Behind the loan: 1520 First Avenue

Harbor Group International originated a $90 million senior mezzanine loan for a planned New York medical office development in October, joining a lending group that includes InterVest Capital Partners, Rexmark and Pacific Western Bank. Extell Development is the sponsor.

The financing comes at a time when there has been a widespread slowdown in commercial real estate lending and investment.

Still, there continues to be capital for projects that tell the right story, says Richard Litton, president of New York-based Harbor Group.

The mezzanine loan will help fund the construction of 1520 First Avenue, a planned 30-story, 420,000-square-foot office building between 79th and 80th Streets on Manhattan’s Upper East Side.

“Across the country – especially cities with a high concentration of residents – there’s an increasing need for world-class medical space,” Litton says.

In addition to strong sponsorship and demand, Litton highlights another key factor that allowed Harbor Group to move ahead: Extell signed the Hospital for Special Surgery, an investment-grade, high-quality tenant, as its anchor. The Hospital for Special Surgery, a prominent musculoskeletal health and surgery center, will occupy 190,00 square feet.

“We thought it was a perfectly appropriate use or strategy for that development because of all the medical uses on the Upper East Side. We believe that sector has long-term staying power,” Litton says.

“Leasing up the remainder of the building will occur very naturally. There will be strong demand for other tenants to be in the same building with HSS.”

Harbor Group’s mezzanine loan is part of a $425 million capital stack. It fits in with the manager’s long-term mezzanine debt and preferred equity business as well as its familiarity with the Manhattan office market, where Harbor Group has been an active investor. The firm came into the deal after being approached by Rexmark, Litton adds.
“As we worked through the process and did our underwriting, we settled on the senior mezzanine loan as the best investment for us to make,” he says.

New York headwinds

The loan comes at a time when New York’s office market – and the office market in general – is facing extreme headwinds. “It is a very challenged market. There is very little debt capital available for office transactions and it is hard to get senior lenders to lend in the office sector,” Litton says.

Still, he is optimistic that activity will pick up as owners will need to refinance maturing debt or might need to sell regardless of valuations. “We will see owners with maturing debt who might have difficulty getting the senior loan they want. But there are investors who could provide mezzanine debt and preferred equity to fill that gap.” n