The recent decision by TIAA-CREF to unload debt on Boston’s One Federal Street tower is shining a spotlight on the tower’s uncertain financial future, even as the trophy building’s owner grapples with souring real estate bets across the country.
TIAA-CREF, an investment firm that manages teachers’ pension fund money, is trying to dump $49 million in senior mezzanine debt it owns on Tishman Speyer’s 38-story Financial District tower. Several industry sources told Banker & Tradesman TIAA-CREF wants to get paid now, and get out of the building’s capital stack, before 400,000 square feet of vacant space hits the building.
Massive vacancies are scheduled to open up this fall. The looming vacancy in the tower’s low-rise component, which once served as Shawmut Bank’s downtown operations center, will exacerbate the effects of a brutal commercial real estate cycle that has battered a string of market-topping Tishman investments from Manhattan to Washington, D.C., Chicago, and California.
‘Way Out Of Whack’
Tishman bought the 38-story tower from a German pension fund in 2006 for $514 million. Lehman Brothers, the now-bankrupt New York investment bank that arranged financing for many of Tishman’s peak-market acquisitions, supplied Tishman with $373.5 million in acquisition debt. Tishman kicked in $140.5 million in equity.
Commercial real estate values exploded in 2006 and 2007, partly because asking rents were soaring, and partly because deal underwriters assumed that rents would continue to soar.
Lehman has gained notoriety for being especially aggressive in its valuations and revenue projections, even by 2006 and 2007 standards. But as rents have fallen and vacancies mount, property owners have struggled to keep up with those rosy projections. Some have defaulted, as was the case last year at the Lehman-financed Bay Colony Corporate Center in Waltham.
“They paid a lot of money for it, and they put a lot of leverage on it,” said one industry insider of Tishman’s One Federal acquisition. Tishman tried, and failed, to flip the tower in 2008. Now, the insider said, “They’re probably way out of whack with their underwriting.”
“It was underwritten at higher net rents than the market can support,” said a second industry professional. “Anything that traded in 2006 or 2007 is suspect, and if there’s any significant leasing roll, there’s a good chance there will be a capital shuffle.”
Tishman financed its One Federal acquisition with a $262 million first mortgage from Lehman, and $111.5 in mezzanine debt. Lehman packaged the first mortgage into a pool of commercial mortgage securities that it sold to investors. Tishman is current on those loan payments, according to the debt tracking agency Trepp. In this commercial downturn, though, a first mortgage default isn’t always a borrower’s downfall.
The John Hancock Tower’s former owner stayed current on that building’s first mortgage, but wound up losing the property through a mezzanine default. A third industry source who spoke to Banker & Tradesman drew a line between One Federal and upheaval at the Hancock. This source said TIAA-CREF is worried that the building’s looming vacancies will drive down the tower’s value, eroding its mezzanine position.
“It’s a great asset in a great location, but there are similarities to the Hancock,” this source said. “It’s a big building that’s going to be almost half empty. Teachers wouldn’t be selling if they didn’t think there was some risk to their capital.”
Not The Worst Buy
TIAA-CREF owns the $49 million debt position immediately behind the securitized first mortgage. Several sources said they believed Tishman’s $140 million in equity had long since been wiped out, along with a chunk of the mezzanine debt that’s junior to TIAA-CREF’s piece.
In the short term, TIAA-CREF has a more pressing concern than falling values. The firm is reportedly worried about the massive costs of leasing the 400,000 square feet of vacant low-rise space. It has massive floor plates, and many portions lack windows. It will take “huge, huge money” to get the vacancy into rentable shape, one industry watcher predicted.
“Teachers wants to get out before a renovation,” another added. “They don’t want to be stuck in a situation where money comes due.”
“It’s not the worst buy in the world,” this source added. “In the worst case, the debt performs. Or, for under $300 a foot, you could own it. But any buyer bidding on the mezz now has to be prepared to [own the building], if not welcoming the prospect.”
Tishman Speyer and TIAA-CREF did not return calls for comment.
Tishman has suffered a string of setbacks recently. It’s struggling to fend off foreclosure threats at a $1.4 billion office portfolio in Chicago and a $2.8 billion office portfolio in Washington, D.C. It famously handed back the keys on the disastrous $5.4 billion acquisition of Peter Cooper Village and Stuyvesant Town in Manhattan, and has lost its equity in its market-topping buyout of multifamily developer Archstone. In December, Tishman lost a 56-acre office park in Los Angeles to foreclosure.
