QUESTION 1: What would Industry City’s debt be used for? IC is currently seeking a rezoning that would allow it to expand, construct new buildings, and host new uses on the site, such as larger scale retail, academic spaces, conference spaces, and hotels (although the development now says it won’t pursue that last use).
Page six of IC’s 2017 Draft Scope of Work related to its rezoning proposal states that it will “have to allocate an additional $638 million towards capital upgrades for existing buildings and the construction of new facilities in order to achieve full utilization of the site. Such capital investments cannot be financed absent regulatory changes…”
Reporting on IC’s loans: Commercial Observer recently reported that IC’s owners had “sealed a $720 million refinance” for the project. This appears to be a refinancing of debt IC took on in 2017. In December of that year, Commercial Observer reported that “Bank of China and SL Green are upsizing their loan for the Industry City complex in Sunset Park, Brooklyn by $244 million to $647 million.”
Is it logical to assume that these are loans that would be used to finance the expansions IC says it wants to do following a rezoning?
QUESTION 2: What can we conclude from the fact that IC’s debt has increased? In 2017, Commercial Observer reported that IC’s debt was $647 million, but it just reported a refinancing of $720 million. What can we conclude from the extra debt IC has taken on? Could it mean something has changed in IC’s redevelopment plan? Could it mean the development is more profitable than before, or more valuable than before, even without a rezoning?
QUESTION 3: What is the significance of IC’s mezzanine financing? The most recent Commercial Observer story reported that, “The debt included a mezzanine component, sources said.” What can we conclude about IC’s business model based on the inclusion of mezzanine financing?
QUESTION 4: Can we connect IC’s debt to past statements regarding office tenants on the site? On two previous occasions, the CEO of IC, Andrew Kimball, has issued public letters stating that without a rezoning, the development will need to move in an all-office direction, which is permitted under current zoning. Specifically:
– In a March 6th, 2019 letter, Mr. Kimball wrote that a failure to rezone IC would “force the project to turn entirely to commercial office-type tenants.”
– In a November 5, 2019 letter, Mr. Kimball wrote: “We hope that ULURP results in an outcome that encourages us to continue to develop the unique innovation ecosystem, including manufacturing, with pathways for local job opportunity and small business development, that we’ve cultivated over the last six years and not be forced to solely pursue existing as-of-right leasing opportunities, including unlimited office and last mile warehouse.”
These statements have never been commented on or explained, but is it logical to link them to IC’s debt? For example (and this is just me thinking out loud): perhaps the terms of IC’s loans require it to develop at a certain rate – to expand into new space, and take on new tenants that will pay a certain amount in rent over time. Without a rezoning, however, IC’s expansion would be limited, and it would therefore need to repay its loans using revenue from currently occupied space. That, in turn, would force it to increase the revenue it is generating from that space, requiring it to take on higher-profit tenants, such as office clients (or, in the case of the second letter, a last mile distribution facility). Might this reasoning be correct?
QUESTION 5: Why would anyone associated with IC’s debt discuss it publicly? IC itself was the source of the 2017 story about its debt, but other stories (such as the most recent one) are sourced anonymously. Why would developers or financiers want to comment on debt in the press? And is anonymous sourcing on these kinds of stories to be trusted?
QUESTION 6: Could IC use its debt for an alternate use? As you can see in Mr. Kimball’s March, 2019 letter, IC says that it wants to continue advancing the “innovation economy” it hosts. But we also know that in 2017, the development proposed turning over 4 million square feet of the site to Amazon for that company’s HQ2 project. That proposal assumed a rezoning would take place.
Is it possible that IC’s current debt could be used to finance development of a kind other than what IC says it wants to do? Typically, how tightly linked is debt to a specific development vision?
QUESTION 7: What explains the timing of the loans? Why would IC take on debt to finance a particular redevelopment project before it has obtained the rezoning needed to allow that project to go forward?
Past related news stories:
One other piece of information:
A 2016 presentation given by Mr. Kimball included a slide which stated that at that time, 27 percent of IC remained vacant, with another 28 percent dedicated to storage. The slide read that, “Without regulatory changes, ownership estimates that it will take 25-30 years to fully invest in the portfolio.”
— Posted by JVS on 12.22.19
Sunset Park Reports 