Credit Markets Open for Boston Properties, but Terms Are Tough

By MAURA WEBBER SADOVI Mortimer Zuckerman's Boston Properties Inc. did something many thought was nearly impossible in this credit-starved climate: The company obtained a $215 million construction loan to complete work on a mixed-use project currently underway in Boston. But the tough terms of the loan, from a group of five banks led by Bank of New York Mellon Corp., show it wasn't an easy matter. Indeed, the loan shouldn't be seen as a sign that the credit markets are finally loosening up. Boston Properties Inc. A rendering of Boston Properties' Russia Wharf project, under construction on Boston's waterfront. First, Boston Properties acknowledged that the credit drought crimped its proceeds from the deal. The loan is roughly 40% of the total estimated $550 million cost of the office, retail and residential project overlooking Boston Harbor, falling short of Boston Properties' earlier expectations. Back in January, the company anticipated borrowing about $320 million. Michael LaBelle, chief financial officer at Boston Properties, said the higher expectations stemmed from preliminary positive responses from people who ultimately opted not to participate. Boston Properties, scheduled to report first-quarter results on Wednesday, will put more equity in the project to make up for the funds it couldn't borrow. The loan's lower value is "a sign of the lack of depth in the construction-loan market," Mr. LaBelle said. "There are not very many lenders that are active." The five-year loan carries a floating interest rate equal to the London interbank offered rate plus 3% annually. Two years ago, rates on similar loans were lower, said Mr. LaBelle. The loan also carries an onerous "recourse" provision, meaning the company is on the hook for repayment if the development can't generate sufficient proceeds to service the debt. Mr. LaBelle declined to comment specifically on the recourse component but noted that, in the current environment, he didn't think it was possible to obtain a construction loan without "meaningful recourse." The loan comes as lack of financing is turning many formerly active construction sites around the country, including some in Boston, into ghostly lots. Last year, a growing number of stalled projects prompted Boston Mayor Thomas M. Menino to unveil a loan fund to jump-start development. Boston Properties had more success winning over lenders because it offered a package with a number of features banks typically like. Most notably, the project was partly preleased by Wellington Management Co., an institutional asset manager, which is set to occupy about 450,000 square feet of office space. Boston Properties has said it has enough money to continue construction even without the loan. Moreover, the project is located on a section of the Boston waterfront that has generated considerable buzz as a promising extension to the traditional financial district. The area has benefited from the completion of the city's Big Dig roadway project, which improved access and replaced an elevated highway with park and open space that are part of the Rose Fitzgerald Kennedy Greenway. As an 81-year-old asset manager with about $420 billion under management, Wellington is the kind of tenant that gives lenders comfort. Commercial-real-estate finance experts say that, in deals of this kind, banks often ask for as much as 50% recourse to start out and 100% recourse if the tenant reneges on its lease. Wellington and the Bank of New York Mellon declined to comment on the loan terms. Before the financial downturn, Boston Properties would likely have been able to get more money on better terms. Typically, as much as 80% of the cost of a construction project could have been financed, says Riaz Cassum, senior managing director at Holliday Fenoglio Fowler in Boston, a commercial-real-estate services and mortgage-banking firm that wasn't involved in the loan. Another challenge for the loan may have been its size because lenders are now trying to minimize exposure to a single property's risks, says Michael Knott, a senior analyst with Green Street Advisors in Newport Beach, Calif. The project has evolved over time. In 2004, Sam Zell's Equity Office Properties Trust obtained approvals from the Boston Redevelopment Authority for a mixed-use project that was to include residential lofts, a hotel and offices. In 2007, Blackstone Group LP acquired the property when it purchased Equity Office and subsequently sold it to Boston Properties. It also has required patience. While similar loans might have taken 90 days to obtain at the peak of the market, Mr. LaBelle said, Boston Properties has been working since November to obtain the loan it completed just last week. "The environment is clearly challenging, but we prevailed," Mr. LaBelle said. "Clearly, there's more diligence being done and appropriately so ... these banks have to go through more hoops to get their approvals." The 854,000-square-foot mixed-use project, which is slated to include a 31-story tower, is set to be completed in 2011. Write to Maura Webber Sadovi at maura.sadovi@wsj.com