The next single-asset CMBS to hit the market is backed by the land under an iconic Manhattan address known as the Lipstick Building.
Not the actual building, which was designed by Philip Stark and has an elliptical shape that sets back from the street at several levels, resulting in a form that looks as though it could retract telescopically. Just the land underneath it.
The transaction, CSMC Trust 2017-LSTK, is backed by a single, $272 million first mortgage originated on April 6 by Column Financial (70%) and Natixis Real Estate Capital (30%). This loan, which pays only interest, and no principal, for its entire term, is secured in turn by the borrower's fee simple and leasehold interests in land parcels beneath 885 Third Ave. in New York.
That's right, there are two separate parcels of land, and they have different forms of ownership. Lot B is a 20,608-square-foot parcel that accounts for 78.9% of the acreage in which the borrowers have a fee simple interest. In other words, they own the land outright. Then there is a 5,500-square-foot parcel of land (surrounded on three sides by Lot B) that accounts for the remaining 21.1% of the acreage. The borrowers have a "sandwich" ground lease, meaning that they are both the lessee of the owner of the land and the lessor of the owner of the improvements.
The two lots are also encumbered by $135 million of subordinated and preferred equity, neither of which serve as collateral for the securitization trust.
The borrower is indirectly owned by BVS-SMI 885 3rd Avenue LLC, a joint venture between BVS Acquisition Co. (controlled by Louis L. Ceruzzi Jr.) and Shanghai Municipal Investment Group USA. In its presale report, Moody's does not indicate whether the loan that the borrowers obtained was used to purchase the property or refinance it.
Even though the Lipstick Building itself does not serve as collateral for the mortgage, Moody's analysis of the transaction takes into consideration a "look-through" to the value of the non-collateral improvements. That's because if the building lessee defaulted on their ground lease payment obligations, ownership of the improvements would be passed to the borrower. "In this scenario, our stressed value for the resulting fee simple property is well below the current market value of the collateral ground leases that are performing," the presale report states.
Moody's also sees the quality of the lessee as a credit positive: The Lipstick Building is owned by a joint venture between IRSA, a $10.6 billion Argentine investment company, and the Marciano Brothers, owners of a significant stake in Guess, the $1.5 billion fashion conglomerate.
In addition, ground lease rental payments ($17.9 million from May 2017 to April 2018) generate a very strong debt service coverage ratio of 1.94x.
Credit challenges include heavy exposure to a large tenant, Latham & Watkins, which accounts for 65.3% of net rentable area and 68.4% of underwritten base rent. The lease expires in June 2021. There's also plenty of new supply coming to the market: SL Green is developing 1.6 million square feet of office space at One Vanderbilt in Midtown Manhattan. Outside of the property's direct submarket, additional new supply is expected across Manhattan with the rezoning of the Hudson Yards district, among other projects.
KeyBank will be the master servicer and AEGON USA Realty Advisors will be the special servicer.