Hancock Tower's owner finds itself in a crunch as rents fail to cover debt
It was an eye-popping deal struck at the top of the real estate market: Broadway Partners LLC bought the Hancock Tower in late 2006 for $1.3 billion, betting the iconic skyscraper would command ever-rising rents as companies clamored for office space.
Now, that purchase has boomeranged on the New York real estate investment firm: Two of the Hancock's largest tenants have left, rents for top-shelf office space are falling, and Broadway Partners next month must repay of hundreds of millions in debt it has so far been unable to refinance.
Broadway Partners must now either get an extension on its Hancock loans or raise fresh capital in an environment where investors are running away from high-flying commercial property deals, said Boston real estate executives familiar with the matter.
A spokesman for Broadway Partners declined to comment. But others in the real estate industry said Broadway's predicament is but one example of the challenges facing recent buyers who borrowed heavily to purchase commercial property.
"Lenders and owners who bet on the rising tide are in for some very significant challenges on debt," said John Sullivan, head of the real estate group for DLA Piper Boston, which represents buyers and sellers in large prop erty transactions. "It's going to be difficult for some firms to retain their ownership."
In 2009, some $30 billion of short-term debt that was borrowed to finance transactions during the rising market between 2004 and 2007 will come due, with that figure rising to $90 billion in 2012, said Frank Petz, managing partner of Eastdil Secured, an investment banking firm that specializes in real estate.
Petz said many of the properties purchased with that debt have plummeted in value, making it difficult to attract new capital from investors who are uncertain what those assets are now worth. "The markets are rife with panic," he said. "People don't know where to price transactions right now."
Some real estate firms have already seen large assets repossessed, due to defaults.
Earlier this year, a New York firm, Macklowe Properties, was forced to turn over $7 billion worth of Manhattan office buildings after it failed to pay back short-term debt it owed on seven properties.
The operator of Faneuil Hall Marketplace, General Growth Properties Inc., hired bankruptcy attorneys last month as it battled to refinance $900 billion of debt following its acquisition of the marketplace's previous operator, Rouse Co., for $7.2 billion in 2004.
In the most extreme outcome, an inability by Broadway Partners to negotiate new terms or find fresh capital could result in a messy foreclosure at New England's largest and best-known office building. But real estate professionals said a foreclosure on the Hancock seems unlikely, because that could lead to lawsuits and because many lenders involved in the transaction are not equipped to manage the 1.7 million-square-foot building.
Broadway Partners has been trying to reposition its real estate portfolio for more than a year. The firm spent $13.6 billion on office towers between 2002 and 2007, including the December 2006 acquisition of a $3.3 billion portfolio of properties that included the Hancock Tower.
As the market turned south in late 2007, Broadway began selling buildings, including 200 State St. in Boston, sold for $167 million in September to GLL Real Estate Partners, a German investment fund. It is also trying to sell 10 Post Office Square.
Broadway borrowed about $1.1 billion, or 85 percent of the Hancock's total price, to buy the building from Beacon Capital Partners. The borrowing included a long-term loan of $640 million from Greenwich Capital Financial Products and a second level of about $470 million in short-term debt, held by now-defunct Lehman Brothers and other lenders, according to mortgage documents and executives familiar with the transaction.
Real estate professionals said that amount of debt left Broadway with little room for error, meaning it needed to generate higher and higher rents to turn a profit and repay its loans. But two large tenants, Marsh & McLennan Cos. and the advertising firm Hill Holliday, vacated space totaling 252,000 square feet, about 15 percent of the total space, after Broadway Partners took over.
The firm did secure other leases there, including the renewal of a lease for 91,000 square feet with Charles River Associates, a consulting firm, and a deal for 52,000 square feet with the private equity firm Berkshire Partners.
But the recent downturn in the economy has made it difficult to command higher rents. Last spring, Broadway sought to raise $350 million to refinance a portion of its debt on the Hancock, but that plan failed to attract investors as the real estate market began to decline.
Market specialists say the Hancock is so valuable that Broadway will find a way to rework its finances.
"Clearly, it's very challenging right now in terms of financing," said David Begelfer, chief executive of the Massachusetts chapter of the National Association of Industrial and Office Properties. "But a trophy property like this still has a lot of credibility in the market."
Casey Ross can be reached at cross@globe.com. 