Water Tower Place lands $200-million loan
(Crain's) — General Growth Properties Inc. has secured a $200-million loan to refinance the Water Tower Place mall on Michigan Avenue, reflecting the much-improved lending climate for trophy properties unscathed by the recession.
The new loan from Metropolitan Life Insurance Co. is even bigger than the $188-million loan it replaces, a rarity today as lenders have become more conservative and property values remain well below their peak of a few years ago. Yet lenders have become increasingly aggressive in recent months, offering attractive terms for top properties in big cities like Chicago.
“For the very best properties, I would call it a frenzy,” says David Hendrickson, a managing director at Jones Lang LaSalle Inc. “You've got the haves and the have-nots, and Water Tower is a have.”
The loan represents another task Chicago-based General Growth can check off its to-do list as it prepares to emerge from Chapter 11 bankruptcy protection next month. The old loan matured Sept. 1, and the General Growth joint venture that owns the 818,000-square-foot mall had sought an extension of the due date, something it no longer needs now that it has a new loan.
Related story: Water Tower Place owner wants loan extension
The Water Tower joint venture, which is not included in the Chapter 11 case, obtained the MetLife loan Sept. 28, according to a mortgage filed with the Cook County Recorder. A General Growth spokesman declines to comment, and a spokesman for New York-based MetLife did not return a phone call.
The mall at 835 N. Michigan Ave., which General Growth took over as part of its 2004 acquisition of Rouse Co., has held up well during the recession.
The property is 95% leased, according to CoStar Group Inc., and was generating net cash flow on an annualized basis of $26.2 million as of June 2009, more than enough to cover its $12.1 million in yearly debt service, according to a Bloomberg L.P. loan report. The property was appraised at $435.5 million in April, the report says.
That helps explain why General Growth was able to increase the amount of debt on the property, bucking recent lending trends. Because of falling property values and lower maximum loan-to-value ratios, many landlords, especially those that borrowed as much as they could at the market peak three years ago, have been forced to invest new equity in their properties as a condition for obtaining a new loan.
But General Growth had more room to increase the debt load because the property was moderately leveraged to begin with. Obtained from Goldman Sachs in 2003, the $188-million loan was split up and sold off in three commercial mortgage-backed securities offerings. The loan was based on a $335-million appraisal.
A $200-million loan is "quite reasonable" for Water Tower, says one loan expert who asked not to be identified. The property's debt yield — its estimated net operating income divided by the loan amount — exceeds 13%, high for a trophy property, the person says. Debt yields of 10% are normal for high-quality properties these days, implying a maximum loan amount of $260 million.
The new loan, says Jones Lang's Mr. Hendrickson, “is a conservative, very safe mortgage for” MetLife.
