For more than a decade, Newton developer Northland Investment Corp. has worked to establish itself as the king of Hartford, Conn.
But recent troubles in the company’s Nutmeg State portfolio raise questions about its ability to keep the Connecticut kingdom together, even as its struggle serves as a potent illustration of the ills facing many commercial property owners nationwide.
Northland is currently battling foreclosure proceedings at two of its downtown Hartford trophy properties, the 12-story Metro Center, and the 18-story CityPlace II tower. A third trophy, the 30-story Goodwin Square tower, is facing significant vacancy issues, and is staring down a 2010 maturity on a highly-leveraged mortgage from Deutsche Bank. There’s also doubt surrounding the company’s priciest investment in Hartford, the $165 million redevelopment of the Hartford Civic Center mall.
Northland is Hartford’s largest commercial landlord, and taken together, these four assets comprise the bulk of Northland’s investment in Hartford. Whether they remain in Northland’s control depends on the company’s ability to play hardball – and its willingness to throw good money at severely underwater assets.
Put simply, the success or failure of Northland’s Hartford gamble is critical to the future success of the city, long-dubbed “New England’s Rising Star.”
“Northland is a vital part of the success of downtown Hartford, and we need them to be successful,” said Shawn McMahon, a senior vice president at Jones Lang LaSalle in Hartford.
Charging In
Northland’s chairman and, until recently, longtime CEO, Lawrence Gottesdiener, is well-known as a contrarian investor. In becoming Hartford’s largest landlord, he bet on growth in the capital of the nation’s wealthiest state when nobody else would. That growth, however, has been slow to materialize.
More than a quarter of downtown Hartford’s office space is currently sitting empty, according to CB Richard Ellis data. And the city’s office market has been battling a glut of space for the better part of a decade. Vacancy rates have been vacillating between 18 percent and 21 percent since the year 2000, according to CBRE. Cost increases have been outpacing rental gains. Average rents in the central business district only crossed north of the $20 per square foot threshold in 2008.
Nevertheless, Northland charged into this tenuous market. It picked up Metro Center in 1997 for $10 million, and CityPlace II in 1999 for $33 million. It added the Standard Building, a 310,000-square-foot Class B office building, in 2003 for $11.7 million; and Goodwin Square, the 331,000-square-foot Class A tower, for $36.3 million in 2005.
Northland also developed Hartford 21, a 36-story luxury apartment, office and retail tower built atop the former Hartford Civic Center mall. The mixed-use project’s $165 million price tag was softened by public subsidy. Northland also operates the XL Center arena, and has floated plans to build a 40-story, $120 million condo tower downtown.
But while Northland’s investment in Hartford deepened, the fundamentals inside its own buildings crumbled.
In 2006, when Deutsche Bank securitized the $25 million mortgage on CityPlace II, the building was 76 percent occupied. According to the prospectus for the commercial mortgage backed securities (CMBS) issuance, net operating income (NOI) in the building had declined from $3.5 million in 2004, to $1.7 million in 2006. Deutsche’s underwriters set a target NOI at $2.2 million, on annual revenues of $5.3 million. But since that time, occupancy in the building has declined to 71 percent, according to CoStar.
The erosion at Metro Center has been even more dramatic. Northland had purchased the 12-story building for just $10 million. The firm saddled it with $25 million in debt from Bear Stearns in 2000.
According to a prospectus from that CMBS deal, at the time, Metro Center was 98.8 percent occupied. The building’s anchor tenant, seemingly solid Lincoln Financial, filled 82 percent of its space.
But Lincoln downsized when its lease rolled over in mid-2008, and the building’s only other major tenant, the Connecticut Business and Industry Association, has shed approximately 80 percent of its space. That sent the occupancy rate at Metro Center plummeting to 82 percent, playing havoc with its debt service coverage ratios, and making the building an unlikely candidate for refinancing without a significant capital injection from Northland. At issuance, Metro Center was appraised at $44.3 million. CMBS tracker Trepp estimates the building is only worth $9.7 million now.
The New Process
In September, Bank of America, the trustee for Metro Center’s $25 million securitized mortgage, sued to foreclose on the 290,000-square-foot building. According to the bank, Northland stopped depositing funds into the property’s lockbox account in January, and hadn’t made a mortgage payment since April. The loan’s servicer also had to dip into Metro Center’s escrow accounts to clear $283,000 in real estate taxes Northland had left unpaid.
Then, last month, special servicer LNR Property Corp. moved to seize CityPlace II. Northland defaulted on the 277,000-square-foot Class A tower in June. That property also carried a $25 million securitized mortgage.
“We’re working on a mutually acceptable solution, and we fully expect to do so,” Northland’s Gottesdiener told Banker & Tradesman, addressing his two properties in foreclosure.
He said Northland had halted debt service on the Class A office towers to force loan modification talks, calling the mortgages on Metro Center and CityPlace II “not refinanceable in this environment.”
“This is the new process,” he added.
The evaporation of the CMBS market has left a gaping liquidity shortfall in a market already roiled by rising vacancies and sliding valuations. CMBS issuers nationwide sold $602 billion in securitized mortgages between 2005 and 2007, often on generous, weakly underwritten terms. Much of it has blown up – Moody’s last count put the carnage at $30 billion. The mortgages that survive often find they have no means of rolling their debt over and fall into maturity default.
That’s the situation in which Northland now finds itself, Gottesdiener argued.
“Right now you can’t refi, even [for debt] at $80 a foot,” he said. “We tried. There are just so few lenders that they can pick their spots, and their spot isn’t downtown Hartford. There’s still very little liquidity on the commercial side. Any expiring loan in 2010 will remain a challenge and will probably involve an extension.”
Many CMBS borrowers have complained that when they’ve tried to approach their loan servicers to negotiate loan workouts, the servicers have been unwilling or unable to modify mortgages.
“The process of extending a loan is still being worked out,” Gottesdiener said. “It’s a longer, more drawn-out process, and at times it’s difficult to find a businessperson on the other end of the line.”
Some borrowers have been successfully transferred to special servicing, where loan terms can be changed, by arguing that any pending maturity constitutes an imminent default situation. Others have played Russian Roulette, and tried jumping to the top of the special servicers’ priority lists by intentionally triggering a default.
This is the path Northland chose with the loan on Metro Center, which was set to mature in December of this year, and CityPlace II, which carried a five-year interest-only mortgage that matures in December 2011. It’s a much riskier proposition, as the CMBS bondholders could decide to sell the towers out from under Northland, rather than extend the loans.
Problems In The Pipeline?
But Metro Center and CityPlace II aren’t the company’s only problems.
Northland is facing another difficult 2010 maturity – a $33 million loan at Goodwin Square, a 30-story office complex that’s leveraged to the tune of 90 percent. According to CoStar, roughly one-third of the tower’s 331,000 square feet sit vacant. The developer shuttered a boutique hotel in the complex last year.
“People are wondering if that’s the next one to default,” said Jones Lang LaSalle’s McMahon. “On the surface, there are problems with the debt. They’re over-leveraged.”
Northland acquired Goodwin Square in 2005 for $36 million and financed the purchase with a $33 million mortgage from Deutsche Bank.
Northland’s original $3 million in equity has almost certainly been wiped out; assuming a recession-standard 30 percent decline in value and a new mortgage at a market-standard loan-to-value ratio of 65 percent, Northland would have to plow an additional $16 million in equity into the building to refinance the maturing Deutsche loan. And that estimate may be conservative.
The situation also looks tenuous at Hartford 21, where Northland has struggled to find major retail tenants. Multiple industry sources said Citizens Bank is shopping the matured construction loan on the complex, saying it’s doubtful whether Northland’s equity position in that property remains intact.
The play for any potential investor might be to buy the debt and then seize the asset in foreclosure, as Normandy Real Estate Partners did with Boston’s John Hancock building.
However, Hartford 21 is Northland’s largest investment in the city, and the firm would fight hardest to retain it. A source close to the developer said while the development’s retail is struggling, the property is generating enough cash to service its debt, thanks to an apartment program that’s 90 percent leased at rates above pro forma.
Gottesdiener told Banker & Tradesman Northland is willing to inject equity into its troubled assets.
“Most lenders will start by looking at deleveraging, and that’s certainly part of a negotiation,” he said.
How much equity Northland can afford to inject remains to be seen. Northland’s current CEO, Steven Rosenthal, who took over as CEO from Gottesdiener in 2007, is said to be less willing to throw good money after bad.
Still, Gottesdiener said he is no stranger to hardball negotiations, and vowed to keep fighting.
“We’ve never lost a building, and we don’t expect to now,” he said.
