"New York now thinks Detroit is worth putting money into." Sky Hi Refi Downtown

**Lowell** · August-14-12, 09:37 AM

More good news for reviving downtown Detroit and more kudos for the 'Dan Gilbert effect'! One Kennedy Square, the green glass building on the west side of Campus Martius Park, was refinanced for $27.3 million, making the value of the loan $112 per square foot.

This is kind of wonky stuff, but news like this is actually huge and even more significant in that it was not a locally financed.

This article was by Nancy Kaffer reported in Crain's here. Unfortunately that is locked to subscribers only for now, hence the following lengthy quotes which summarize the story.

"That's a big fricking number," said Dennis Bernard, president of Southfield-based Bernard Financial Group, which hand-led the refinancing for Southfield-based Redico LLC, owner of One Kennedy. "I'll close $500 million in loans this year, but this is huge."

The deal is far from the rock bottom sales of recent history such as the $5 million sale of the Penobscot Building representing a price of $5 per square foot.

And the One Kennedy Square mortgage, issued by New York-based J.P. Morgan Chase, is non-recourse -- in this type of mortgage, only the buildings are used as collateral, and borrowers aren't on the hook if the loan goes into default.
Bernard

That, too, is a positive sign, Bernard said.

"They're relying on the value of the real estate and the sustainability of the value of the real estate," he said. "We're not aware of any non-recourse financing in the city of Detroit since 2007. ... [[Lenders) now believe the value of One Kennedy will sustain itself going forward. They're not looking for borrowers to sustain the loan."

Bernard said: "New York now thinks Detroit is worth putting money into."

Watchowski acknowledged that the deal would have been difficult in recent years.
Watchowski

"We were happy with the proceeds," Watchowski said. "We had targeted a loan amount based on our mortgage debt and some mezzanine debt."

The mortgage was through a bank, but the mezzanine debt was from Invest Detroit and the city's Police and Fire Retirement System. All lenders have been repaid, he said.

Redico decided to refinance now, Watchowski said, because "the debt was coming due, but I will also attribute the timing to the positive momentum in the city created in large part by Dan Gilbert ... and what Quicken is doing in downtown in terms of occupying a good part of the downtown marketplace."

"Gilbert is helping a lot in Detroit," Kernen said. "The lenders basically redlined Michigan through the downturn. To see someone like Dan Gilbert make that big of an investment in Detroit gives them some confidence in the market that things are getting better."

Moving employees into the buildings "gives the ability, with having new leases signed, it gives them price points in the markets," Kernen said. "Lenders on other buildings can judge where their leases stand."

The One Kennedy Square refinancing should impact other deals, said A.J. Weiner, executive vice president and national director of office leasing for Jones Lang LaSalle.

"You can't ignore the dramatic change in downtown Detroit," he said. "Dan Gilbert, Blue Cross, General Motors committing to the Renaissance Center -- it makes for a much more appealing underwriting.

"The risk piece is much lower because you have all these owner-occupied facilities and a tenant base that's growing... optimism that if I buy this building and put money into it and fill it up, there will be a debt market that's responsive. It helps overall the cause of the rebirth of downtown."

**iheartthed** · August-14-12, 09:57 AM

Good sign for sure, but there will need to be more than Dan Gilbert owned companies popping up downtown for this momentum to sustain itself...

**jpbollma** · August-14-12, 09:58 AM

Originally Posted by Lowell

More good news for reviving downtown Detroit and more kudos for the 'Dan Gilbert effect'! One Kennedy Square, the green glass building on the west side of Campus Martius Park, was refinanced for $27.3 million, making the value of the loan $112 per square foot.

This is kind of wonky stuff, but news like this is actually huge and even more significant in that it was not a locally financed.

This article was by Nancy Kaffer reported in Crain's here. Unfortunately that is locked to subscribers only for now, hence the following lengthy quotes which summarize the story.

Great news! I think the rebound of Downtown and the surrounding areas [[ Eastern Market, Belle Isle, Rivertown, Lafayette Park, Midtown, Woodbridge, Corktown) is all but assured. Now the focus needs to move to the neighborhoods that can still be salvaged. If crime could be reduced in a substantial way, I think that would be the last piece of the puzzle.

**Lowell** · August-14-12, 10:05 AM

Originally Posted by jpbollma

Great news! I think the rebound of Downtown and the surrounding areas [[ Eastern Market, Belle Isle, Rivertown, Lafayette Park, Midtown, Woodbridge, Corktown) is all but assured. Now the focus needs to move to the neighborhoods that can still be salvaged. If crime could be reduced in a substantial way, I think that would be the last piece of the puzzle.

I absolutely agree. Nonetheless, the revival of the downtown core of the City of Detroit is the most important and first step. It is the historical heart and soul of the international metropolis that surrounds it. It's rise will lift all ships in greater Detroit as it is essential to the Detroit brand and image borne by all.

**401don** · August-14-12, 10:23 AM

Originally Posted by jpbollma

Great news! I think the rebound of Downtown and the surrounding areas [[ Eastern Market, Belle Isle, Rivertown, Lafayette Park, Midtown, Woodbridge, Corktown) is all but assured. Now the focus needs to move to the neighborhoods that can still be salvaged. If crime could be reduced in a substantial way, I think that would be the last piece of the puzzle.

Finding the last piece is as simple as fixing morality, the educational system and the economy. Why has it taken 50 years so far?

**Gannon** · August-14-12, 10:28 AM

Originally Posted by jpbollma

Great news! I think the rebound of Downtown and the surrounding areas [[ Eastern Market, Belle Isle, Rivertown, Lafayette Park, Midtown, Woodbridge, Corktown) is all but assured. Now the focus needs to move to the neighborhoods that can still be salvaged. If crime could be reduced in a substantial way, I think that would be the last piece of the puzzle.

All we need is RoboCop.

**Gannon** · August-14-12, 10:29 AM

OMG, they are re-doing the movie.

http://www.imdb.com/title/tt1234721/

**Gannon** · August-14-12, 10:30 AM

In Toronto.

Thanks, Governor Snyder.

**davewindsor** · August-14-12, 11:26 AM

I don't know if this mortgage translates into anything significant for the rest of downtown like the article suggests because I don't know what else in downtown compares to this transaction. What can you compare to it? One Kennedy cost $54m to build six years ago and now they're getting it refinanced for $27.4m, which is basically a 50% LTV mortgage, with one of the best tenants in Detroit and the world, Ernst & Young, a multi-national which operates in 140 countries and has over $23billion in revenues a year.

With a AAA+ tenant like that, shouldn't the financing have been higher than 50% of what it cost to build six years ago? That sounds like a bum rap for this city. If Ernst & Young had to sign a 20 year lease [[my guess on the term) to get the building built, where's the risk for a lender like JP Morgan? The rents are guaranteed by Ernst & Young. If Ernst & Young didn't occupy it, but smaller local accounting and law firms instead, I can't imagine JP Morgan financing this building.

I'm sure a building housing a McDonald's restaurant would also have no problem getting New York financing with at least those LTVs because of who's leasing it. With Ernst & Young as the main long-term tenant, you could probably get financing on a building anywhere in the world just like you could with a AAA+ multi-national like McDonald's as the main tenant.

It's good to be informed, but I don't think JP Morgan or any other NY based lender will finance other downtown buildings like that as evidenced by the recent Penobscott foreclosure sale for $5m.

**Islandman** · August-14-12, 11:30 AM

Originally Posted by jpbollma

Great news! I think the rebound of Downtown and the surrounding areas [[ Eastern Market, Belle Isle, Rivertown, Lafayette Park, Midtown, Woodbridge, Corktown) is all but assured. Now the focus needs to move to the neighborhoods that can still be salvaged. If crime could be reduced in a substantial way, I think that would be the last piece of the puzzle.

Not the last piece of the puzzle by a long shot. Our educational system in shambles in Detroit. Until this downward spiral is stabilized, then slowly improved, all of this percieved progress will be for naught.

**Meddle** · August-14-12, 12:17 PM

"New York now thinks Detroit is worth putting money into."

Maybe they could do 'Detroit - the Musical'; an updated version of 'West Side Story'

**Hypestyles** · August-14-12, 12:20 PM

..where are the NYC [[and elsewhere) investors to buy up the remaining vacant/in-bad-shape buildings downtown? What other businesses/services are missing/in-short-supply downtown? Hopefully the momentum will pick up soon.. [[and who said something about a McDonald's downtown?)

**Meddle** · August-14-12, 12:23 PM

..where are the NYC [[and elsewhere) investors to buy up the remaining vacant/in-bad-shape buildings downtown?

When do Tokyo and Peking start buying in?

**jpbollma** · August-14-12, 12:28 PM

Originally Posted by Hypestyles

..where are the NYC [[and elsewhere) investors to buy up the remaining vacant/in-bad-shape buildings downtown? What other businesses/services are missing/in-short-supply downtown? Hopefully the momentum will pick up soon.. [[and who said something about a McDonald's downtown?)

I think Downtown could really use more housing. I know the three vacant buildings in Capitol Park near the Westin are all scheduled to be transformed into apartments within the next 1-2 years and starting soon. Also the Whitney. I would think the David Stott and Book would be perfect for more apartments/condos. With another 600-700 apartments downtown, more of the ground floor retail can be filled.

**Hermod** · August-14-12, 01:01 PM

Originally Posted by davewindsor

I don't know if this mortgage translates into anything significant for the rest of downtown like the article suggests because I don't know what else in downtown compares to this transaction. What can you compare to it? One Kennedy cost $54m to build six years ago and now they're getting it refinanced for $27.4m, which is basically a 50% LTV mortgage, with one of the best tenants in Detroit and the world, Ernst & Young, a multi-national which operates in 140 countries and has over $23billion in revenues a year.

With a AAA+ tenant like that, shouldn't the financing have been higher than 50% of what it cost to build six years ago? That sounds like a bum rap for this city. If Ernst & Young had to sign a 20 year lease [[my guess on the term) to get the building built, where's the risk for a lender like JP Morgan? The rents are guaranteed by Ernst & Young. If Ernst & Young didn't occupy it, but smaller local accounting and law firms instead, I can't imagine JP Morgan financing this building.

I'm sure a building housing a McDonald's restaurant would also have no problem getting New York financing with at least those LTVs because of who's leasing it. With Ernst & Young as the main long-term tenant, you could probably get financing on a building anywhere in the world just like you could with a AAA+ multi-national like McDonald's as the main tenant.

It's good to be informed, but I don't think JP Morgan or any other NY based lender will finance other downtown buildings like that as evidenced by the recent Penobscott foreclosure sale for $5m.

It isn't Loan-to-Original Cost, it is Loan-To-Value [[current). The building is probably not worth 54 Million at today's prices.

**maverick1** · August-14-12, 01:37 PM

Originally Posted by Meddle

When do Tokyo and Peking start buying in?

This is the question I have. It seems New York banks don't see value here. Why aren't we looking outside the U.S.? Or is there an effort to get foreign banks to invest in Detroit?

**Lowell** · August-14-12, 01:49 PM

Originally Posted by Hypestyles

..where are the NYC [[and elsewhere) investors to buy up the remaining ? What other businesses/services are missing/in-short-supply downtown? Hopefully the momentum will pick up soon.. [[and who said something about a McDonald's downtown?)

One has to view these events in term of trending. Consider the situation if One Kennedy was going into default instead. The 'vacant/in-bad-shape buildings downtown' all gain in attractiveness by the trends that are occurring.

My point is that the direction is up and has been for some time now. A refi like like this validates that trend even if the progress is two forward, one back.

**rb336** · August-14-12, 04:18 PM

There are always the haters who look for the dark clouds behind every silver lining. The trend for Detroit and Michigan is up. Granholm's MEDC projects are now bearing fruit, although no one will give her the credit. There are people investing in manufacturing in Detroit, which is good for the neighborhoods too. Will Detroit ever be the same as it was in the 50s? no, and a lot of that is to the good. the smokestack and concrete silo riverfront is now family-friendly. Downtown has a better mix of office and residential than it ever had. some neighborhoods have reinvented themselves with new identities [[that is something that can only be done from the grass roots, not the council-mandated "paradise valley" type of thing.) Who knows what Detroit mark vi will be.

Robocop? I'd rather have Detroit portrayed by Toronto than Dallas [[the original) any day, if it's not filming here

**cman710** · August-14-12, 04:32 PM

Originally Posted by Lowell

One has to view these events in term of trending. Consider the situation if One Kennedy was going into default instead. The 'vacant/in-bad-shape buildings downtown' all gain in attractiveness by the trends that are occurring.

My point is that the direction is up and has been for some time now. A refi like like this validates that trend even if the progress is two forward, one back.

I agree. I first visited Detroit in 2006, and even in the short time since then, downtown has seen an incredible number of improvements [[renovation of Book Cadillac and Fort Shelby, Rosa Parks transit center, Dan Gilbert's moves, renovation of the Broderick and pending renovation of the Whitney, to name only a few). Things are definitely trending in the right direction, even if they have gone in the opposite direction in many of the neighborhoods.

While progress may sometimes ebb and flow, the general current is in the positive direction.

**davewindsor** · August-14-12, 06:23 PM

Originally Posted by Hermod

It isn't Loan-to-Original Cost, it is Loan-To-Value [[current). The building is probably not worth 54 Million at today's prices.

I would argue that One Kennedy is still worth today at least what it cost to build. It's six years old. It's basically a new building. It's got a solid lease generating income for a long time. And, there's no building as new in downtown. The Compuware Building is a decade old and owner occupied.

If a multinational wanted a new class A office building in downtown, they are going to spend more than that to build it. And, they would do that if they can't buy out the lease on this one at a savings to it's replacement cost.

Why would a multinational build new when there are so many vacant older office buildings in downtown that can be had for cheap? For one, the maintenance and operating expenses are a lot less. And, I'm sure that was the same question asked when One Kennedy was built six years ago in a depressed office market with more boarded up skyscrapers and yet it was built.

**JBMcB** · August-14-12, 06:46 PM

Originally Posted by maverick1

Why aren't we looking outside the U.S.? Or is there an effort to get foreign banks to invest in Detroit?

Well, there are European banks, which aren't doing so hot right now. The banks in Japan are still shell-shocked from the 90's collapse, so they are pretty conservative in their financing. Then there are Chinese banks, who are just starting to feel the pinch from the ridiculous Chinese real estate bubble. It's particularly bad in China, they've built entire cities that are completely vacant.

There are a few emerging economies doing OK who might have some investment capital handy. India and Brazil come to mind.

**Cincinnati_Kid** · August-15-12, 01:30 AM

Originally Posted by Islandman

Not the last piece of the puzzle by a long shot. Our educational system in shambles in Detroit. Until this downward spiral is stabilized, then slowly improved, all of this percieved progress will be for naught.

Also, it's not just about the Downtown and Midtown areas when the neighborhoods are in shambles. When is there going to be attention focused on that?

**1953** · August-15-12, 09:32 PM

I love that rb336 worked in a pro-Granholm comment - that would make him, officially, the last of her supporters!

**rb336** · August-15-12, 09:54 PM

No, merely someone who believes in credit where credit is due

**cman710** · August-16-12, 12:07 PM

Originally Posted by Cincinnati_Kid

Also, it's not just about the Downtown and Midtown areas when the neighborhoods are in shambles. When is there going to be attention focused on that?

With scare resources, addressing the neighborhoods becomes very difficult because of the breadth of the problem. I hope that the Detroit Works program will eventually lead to improvements in at least some neighborhoods. In the meantime, we are better off with a Midtown and Downtown on the upswing and suffering neighborhoods than having both the neighborhoods and Midtown and Downtown struggling.