aside 24 percent of the apartments for affordable housing and also include a two-level underground garage for 320 cars.

In the deal with the housing authority, the developer struggled over how to finance some $60 million that was needed to transform the space, which is now raw, into a usable office, including furniture, carpeting and lighting.

“Very often, tenant improvements are the last piece of the puzzle,” said Richard L. Podos, the chief executive of Lance LLC, which advised GFI on the transaction, “and they can be a stumbling block to getting a large deal done.” Landlords, and the lenders who finance them, prefer not to bear the costs of building out office interiors because they do not increase the overall value of the property. Tenants, meanwhile, do not want to pay to improve office space they do not own. Typically, landlords will allocate some money for improvements and tenants pay the remainder.

In this case, the city wanted GFI to pay all of the upfront costs and to reimburse the developer when it occupied the space. GFI, however, did not have access to sufficient funds. “The city likes the landlord to pay the whole thing, and then when the work is done and they are ready to occupy the space, the city will write a check,” said Mr. Hurwitz. “The amount was significant, however, and we needed a financing tool to bridge the gap.”

To close the deal, GFI joined with Lance Capital and the CGA Capital Corporation to create a trust company that issued a bond. In a twist, the $44 million bond issuance was secured not by the building but by a part of the rent that the housing authority will pay. Since the bonds are not backed by any physical assets, should the city stop paying its rent, the only recourse bondholders would have is to sue the city for payment. Still, bondholders are betting that the city, with a double-A rating, is unlikely to go bankrupt or stop its payments.

The bonds, which were privately placed with investors and fully amortize over seven years, came with a rate of under 5 percent, well below the 8 to 12 percent that banks would normally charge borrowers for this type of expenditure, Mr. Podos said. “Because we figured out how to use the creditworthiness of the city,” he said, “we were able to finance it really cheaply for the landlord.”

The city was not involved in the bond financing, and is connected only insofar as it is a tenant whose rent is being used as collateral. “At the time, we understood that conventional financing was unavailable to the landlord,” said Theresa Ward, the chief asset management officer for the Department of Citywide Administrative Services, and “the landlord presented this as a cost-effective alternative.”

In addition to issuing a bond to pay for the tenant improvements, GFI also refinanced its existing bank loan and increased the lending facility on the property to $130 million. As part of this, it brought in an additional $24 million of equity from a new partner, the Starwood Capital Group.

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