March 31, 2009 - 1101 K Street - JBG Cos. and Rockwood Capital LLC, Washington D.C.

How the Developers of 1101 K St. in D.C. Got a Loan

It wasn't easy.........

How the Developers of 1101 K St. in D.C. Got a Loan

It wasn't easy.........

Among the real-estate executives losing the most sleep in this credit-starved world are developers who are finishing up projects who need to take out construction financing with longer-term mortgages.

The developers of 1101 K St., a 310,824-square foot office building in Washington, can now rest easier. With only a few days to go before their roughly $100 million construction loan became due, the venture of JBG Cos. and Rockwood Capital LLC just got a new $100.5 million mortgage on the property. The new lender was Germany-based Landesbank Hessen-Thüringen Girozentrale, a sign that German lenders are active in the U.S. market.

But getting the loan wasn't easy.

Although the Washington office market is better than many, it is still suffering from anemic demand. Also weakening lender appetite: The building at 1101 K St. is only about 60% leased, even though the building opened in 2007 and is located near the convention center in a submarket popular with lobbyists and law firms. The area had a 6.9% vacancy rate in the fourth quarter compared with 12.4% metro-wide, according to Property & Portfolio Research Inc. But the vacancy rate downtown is expected to rise partly because about 1.6 million square feet of new office space is expected to be completed this year.

The developers of 1101 K St. in Washington, got a last-minute $100.5 million mortgage. The developers of 1101 K St. in Washington, got a last-minute $100.5 million mortgage. The developers of 1101 K St. in Washington, got a last-minute $100.5 million mortgage.

JBG, of Chevy Chase, Md., which developed the property for the venture, and Rockwood, of White Plains, N.Y., originally hoped to sell the building after completion. But the weak sales and leasing markets forced them to switch strategy. In November they began looking for a mortgage. But as the economic crisis deepened, some U.S. life-insurance companies expressed concern about the loan's size and took a pass at refinancing it, says Bob Donhauser, a senior managing director with mortgage-banking firm Holliday Fenoglio Fowler LP, which represented JBG and Rockwood.

Bank of America Corp., which provided the construction loan, considered extending the loan but its terms were too onerous, Mr. Donhauser says. The bank wanted 50% of the loan to be "recourse," meaning that it would have claims to other borrower assets besides 1101 K St. if there was a default. Bank of America couldn't be reached for comment.

Several German lenders nibbled. With credit tight and many U.S. lenders focused on managing their existing portfolios rather than offering fresh loans in an environment with uncertain building values, some European banks are still stepping up to lend more in the U.S., says Matthew Anderson, a partner with Oakland, Calif.-based Foresight Analytics LLC. "There still seems to be money available from European banks and German banks in particular," Mr. Anderson says.

The new three-year loan from Landesbank, has a fixed interest rate below 6% for the first three years and is due in March of 2012 though it includes an option to extend it for one-year, people involved in the deal say. The bank, also known as Helaba, didn't return calls for comment.

The developers were helped by JBG's strong reputation in the Washington area. The firm, which raises investment funds, has about $10 billion in office, residential and hotel assets under management or development. Its portfolio includes such other D.C. properties as the Department of Transportation's new headquarters and the I.M. Pei-designed L'Enfant Plaza Hotel. Joseph Gildenhorn, a one-time U.S. ambassador to Switzerland, was one of the founders and remains an investor though he is no longer active in the company, JBG says.

JBG also has been one of the few active buyers in the office market. In February it took a $60 million equity stake in the large two-building TechWorld office complex, located near the newer office building it refinanced.

Separately, JBG also recently paid about $35 million in equity and assumed debt for two suburban office buildings in McLean, Va.

James Iker, a managing director at JBG, says the 1101 K St. financing was helped by the low value of the loan to the property. The refinancing equates to about $325 a square foot for the property, which he says will be worth over $600 a square foot once it is leased up.

At the peak of the market, prime new office properties were selling for more than $800 a square foot, he says. "Financing is still out there selectively," Mr. Iker says.

Original Story - Wall Street Journal