In Depth: Lance Capital's Creative Financing Drives Brooklyn's 470 Vanderbilt Lease

While the ink has cooled on the lease signing at Brooklyn's 470 Vanderbilt project, CPE was able to sit down with Lance Capital to see how creative financing terms pushed the deal through with the anchor tenant, the New York City Human Resources Administration.

December 2, 2011
By Barbra Murray, Contributing Editor

When the owners of the 470 Vanderbilt Ave. project in Brooklyn, N.Y., were attempting to complete a pre-lease with the New York City Human Resources Administration for 400,000 square feet of office space recently, Lance Capital L.L.C. helped pave the way with its participation in the creation of a multi-faceted financing package. The firm ventured onto new ground in its effort, employing a new form of tenant improvement financing that may well have marked a watershed moment in the real estate leasing process.

“What’s creative and different is the financing of a portion of the rent,” Richard L. Podos, CEO of Lance Capital, told Commercial Property Executive.

The story starts with HRA agreeing to a 20-year lease at 470 Vanderbilt, a 650,000-square-foot redevelopment project owned by a partnership consisting of GFI Development, Starwood Capital and The Carlyle Group. The partners planned to transform the former manufacturing building, originally developed roughly 80 years ago, into an office destination while keeping its new semi-pledged anchor tenant’s preferences in mind.

“The proposed facility at 470 Vanderbilt Avenue is of sufficient size and would be appropriately renovated for cost-effective HRA operations,” the City Planning Commission noted in a report. “The space is currently vacant and in good condition and would require an office build-out to make it suitable for HRA’s needs.”

Customarily, the closing of the deal would move forward, however, HRA was not prepared to fully commit to the traditional lease agreement. “The City of New York, very intelligently, said, ‘We will negotiate a lease with you but then we’re going to put the lease into escrow,'” Podos explained.

HRA insisted on refraining from executing the transaction until a firm financing package for the redevelopment of 470 Vanderbilt and build out of the agency’s space was firmly in place. HRA’s decision created a financing puzzle, of sorts, that needed all the pieces to fit together perfectly before the deal could move forward.

Lance Capital took steps to orchestrate the TI segment of the necessary funds. The firm secured $44 million in sub-5 percent rate credit-backed funding through CGA Capital Corp. “It’s actually a really fascinating sort of sequence of events that all had to happen at once,” he said. “What we did was we inserted an eight-page clause into the lease relating to the TI contribution from the landlord and we financed that. There’s a specific portion of rent associated with the tenant improvement and that’s really what we financed.”

Financing a portion of the rent. Not the building’s cost, not the cost of capital, not the security collateral value of tenant improvements, but a portion of the rent.

“With net lease deals, for example, the financing is focused on the credit of the tenant and the stream of cash flow that comes out of rent. We figured out, basically, how to take elements of the net lease world and insert it into a regular multi-tenant lease to finance the TI.” With early lease agreements in place, other names that will be on the tenant roster are The League Education and Treatment Center and Carl Fenichel Community Services Inc., which have signed on for an aggregate 77,100 square feet under 25-year contracts.

“It was credit-backed financing of tenant improvements in a multi-tenant building with a gross lease for the tenant — so it wasn’t a net lease for the tenant, it was just a regular office building lease — and we inserted this credit-based TI financing into that,” Podos noted of the HRA arrangement. “We don’t think that’s ever been done before, credit-based TI financing inside of a gross lease in a multi-tenant building. It’s actually really simple when you come down to it but nobody put these pieces together in something like a Rubik’s cube. But now that we’ve done it, we can bang these out literally in a matter of weeks. ”

Lance Capital’s innovative facilitation of TI financing for 470 Vanderbilt was just one piece of the puzzle. Money for the actual redevelopment endeavor came in the form of a $130 million loan from CIBC along with Eurohpyo and M&T Bank, and $24 million in equity from Starwood. Essentially, it took a total of roughly $200 million in total project financing to seal the deal with HRA. But it was the TI financing that served as the jumping off point for the remaining facets of the transaction — completion of the remaining segments of the project’s financing package and ultimately, the closing of the lease deal.

The new method of TI financing utilized for the HRA lease marked the beginning of a new trend at Lance Capital. The firm has roughly 15 other prospective TI financing transactions based on the new model in the works right now, involving various types of property owners–including institutional owners and REITs–and tenants ranging from corporations to healthcare entities. “We can apply this kind of TI financing to any property, any property type, anywhere,” he said. “It can even be done internationally.”

In fact, Lance Capital recently made the trek to London to confer with businesses on the tenant side. “We’re meeting with a variety of corporate healthcare and governmental entities that are looking for more efficient ways to fund capital expenditures related to tenant improvements, even with renewals. In a renewal, to the extent the tenant has already invested a lot of their own capital in interior improvements during the previous term of the lease, we can actually monetize the existing tenant improvements in addition to funding new tenant improvements.”

The novel technique is on its way to becoming commonplace for Lance Capital, and the firm believes a greater trend could be afoot. “It can be and should be a game-changer for the entire industry,” Podos asserted. “This is a better way to fund tenant improvements, starting with larger transactions but over time moving towards even small deals like million-dollar or $2 million deals. This is a better way to do it.”