Silverstein May Default on Debt for 575 Lexington

[Ognir]

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By Brian Louis and David M. Levitt

March 10 (Bloomberg) -- New York developer Larry Silverstein, who teamed with the California State Teachers Retirement System to buy a 35-story skyscraper in 2006, now faces "imminent default" on debt tied to the property, Fitch Ratings said today.

Silverstein and Calstrs paid $400 million for the tower at 575 Lexington Ave. in Midtown Manhattan near the height of the U.S. property boom. A loan balance of $325 million was turned over to so-called special servicing today, Fitch said.

The transfer "was done at our request to help facilitate ongoing discussions with our lender about a modification to our loan, which is not currently in default," Silverstein spokesman Dara McQuillan said in an e-mailed statement.

Investors are defaulting on loan payments for commercial real estate at record levels as vacancies at malls, offices and industrial properties climb and rents fall. Delinquencies on loans packaged and sold as commercial mortgage-backed securities rose to a record 6.7 percent in February from 1.7 percent a year earlier, according to New York-based research firm Trepp LLC.

Kushner Cos. said last week that it sought special servicing on the debt it used to buy Manhattan's 666 Fifth Ave. in 2007 for $1.8 billion, what was then a record price for a U.S. office building. Vornado Realty Trust, the New York-based real estate investment trust founded by Steven Roth, last week asked that a $217 million loan on properties it owns in North Carolina be sent to a special servicer, saying it wasn't prepared to fund any shortfalls on the debt.

2006 Venture

Silverstein, whose biggest project is redeveloping office towers at the former World Trade Center site in Manhattan, formed a real estate partnership with Calstrs, the second- largest U.S. pension fund, in 2006. The building at 575 Lexington was the venture's first purchase.

The partnership also acquired the former headquarters of Moody's Investors Service at 99 Church St. in lower Manhattan, which it tore down to build a hotel. That project is now on hold. It also paid $1 billion for the 47-story tower at 1177 Avenue of the Americas in Midtown.

McQuillan said the move on the 575 Lexington loan "does not impact any other developments or properties in which Silverstein Properties and its various partners are invested."

A message left with Calstrs spokesman Ricardo Duran wasn't immediately returned.

More than 160,000 square feet of the skyscraper have been leased since the venture bought it, according to McQuillan. Silverstein is in "late-stage discussions" with another tenant for rental of 40,000 square feet, which would bring occupancy to 89 percent, he said.

The building has about 640,000 square feet, according to Bloomberg data. It has been on a special servicing watch list since June 2007.

Its revenue fell short of its debt payments the last three years, with a coverage ratio of 0.71 based on cash flow in 2009, according to Bloomberg commercial mortgage data.