Blackstone Mortgage Trust is leading a $300 million debt package to owner Salmar Properties, who has been embroiled with the city in efforts to walk-back a manufacturing-focused leasing and usage requirement mandated years ago after the firm received hefty tax breaks to redevelop the massive warehouse.
The financing includes $216 million in initial funding from Blackstone, Madison Capital, Meadow Partners and Acadia Realty Trust and $84 million in future commitments from Blackstone, Madison and Meadow for tenant improvements, leasing commissions and additional capital expenditures, according to information provided by Madison. The deal closed on January 17.
Blackstone provided a $203 million first mortgage consisting of $135 million in initial funding, plus $68 million in future funding. Madison, Meadow and Acadia together contributed $81 million in initial funds, with Acadia providing $54 million through a preferred debt placement, according to Madison managing partner, Richard Wagman. Madison and Meadow have also committed almost $16 million in future proceeds…
As part of the recap, Madison will assume the management and operation of the development — at 850 Third Avenue between 30th and 32nd Streets — from Salmar, who received approval from the city earlier this week to renege on the industrial-focused leasing requirement that it agreed to in 2011 after the firm proved the financial infeasibility of the business plan.
“This recap brings Madison Capital into the fold, managing the property, driving a lot of the initiatives and bringing in the active repositioning of the property,” Madison Capital managing director Jonathan Ratner told CO…
Salmar bought the asset — which is now valued at $300 million, according to Madison — for $11 million in 2011. This recap retired a $30 million loan that Salmar received from Goldman Sachs that year to fund its acquisition of what was then a vacant warehouse. Goldman provided financial analysis to help prove Salmar’s case to the city, that the asset’s sagging performance under the usage requirement had hampered its ability to cover its debt burden…
The firm is now looking to attract tenants to use the asset for light manufacturing, active warehousing, distribution and for focusing on new industry and innovation via the “makerspace” arena…
“The big picture is the Liberty View redevelopment was completed six years ago, has struggled to attract tenants and has been 70 percent vacant since it opened,” Max Padden, a vice president of real estate transactions services at the New York City Economic Development Corporation, told CO. “The retail was doing well, but the industrial portion was struggling to attract tenants. Our goal was to change the status quo and live up to the original promise [to the Sunset Park community].”
Madison will reposition the property and reintroduce it to the market, now with approval to add office tenants and make the development more profitable…
Ultimately, it was a two-year process for the EDC, with five or six months spent understanding the financials. Padden said Salmar’s original request was a blanket removal from the usage restrictions “and we said no, because it would not have been an equitable outcome. We did our own internal analysis on how it could be recapped; we understood it needed commercial; we extracted every concession we wanted; it was a tight deal.”
Padden said that base business systems essential for industrial tenants were never completed, so the development was in need of a substantial amount of capital to finish the work. He said that sagging performance had nothing to do with mismanagement or “incompetence” on the part of Salmar and that it was simply hampered by the previously flawed business plan that kept the owner from finishing up the work needed to usher in those critical manufacturing tenants…
The asset “needed higher rents to justify the expenditure,” Padden said about the new, revised plans. “The idea is to use the [rents from] commercial space to offset the cost of improvements … and that money will be used to invest back into base needs and to get industrial tenants into the building at a lower rental rate.”…
“[We really put a lot of effort in] negotiating this,” Padden said. “We held [Salmar’s] feet to the fire and told them that the usage restrictions were to remain in place no matter what.”
Wagman said: “Over 50 percent of the building will [continue to] be industrial, and we are able to offer 350,000 square feet of [rentable] multi-tenant office space that was previously not permitted at the building. We worked with the community and elected officials to provide an affordable pre-let industrial program at the building, and we’re excited to attract local and other national industrial businesses to the building and expand the industrial workforce in Sunset Park.”
The industrial space will total around 500,000 square feet, 175,000 square feet of which will be “affordable,” according to Wagman. He said his firm will work with the community to attract Brooklyn small businesses into the affordable space.
Padden said the changes to the agreement have had an immediate impact on leasing momentum. Already, the building has secured 75,000 square feet in new leasing, 45,000 of which is industrial.
“All those tenants were able to sign those leases due to the capital infusion,” Padden said…
The development has qualified for a range economic incentives through a variety of city programs, including Payment in Lieu of Taxes, the NYC Relocation and Employment Assistance Program and the Industrial & Commercial Abatement Program , and its location makes it an Industrial Business Zone beneficiary…
“With huge floor plates, narrow columns and low ceilings, this space is best suited for hybrid space, with a mix of nascent manufacturing companies who come in and want to have their whole operation there, so industrial space and also office for their HR and [other administrative departments].”
Sunset Park Reports 