CalSTRS’ NY office transferred to special servicers

A $325m loan secured against 575 Lexington Avenue has been handed over to Helios AMC as the Californian pension and partner, Silverstein Properties, tries to modify its debt and avoid default.

The California State Teachers’ Retirement System has called in the special servicers to a $325 million loan secured against the New York office building, 575 Lexington Avenue.

The pension, which bought the property in 2006 for $416 million with developer Silverstein Properties, voluntarily transferred the securitised loan to Helios AMC as it continues to negotiate a modification of the debt and avoid default.

The property had a debt service coverage ratio of just 0.71x as of the second quarter of last year and an occupancy level of less than 90 percent. That compares with a stablised cash flow and occupancy of 1.14x and 94 percent at the time of securitisation, according to a recent Fitch Ratings report.
The loan was underwritten in 2006 based on expectations that below-market rate leases would be renewed during the life of the mortgage at higher rates, the report added. However, despite average in-place rents of $36 a square foot (compared to average asking rents of $64 a foot for Midtown Manhattan), tenant demand has remained low.

Dara McQuillan, a spokesman for Silverstein Properties, said in an emailed statement the transfer to special servicing was “done at our request to help facilitate ongoing discussions with our lender about a modification to our loan, which is not currently in default. We are optimistic that these discussions will be productive.”

He added the loan – securitised in two $162.5 million series by Bank of America, BACM 2007-1 and BACM 2007-2 – was not cross-collateralised with other properties, adding: “It does not impact any other developments or properties in which Silverstein Properties and its various partners are invested.” CalSTRS said it couldn't comment on the deal other than it was the pension's “strategy of reassessing with our partners, the status of our holdings”.

According to the Fitch report, occupancy in the property – also known as the Grolier Building – suffered in 2008 and 2009 as leases covering 33 percent of the rentable space expired. CalSTRS took a 97 percent stake in the acquisition, and provided a $10 million guarantee to cover debt service shortfalls. As of October last year, the reserve balance for tenant improvements and leasing commissions was $6.9 million, the report said.