One Seneca Tower, Buffalo’s tallest building, could be foreclosed upon. Though Seneca One Realty LLC is current on its loan, the lenders holding the mortgage for the nearly-empty building have started foreclosure proceedings according to Buffalo Business First:
A consortium of lenders, led by LaSalle Bank, have filed for foreclosure documents State Supreme Court Justice Timothy Walker against Seneca One Realty LLC, the New York City-based investment group that bought the downtown building in 2005.
As part of the proceedings, Richard Schechter, Pyramid Brokerage Co. of Buffalo senior director, has been named temporary receiver for the building. Schechter will act, on a temporary basis, as the building’s agent covering everything from rent collections to operational issues. Building general manager Steve Fitzmaurice and his eight-person staff will report to Schecter.
“I view my role as safeguarding the value of the asset,” Schechter said.
The action is one of the first steps in what should be a long and complicated foreclosure process for the largely vacant downtown landmark. It may eventually lead to a new ownership for the building and a possible redevelopment effort that may see large portions renovated into non-Class A office uses such as residential units, a hotel or retail/restaurant operation.
If the foreclosure process is uncontested, Walker may be able to appoint a permanent referee to govern over the building until its future is ultimately determined. However, should the action be contested, it could set the stage for another layer of complicated legal proceedings that could further cloud the building’s future.
HSBC vacated the tower when its lease expired last fall. Bank employees occupied 2/3 of the 38-story building straddling Main Street, or 650,000 sq.ft. Law firm Phillips Lytle recently moved to One Canalside and the tower lost tenants Capital One Financial and the Canadian Consulate. The exodus left the tower nearly 90 percent vacant.
Flooding the market with over 800,000 sq.ft. of office space is a significant blow to developers and landlords where, in a good year, downtown absorbs 200,000 sq.ft. of space.
Seneca One Realty LLC had begun exploring options including adding residential and/or hotel space to the building. The owner brought in a panel of Urban Land Institute (ULI) professionals to study possible new uses and a redevelopment strategy for the building early last year. Their recommendation was to convert the building into mixed use including office space, rental and for-sale residential, a hotel, and ground-floor retail.
The ULI report details the tower’s financial situation:
This building was purchased by the existing owners in 2005, and its debt was securitized through issuance of commercial mortgage–backed securities (CMBS; essentially, bonds), secured by a pool of mortgages from a variety of commercial loans. The information the panel received is that the HSBC mortgage represents about 12 percent of the total pool against which bonds were issued.
CMBS mortgage pools are administered by a trustee called a special servicer that acts like the loan administrator at a bank and is required to protect the interests of the bondholders by taking action on loans that stop performing. In the case of the HSBC loan, this nonperformance will begin when cash flow from the building is insufficient to pay the periodic loan payments and will also occur at the end of the term of the loan in January 2015 when the entire balance remaining of $75 million comes due.
As a trustee, the special servicer’s job is to protect the bondholders. The special servicer (usually a financial service firm) may also be a bondholder itself, so any decision by the special servicer that differentially protects its tranche of bonds at the expense of other bondholders will be subject to challenge.
The options for dealing with the default on the loan include foreclosing, reducing the loan amount (and perhaps converting the reduction amount to equity), and extending the loan with accrual of interest on the extension as equity.
Foreclosure is the most likely option unless the special servicer can be convinced that reducing or extending the loan by converting some portion of it to equity that is repaid when the property is revitalized is a superior outcome.
If the special servicer forecloses, the property will be auctioned and sold to the highest bidder. That will mean a change in ownership and may mean that the new owner decides to simply compete in the market for office users without any investment in property revitalization. The City wishes to avoid this outcome because it is likely to cannibalize the market and reduce market values throughout the downtown. If foreclosure and change in ownership do occur, immediately engaging the new owner regarding participation in the revitalization strategy will be important.
When Goldome and Empire Saving Bank collapsed in the early 1990′s, it took the downtown office market nearly decade to absorb the vacant office space. There have been rumors of at least one local developer being interested in buying the tower. Sit back and hope for the best.