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$1.25B Saks deal leads refinancing feeding frenzy

By Konrad Putzier

Hudson’s Bay Company announced plans to take out a $1.25 billion mortgage on the Saks Fifth Avenue flagship in Midtown. The deal, which the firm expects to close in December, values the trophy property at a whopping $3.7 billion.

Hudson’s Bay will use the loan to pay off a $1.2 billion first lien mortgage on the 36-story, one million s/f property.

The Saks building at
The Saks building at 611 Fifth Avenue.

The new loan on the building’s ground portion will carry a fixed, 4.4 percent interest rate, as opposed to the previous mortgage’s floating rate of 4.75 percent.

The firm reckons this will save it more than $4.4 million in interest payments per year, with the added benefit of insuring the borrower against future rate hikes.

The deal is the latest example of a citywide boom in premature refinancing, as borrowers hope to benefit from low interest rates and looser underwriting by banks.

ELI BREINER
ELI BREINER

“The floodgates are open,” said Eli Breiner, senior managing director at the mortgage brokerage, Eastern Union Funding.

He explained that many borrowers had been looking to refinance their commercial mortgages prematurely since interest rate began plummeting in 2008, but cautious underwriting by banks scuttled many deals.

According to Breiner, refinancing a mortgage prematurely usually involves paying a penalty to the previous lender. This means a lower interest rate on the new loan doesn’t automatically make refinancing a good deal. Rather, borrowers often look to increase their leverage on a building by taking out a larger amount through a refinancing — which cautious underwriting by banks rarely allowed in the years following the 2008 crash.

But over the past 12 months, Breiner said, banks have loosened their underwriting considerably. This has resulted in more and more borrowers choosing to refinance their loans prematurely, meaning before the previous mortgage’s term is up.

For now, Breiner expects the trend to continue. “As long as the banks are underwriting at the pace they are now and interest rates are where they are, there is no reason this will stop,” he said.

According to Hudson’s Bay’s press release, the refinancing will result in one-time expenses of $76 million, including $35 million in taxes.

The previous loan was due in 2020, meaning the premature refinancing will merely save Hudson’s Bay a total of $22 million in interest payments at current rates. However, the refinancing allows the firm to lock in current low rates for the new loan’s term of 20 years, acting as an insurance against future rate hikes. It also increases leverage on the building from $1.2 billion to $1.25 billion.

Hudson’s Bay bought the retail chain Saks Fifth Avenue for $2.9 billion in 2013, and will invest $250 million in renovating the flagship store at 611 Fifth Avenue starting next year.

In an interview with Bloomberg News, Hudson Bay’s CEO Richard Baker said the firm is considering turning the building into a REIT or using it to secure additional debt.

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