Lowell’s Wang Towers became a powerful symbol of the 1990s real estate crash when the office complex sold for pennies at the market’s trough, only to trade for more than $100 million once the market rebounded.
The property, re-branded as Cross Point Towers after Wang’s bankruptcy, is now threatening to reclaim the mantle of market crash case study: Its owners are staring down an $86 million mortgage maturity at a time when property values are on the floor, and big chunks of refinancing debt remain elusive.
Cross Point appears to be a classic victim of the new form of commercial real estate distress – it’s performing as an asset, but default is looming, thanks to a rapidly changing finance environment.
Performing, But Not
As an office complex, Cross Point is generating more than enough cash to stay current with its mortgage interest payments. But the impending $86 million balloon payment is casting a pall over the iconic buildings at a time when commercial real estate finance has been thrown into flux, and tenants are increasingly shying away from buildings with uncertain financial futures.
Cross Point is owned by a joint venture of DivcoWest and Yale Properties. Divco and Yale placed a five-year, interest-only mortgage on the 1.2 million-square-foot office complex in 2005. It was originated by Greenwich Capital Financial Products, a Royal Bank of Scotland affiliate, which then placed the loan in a pool of mortgages, chopped the mortgage pool into commercial mortgage-backed securities (CMBS), and sold the securities to Wall Street investors. That mortgage matures in September.
New CMBS issuances have been virtually non-existent since the second half of 2008, so Cross Point’s owners are facing the prospect of finding a big chunk of replacement debt at a time when rents, and real estate values, are at a low point.
Greenwich Capital’s appraiser pegged the three interconnected buildings’ value at $118.5 million in 2005, and Cross Point’s owners were close to selling the properties for $170 million in late 2007 and early 2008.
But that sale fell through, and industry insiders now believe Cross Point is worth slightly less than the $86 million in debt on the property. Yale and Divco have seen tens of millions of dollars in equity wiped out, to say nothing of the large windfall they might have netted two years ago. Now, to refinance Cross Point, they’d have to pour in tens of millions of dollars more in equity.
“A lot of buildings are still dangerously over-leveraged, with notes coming due, or they’re close to being under-capitalized,” said Joe Sciolla, managing principle of Cresa Partners, a Boston-based brokerage specializing in tenant representation. “Almost everybody has some exposure. The core of the problem is, rents are down 30 percent to 40 percent, and valuation follows rents. Anyone who was only 75 percent to 80 percent leveraged, let alone 90 percent to 95 percent leveraged, has some problem, and is dangerously close to not having equity in their building.”
Ironically, Cross Point’s tenant roster is full enough that Yale and Divco are easily meeting their monthly mortgage payments, but it isn’t producing strong enough rents to attract a loan close to the $86 million mortgage Yale and Divco need to replace.
Fly In The Ointment
According to the debt tracking agency Trepp, the Cross Point mortgage was transferred to special servicing in late April, for workout talks. Servicer LNR Partners told Trepp the parties are discussing possible extension terms.
In a similar case, the New Boston Fund recently received a one-year extension from special servicer CT Investment Management Co. on an $85.5 million mortgage, temporarily avoiding a maturity-driven default. Typically, such extensions involve principal pay-downs, cash sweeps and additional deposits into a reserve account.
Cross Point’s ownership had no comment on its looming maturity.
Complicating matters is $10 million in mezzanine debt held by Greenwich Capital on the property. Greenwich is said to be shopping that debt, at a discount, to local real estate investors. In some hands, the mezzanine debt could provide a vehicle for a takeover of Cross Point, since it matures at the same time as the CMBS debt.
At the very least, the mezzanine debt would be senior to any new capital that Cross Point’s owners may sink into the complex. Industry veterans said Yale and Divco will likely have to buy back the mezzanine debt, in addition to any cash they advance to the CMBS bondholders to secure an extension.
“In the early 1990s, when the market dropped, it dropped across the board,” said David Begelfer, CEO of commercial property trade association NAIOP Massachusetts. “The difference this time is that properties aren’t over-leveraged across the board. There’s a portion of the market that is over-leveraged because of the drop in values, but they’re not all that way. If you bought something eight years ago, you have a pretty good basis. Anything that traded three years ago is over-leveraged, across the board.”
