Open Letter to the Town of New Castle and NCNOW.org on Chappaqua Crossing
Tuesday, May 14, 2013
by Steve Coyle
I am writing this letter as a follow-up to a previous letter that I sent to the New Castle Town Board.
In my previous letter to the Town Board, I argued against retail development at Chappaqua Crossing and also urged the Board to consider whether “Summit Greenfield has the means to complete this proposed project,” (that is, retail development at Chappaqua Crossing).
On your website there have been a number of comments that were made to my letter. One of these commentators, “Real Estate Finance 101,” discussed the financial viability of the project. It would appear that this author is well-versed in commercial real estate finance, for they have done significant homework on the history of the Chappaqua Crossing/Reader’s Digest site. I find their analysis to be on point and interesting. Further, I believe that there is additional information that indicates that Summit Greenfield likely lacks the capital to fund future development at the site.
Summit Greenfield purchased the Reader’s Digest Headquarters in 2005 for $59 million, which consisted of $28 million of equity and $31 million of debt that was originated by Bank of America. Summit Greenfield is a joint venture between Summit Development and Greenfield Partners. Greenfield is the (largest) capital partner and Summit is the local development partner who runs the property day to day and oversees any development. Greenfield’s primary source of equity for the transaction was, I believe, Greenfield Acquisition Partners Fund IV. This was a $675MM fund that is now fully deployed. Hence, this fund has no capital available for future investment, and its investors are unlikely to fund future capital calls for existing investments.
In conjunction with Summit Greenfield acquiring the Reader’s Digest property, Summit Greenfield agreed that Reader’s Digest would downsize to 198,284 square feet (less than 1/3rd of the campus) upon the sale of the property. This occurred upon the sale of the property. Shortly thereafter, Summit Greenfield stated that they were pursuing a large potential lease with Pepsico and began to appeal the site’s zoning. Summit Greenfield sought, (and eventually received), a zoning change that allowed up to four office tenants; however, Pepsico never executed a lease at the property, nor did they occupy any space at the property. Since that time, Summit Greenfield has sought many other zoning changes (some of which have been successful, some of which have not, and some of which are pending). Today the site allows for an unlimited number of office tenants, 111 units of multi-unit residential and there is a zoned, but unentitled, section for single family residential.
Subsequent to the purchase of Reader’s Digest/Chappaqua Crossing, Bank of America syndicated the loan for the property. This loan was contributed to a commercial mortgage backed security, (CMBS), offering. The $31 million original loan was split up into three pieces: a $16 million senior note (the “A” class), a $2.9 million secondary note (the “B” class), and a $12.1 million junior note (the “C” class).
With the property underperforming, Reader’s Digest subsequently filing for bankruptcy, and Summit Greenfield unable to significantly lease the asset, the loan was “watchlisted” by the servicer by September of 2009. As the property continued to bleed cash from reserves that were established to fund the interest payments on the loan, the loan’s special servicer continued to mark down the value of the loan. This not only indicated that the initial equity was “wiped-out,” but also that the loan itself was underwater. As the value of the loan continued to fall, Summit Greenfield began purchasing portions of the loan, (specifically the “B” note at (likely steep) discounts to the original value of the loan.) This allowed Summit Greenfield to remain in the deal and to be able to negotiate with the loan’s special servicer.
Eventually, the special servicer for the loan, (C-III), decided to sell the loan at a discount to Summit Greenfield. This sale occurred on January 20, 2012. Summit Greenfield reportedly paid $17.2 million for the loan and control of the property. This indicates that the value of the property had fallen from $59 million upon the sale to Summit Greenfield to $17.2 million +/- in January 2012. Thus, the property lost approximately $41.8 million of value from its acquisition through that period of time, (that is, $28 million of equity plus $13.8 million of debt losses). The debt losses included a complete loss of the C-note and a substantial loss to the B-note.
Given (1) that the major equity source of the deal was a fund that is now closed to making new investments, (2) that the property has lost approximately $41.8 million in value since acquisition, and (3) that there have been no identifiable letters of intent by retail tenants, I sincerely doubt that Summit Greenfield has the financial means to execute retail development on the site.
As stated in my previous letter to the New Castle Town Board, I believe that there are numerous reasons why retail zoning should not be approved at Chappaqua Crossing. Since the development team does not likely have the financial resources needed to execute the propose plan, this further complicates an already dubious plan.
I believe that if Summit Greenfield were to receive the necessary zoning changes to allow for a 120,000 square foot shopping center on a portion of the property, one of three outcomes is likely: (1) that Summit Greenfield would sell the zoned, but undeveloped site to a new owner, (2) Summit Greenfield would seek an additional capital partner to join with them so that they could finance the development costs, or (3) Summit Greenfield would begin development without the financial resources needed to complete the development.
I believe that each of these scenarios is potentially risky from the Town’s standpoint. First, national retail tenants are generally reticent to sign new leases or letters of intent on sites that lack both zoning and an owner entity with financial resources in-place necessary to complete development. Second, if the site were to be sold, the next owner could seek further zoning and site-layout changes. Third, as I previously mentioned in my earlier letter, I believe that the site is ill-equipped to attract and maintain national retailers as it is currently designed. All of these issues, I believe, put the Town of New Castle at risk of facing further zoning changes and/or developing a shopping center that may prove to be less successful than is currently envisioned.
I hope that the Town Board considers these issues, in addition to the others that have been raised with respect to Chappaqua Crossing.