RXR Realty, one of the largest real estate owners and developers in New York City has some of the Big Apple’s most notable properties in its portfolio. They include the office towers at 75 Rockefeller Center, the Starrett-Lehigh Building, and 1166 Sixth Avenue. The firm, led by Scott Rechler, has also embarked on several public-private partnership developments over the years, including the massive, nearly $1 billion redevelopment project of downtown New Rochelle and the sprawling, $1 billion mixed-use development project in Glen Cove on Long Island. But one of the firm’s largest purchases was in 2016 when RXR acquired 1285 Sixth Avenue for the massive sum of $1.7 billion in a joint purchase with investor David Werner and China Life Insurance Company. It was one of the biggest commercial deals of the year, and RXR and its partner financed the acquisition with $1.2 billion in loans from AIG and Morgan Stanley.
The towering 42-story office property in the heart of Midtown was originally built in 1960. Formerly known as “The Equitable Building,” the 1.8-million-square-foot building was designed by the renowned architecture firm Skidmore, Owings & Merrill and is the New York headquarters for UBS, the big law firm Paul Weiss, and the global advertising agency BBDO. RXR became the new owner in 2016 when it purchased the property from JP Morgan Asset Management and AXA Financial. As part of the deal, RXR renewed the more than 900,000-square-foot lease of the office building’s largest tenant, UBS. Things were going well for the building. Then came the pandemic.
The global health crisis rocked what most people perceived as an unshakeable Manhattan office market, and though it has rebounded, occupancy across the country is still not at pre-pandemic levels, and the high-interest rate environment is making it difficult for owners looking to refinance their properties. But late last month, news broke that RXR had closed a modification deal for its $1.2 billion in loans on 1285 Sixth Avenue. The high-profile deal came as a bright spot during a time when many office tenants are downsizing their footprint and office foreclosures are becoming more common. Michael Maturo, President of RXR Realty, was one of the leaders behind the transaction. As the industry got wind of the deal, Maturo got a lot of phone calls and a lot of questions about it. “People are interested in hearing some of the dynamics,” he told Propmodo. “It’s not a great surprise that we did this in terms of what’s going on in the marketplace, considering the debt coming due and the difficulty in getting loans refinanced.”
RXR’s journey to modify the largest loan in its portfolio began several months ago. Company leaders, including Maturo, began working on getting this done in the fourth quarter of last year. “Obviously, it was a very big loan, and the banks had large exposure to it, so the antennas were up on it,” he said. “It was a long process.” The market is one that is changing rapidly, especially over the last few months, as more building owners face challenges in meeting loan obligations, and foreclosures have mounted. But last year, banks, in general, were bullish on needing liquidity and getting repaid. “Although I don’t think they really thought that could happen, they encouraged us to go try and get it refinanced, which we did,” Maturo said. “Fast forward to today, it’s general knowledge that it’s very difficult, if not impossible, to get something financed.”
What helped buoy the deal was the strength of several things: the building itself, tenancy at the building, and the Plaza District submarket where 1285 Sixth is located, Maturo said. “When you look at the market these days, it’s very bifurcated. The Plaza District is doing relatively well compared to other markets,” he said. All the players in the transaction—the lender and the equity group, felt good about the building and the market and had confidence in the bundling going forward, even in today’s uncertain office environment. In the end, the modification includes a five-year loan extension, originally due in March of this year, but was given a short extension at the time, and the senior loan interest rate was raised from 4 percent to 6 percent. The senior component of the loan is jointly owned by AIG and Morgan Stanley but also has a syndicate portion from a foreign lender, which “took some work” to get the group of investors on board. “I think that’s just the matter of educating folks through the process as the market has evolved,” Maturo said.
In addition to the extension, there was a substantial $200 million paydown of the loan, bringing the loan from $1.2 billion to around $1 billion. The modification also included a $60 million facility for future capital cost needs. “At the end of the day, it’s not that complex a situation in terms of the structure of the deal,” Maturo said. “It was just working through the complexities of the evolution of the market and getting everybody on board.” The office building on Sixth Avenue between West 51st and West 52nd Streets is currently fully occupied and does have some lease expirations approaching, but Maturo and RXR feel confident that demand is high for this type of building and the size of the spaces that may become available. “The building is 100 percent leased, and that’s another element of why it’s so successful. It’s not like it’s a building with only 50 percent leased,” Maturo said. “It currently has strong cash flow, and that can support the payment of the interest on the debt that was restructured.”
The last several months have seen a growing number of well-known office owners default on mortgages or walk away from their buildings in major cities, including New York City and Los Angeles. The concerning developments have come during a year when tens of billions of maturing office market loans are coming due, and according to Moody’s Analytics, nearly 90 percent of office CMBS loans that matured in September of this year were not paid off. RXR’s loan modification will no doubt serve as a model for other office owners in the industry looking to restructure their loan debt and hang on to their properties. But as the particulars of the transaction go to show, landing a deal may come down to the size of the company, the strength of the local market, the current and potential future tenants, and the building itself.