Six years after construction started, the developer of 3 World Trade Center is planning to bring a $1.63 billion long-term tax-exempt financing for the project to the market.
Experts say that the bonds will have unusual, though not worrisome, features for a municipal bond.
The unrated tax-exempt refunding bonds will be sold through New York Liberty Development Corp. A professional familiar with the bonds said he expected they would be sold on Oct. 28 or Oct. 29.
Proceeds will be used for the development and construction of 3 World Trade Center in downtown Manhattan. With construction having started in 2008, the first seven floors of the building have been completed.
The building is ultimately planned for 69 floors above grade and 2.5 million rentable square feet, with 58 office floors.
One way the bonds will be unusual is that they are municipal bonds that will fund the construction of a private office building.
Federal laws passed after the attacks of Sept. 11, 2001 to boost the recovery of New York, particularly downtown, permitted the issuance of Liberty Zone and Recovery Zone Bonds on a tax-exempt basis for projects that would normally have to be issued on a taxable basis.
This month's bonds will provide a long-term financing structure for 3 WTC by refunding short-term debt issued under the Liberty Zone and Recovery Zone programs.
It is unusual for tax-exempt municipal bonds to be issued to build a commercial office building, a professional involved with the deal said. This explains why the bonds will be unrated, he said.
When the ratings agencies were contacted about giving the bonds a rating they either said they could not because they were unusual for a muni or they could but would need more time than the developer had to give, according to the deal professional. The developer is 3 World Trade Center, LLC, an affiliate of Silverstein Properties.
In response a professional at one of the ratings agencies said he was unaware of anyone coming to his agency to seek a rating for 3 World Trade Center. He said that securitizations for construction loans are unusual but not unheard of. He said his agency had rated such securitizations before but they were more difficult to rate than more run-of-the-mill bonds.
The bonds are similar to bonds sold by the New York Industrial Development Authority in 2005 for 7 World Trade Center, the professional familiar with the deal said. The tax-exempt $475 million bond was for constructing the building and was sold without ratings, he said.
When the bond was refinanced in 2011 or 2012 there was a rating. The key difference was that the building was then occupied and with a demonstrated revenue stream could more easily get a rating, he said.
Group M Worldwide has signed an agreement to lease a little more than 20% of the office space at 3 WTC. There are no other contracts to lease the office space.
Noting that the bond's preliminary official statement was 2,700 pages, Municipal Market Advisors managing director Matt Fabian said he had not read it. He said the size of the bond and the size of the POS made the bond unusual.
MMA's indexes of high yield municipal funds were up 8 to 11% from the start of the year to Oct. 10, before the most recent rally, Fabian said. If there is sufficient yield connected with the 3 WTC bonds there should be no problem finding buyers, he said.
The bonds are to be sold in three tranches: classes 1, 2, and 3. Class 1 bonds that will have a payment priority over Class 2 bonds, which will have a priority over Class 3 bonds. According to the POS, the tentative dates for maturity of the Class 1 and 3 bonds is 2044 and for the Class 2 bonds is 2041. The POS indicates there will be a general optional redemption date and a make-whole optional redemption date, but these dates have not yet been set.
The Port Authority of New York and New Jersey owns the site and will own the building. The developer will lease the building through 2100. The Port Authority has made several promises to support the bond and the construction of the building. Among these are to contribute $210 million in funds from New York City and New York State for construction. It has also promised to hand over $159 million in insurance payments from the events of Sept. 11, 2001 toward the construction of the building. The authority made a variety of other financial promises to support the project.
"The most interesting thing [about this deal] is how the Class 3 bonds are structured," said Ben Thypin, director of market analytics at Real Capital Analytics, who is familiar with office building construction financing. "The Port Authority's backstop financing has a higher lien priority than the class 3 bonds and it cannot be used to fund the debt service payments on those class 3 bonds."
In the spring Silverstein Property was seeking a $1.2 billion loan guarantee from the Port Authority. Several Port Authority board members raised concerns about this. Ultimately, the authority did not extend the guarantee.
Kenneth Lipper, one of the Port Authority board members who opposed the loan guarantees, said he couldn't be happier with the authority's arrangement with the developer on the bond. While the authority is supporting the bond, the support does not go beyond what it agreed to provide in a 2010 deal with the developer, he said.
An outside observer of the Port Authority, Manhattan Institute senior fellow Nicole Gelinas, was more critical of the authority's financing arrangements for 3 WTC.
About the POS she said, "This is the longest, most intricately detailed bond document I've ever seen."
The authority has chosen to guarantee the senior debt and make an equity contribution, Gelinas said. In total, the authority's guarantee comprises 28% of the tower's cost, which is good for investors but risky for the authority.
Gelinas said the biggest risk was the political risk that if the developer does not pay back the senior bondholders, the authority has the power to force a restructuring that goes outside the agreement's terms.
"If the city's economy keeps growing six-figure jobs over the next decade, then all will be well," she said. "If not, it will be very interesting to see what happens!"
There is a rising demand for office space in downtown Manhattan, said Louis Puopolo, co-head of operations for Douglas Elliman Commercial. As more and more senior corporate professionals chose to live in Brooklyn, they are increasingly inclined to locate offices in downtown Manhattan, which is easily accessible to Brooklyn.
The bonds will be sold as a limited offering, only available to qualified institutional buyers, accredited investors, and sophisticated municipal market professionals. The minimum order will be $100,000. The professional familiar with the deal said the limited offering stems from the deal's unrated, speculative nature.
The POS provides a provision whereby the minimum trade on classes of the bonds could decline to $5,000 if they are given investment grade ratings.
"This deal is definitely unusual for the muni market, as it is structured more like an asset backed security or commercial mortgage-backed security deal with several classes," said BMO Capital Markets managing director Justin Hoogendoorn. "That said, I don't see it as a major red flag because it essentially is a commercial real estate deal with a tax exemption . Due to these complicating factors, I believe that it makes perfect sense to structure this for qualified institutional buyers."
The bond will provide capitalized interest for the early years' debt service. Further, the borrower plans to not set aside any money for principal repayment for the first 15 years after the sale.
With real estate deals, "it is not unusual to defer principal payments for a number of years until it is believed that the building will be completed and occupied at a percent sufficient to be self-supporting," said Evercore director of municipal research Howard Cure.
Goldman, Sachs & Co. will be the lead underwriter. JPMorgan, Siebert Brandford Shank & Co. and Bank of America Merrill Lynch will be the co-underwriters.
Winston & Strawn LLP is the bond counsel. The Bank of New York Mellon will be the indenture trustee.
