New York’s office deal breaks ground

An innovation in the funding for large-scale tenant improvements (TI) has helped the New York City Human Resources Administration (HRA) arrange to lease 400,000 square feet in downtown Brooklyn without a large capital outlay to build out the office space. The project includes more than $100 million in construction work for renovations paid for by financing a portion of the rent.

HRA is consolidating three locations into one and downsizing from approximately 600,000 square feet of office space to save money. In searching for a new location, it identified a former manufacturing building that was being converted to office space. The nature of the renovations at the location, however, required significant construction to create an appropriate office environment.

Traditionally, tenants receive a TI contribution from the landlord to perform any renovations, and the tenants provide capital for the balance — often 70 percent or more — from their own budget. New York, however, preferred a turnkey solution. So, after the city signed a 20-year lease and put it into escrow, the building owner, GFI, sought financing to pay for the renovations. Lance Capital arranged a $44 million TI loan provided by CGA Capital Corp. that would be backed by a portion of the rent payable by HRA under the lease. Because of the city’s high credit rating, the loan rate was well below 5 percent, which was cheaper than traditional real estate finance.

The lease transaction required a recapitalization of $130 million in senior loan financing led by CIBC, and included the credit-based $44 million TI loan. Bonds tied to the TI loan were issued by CGA and privately placed with institutional investors; the bonds are unrated, but implicitly benefit from the city’s double-A rating. All of the transaction elements — HRA’s 20-year lease, a new equity investment by GFI, and the new senior loan syndicate — were triggered by the TI loan and closed concurrently in late September 2011.

The project is now in the design and construction phase, and HRA expects to move into the new offices next year. New York City’s TI funding solution allowed the landlord to build out the leased space without an upfront payment from the city, preserving municipal capital for other uses.