SL Green / Chetrit Transaction Fall out
“Jacob Chetrit pulls out of $815M Daily News building deal; SL Green keeps his $35M deposit”
https://www.google.com/amp/s/therealdeal.com/2020…
This is absolutely crazy and perhaps the biggest CRE news bomb these days as result of COVID-19. Seems like the lender pulled out of a SASB execution due to concerns over market turmoil (at a great expense of damaging relationship).
Any ideas as to what implications this will have for CMBS issuance in the short term? Thoughts on credit profile of NYC core office assets?
Why would the scuttling of this particular deal create problems for this particular months CMBS issuance?
If a lender had to pull out from a big transaction and screwed borrower financially, that’s gotta be indicative of how hard it is to issue new CMBS right?
Spreads from all lenders have blown way out since that deal was signed up. The problem with CMBS is that when you sign apps you acknowledge that the spread can change when you go to close. The lender probably didnt pull the app but adjusted spread which didnt make the deal work (no deals are penciling when spreads go up 2.5x from all lenders in a matter of a couple weeks), but thats one of the risks of going the CMBS route.
MBS securities market is frozen. That's why this particular credit market is frozen (and overall credit is basically frozen), thus the lender backed out and deal fell apart. This is more a product of the current environment and less an implication on future CMBS issuance. No one knows how to price risk until the world stops flipping over, there's too many unknowns as to where and how it could surface until we get further into this iceberg and then dust starts to settle. There's pain in such an environment, and this is an example.
Yeah the CMBS market particularly conduits have shut down. There are three CMBS dealswith each having more than $600MM in loans that could have been securitized by now if the market didnt turn. So the issuers have long term loans on their books that wasnt meant to be balance sheet loans and to make it worse, the B buyers like Rialto are pulling out of deals, so they need to find a new B buyer and go through the process all over again. Just a shitshow.
Hmm I actually can't access the Real Deal... says it's offline. Kinda sucks that that is only the case for me? Or is that happening to others too?
But more to the point, anyone seeing this as a failure of the CMBS markets and not of Mr Chetrit is missing the point. SL Green was desperate to sell this building. No one else is going to buy it. As with so many other over-enthused buyers of the last half decade, Chetrit was buying this on the back of cheap debt and nothing else. You don't think SL would have been happy to give a 60 day extension for them to find another source of financing?
This is classic bubble behavior. This was probably a borderline deal in the first place that only penciled because of the cheap, interest-only CMBS debt.
Any time you see someone walk away from a hard money deposit and give an excuse other than "we fucked up," you can ignore that excuse and assume they fucked up.
Why is SL Green desperate to sell?
Here's what I scrubbed online - Cushman and Wakefield Arranges $275 Million Financing (Senior Loan) For 220 East 42nd Street $275M
SL Green purchased the property in February 2003 for $265.0 million
Why wouldn't anyone want to buy it?
Well, their share price is down over 50%, so that can't help.
It's also pretty obvious that the market is about to undergo a period of adjustment which might last for years - since the financial crisis the entire concept of office space has been disrupted - even if WeWork and it's ilk were all failed Ponzi schemes, it still demonstrated the value and attractiveness of flex working space. Larger companies like IBM now do this as a matter of course within the company. And now this coronavirus nonsense is showing that coming in to the office at all isn't a necessity.
All of which is to say there are a lot of ways in which the office market may fundamentally not look the same in 10 years. It's certainly easy to imagine a world in which the kind of flagship, name-on-the-building Class A office space looks less attractive now than it did 12 months ago. And that is ignoring the macro-economic aspect of this. Who else is SL Green going to sell to? Obviously this purchase price was one at which they were comfortable transacting, whatever their internal reasoning. It's extremely difficult to imagine that extending the closing period by 3 months in order to obtain that price would have had a meaningful impact on their return metrics, especially considering (as you note) how long they've owned this - it's not a contract flip or value-add play, where holding your investor's money for 3 months makes it much harder to hit your hurdles.
Logically, the reason SL Green didn't allow Chetrit additional time in return for something (releasing some of the deposit, or an additional million bucks or really anything) is because Chetrit didn't ask. It's one of those times you ask yourself what makes more sense:
That a Purchaser might have overpaid for an asset at the tail end of a massive bull market, and taken the opportunity to walk away from it when given the excuse to.
Or that a Seller, having gotten the price they wanted, decided that the best possible time to take a Purchaser's deposit and hold on to an asset is right at the outset of what is at best a small recession and at worst an bad recession coupled with a massive dislocation in the office market?
Like a ton of buyers over the last 3 years, it's more than possible that the only reason this penciled for Chetrit is because he was financing it at absurdly low rates. If you can't afford to carry a deal without the I/O, you shouldn't have been in it in the first place. To me, that's a more compelling reason for this than anything else. The 5% hard money deposit means relatively little to the economics of the deal for SL Green, not so much that they'll blow up a deal for an asset that is almost certainly worth 5% less than they were going to get for it.
Going to reply, just wrapping my head around a couple things
To report back here, the property is for all you can tell unencumbered. There's word that SL Green is likely going to refi the property, and will have success, despite turmoil wrecking those deals for many.
Knowing that, it fits into what you said earlier about them wanting to sell, but speculatively, it's not to offload a bad asset, it's to generate liquidity for themselves and pay down other debts? But the fact that they can land financing, either is relationships they have as an owner operator or as you said earlier, Chetrit must've come in w/ lower equity. Current is $500mm on $815mm hard money deposit valuation. That V may even likely be lower in reality
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