At a time when falling values and rising cap rates have most commercial developers shying away from new development projects, Boston’s Berkeley Investments is charging ahead with the second phase of an ambitious, 400,000-square-foot rehabilitation of the historic Waltham Watch Factory.
Berkeley is putting the finishing touches on the first phase of redevelopment work, a $54 million conversion of 160,000 square feet of space to brick and beam office space. Eric Ekman, Berkeley’s project manager, said his firm is days away from signing loan documents that will allow the second phase of work – on 96 units of loft-style apartments – to begin immediately. The residential project carries a price tag of $38 million.
A third phase, with 77,000 square feet of additional office space, is targeted for construction in late 2010.
“Financing is extremely challenging,” said Ekman, who added, “We have a strong team assembled.” Berkeley is financing the work with a construction loan for approximately half the budgeted cost. The other half comes from a mixture of private equity and federal and state tax credit equity.
Can You Say ‘Complex’ Financing?
In May 2008, when Berkeley financed the first phase of office work, it needed one construction lender, US Bank, and one tax credit investor, Bank of America. US Bank also provided the bridge loan to the tax credit equity.
By contrast, to finance the residential phase that’s about to begin, Berkeley had to double the size of its investment team: there’s a construction lender, a bridge lender and two tax credit investors – one for the project’s federal tax credits, and a different one for state tax credits.
“It’s fairly complex,” Ekman said. “The market for tax credits is not as strong as it was. It’s not debilitating, like it is for low-income tax credits. There’s still demand. But the terms are less favorable.”
He added that restrictions on historic rehabilitation tax credits, which require the developer to retain ownership of the project for five years, dovetail with the current residential development climate which remains receptive to multifamily apartment development, but has rendered condominiums all but unfinanceable.
“Apartment rents are still relatively strong,” he said. “Financing terms are less favorable, but overall, the residential product is still pretty strong.”
Ekman couldn’t identify the lenders because loan documents have not been signed yet.
Berkeley has been eyeing the Watch Factory site for years, at one point making an unsuccessful bid on the property. Berkeley joint-ventured with the property’s prior owner, New York investors First Republic Corp. of America, in 2007. The partnership, Watch City Ventures LLC, purchased the 22-building factory and two adjacent parking lots from First Republic for $2 million. At the time, the aging complex’s labyrinthine interiors were chopped up by drop ceilings and irregular walls; rubber roofing obscured skylights, plaster caked brick walls, and a weed-covered fence obscured the Charles River. The first phase of work, now being completed, began in May 2008. The factory, which sits directly on the Charles, was added to the National Register in 1989.
Equity Residential’s Longview Place, which sits directly across the Charles River from the Watch Factory, provides an indication that the market for rentals at Berkeley’s price point is healthy.
This Project’s ‘On Fire’
“Waltham has a deficit of apartments at this level,” Ekman argued. Berkeley’s bet is that the Watch Factory will match other luxury rentals in amenities, provide a more unique living environment, and boast easier access to Moody Street and the commuter rail.
“This is a unique, attractive product, and it’s unparalleled in Waltham. Even in a very difficult financing environment, the product allows us to move forward.”
“It’s a fascinating project,” said the office component’s listing agent, Grubb & Ellis executive vice president Jack Kerrigan. “It’s on fire with sincere interest. We’re seeing a lot of younger, tech-based companies. They’re concerned with having a unique image, and with expansion. A lot of times, knowing what else is available, tenants don’t want to see another building. They don’t want a generic, bland, corporate building on [Route] 128. All the other buildings in the area are nice, but they’re more Fortune 500 buildings.”
Kerrigan added that the project was a “challenging showing” while it was under construction, but since the building’s first occupants moved in, “People who are there are telling their friends and associates. We’re getting a lot of referral calls. That’s unusual.” Kerrigan said the turnkey space is renting in the mid-$20s. The developers expect to be one-third leased by October.
