One Franklin
Original Story - Boston Globe
Update - February 26, 2009
Credit crisis bites Filene's development
Builder says funding woes to delay restart of project
Despite cutting seven floors off his $700 million Filene's redevelopment, John B. Hynes III is still struggling to obtain loans for the 32-story tower in downtown Boston and will not be able to resume construction next month as he had planned.
Without funding for the entire project, the Filene's developers are now considering several other options to move forward on the office, hotel, and retail development, said an executive with knowledge of its finances.
Hynes's firm, Gale International, is developing the Filene's block in partnership with Vornado Realty Trust of New York. Spokesmen for Hynes and Vornado did not return calls seeking comment.
The builders stopped construction in November after they were unable to raise enough financing to build the entire project as conceived. Since then, Hynes and Vornado proposed the reduction in height to 32 stories, and eliminating all 166 planned condominiums.
The development site, at the corner of Washington and Franklin streets, consists mostly of a hole in the ground in the middle of Downtown Crossing, and the skeletal remains of several other buildings, including the original Filene's department store.
The project is one of many caught up in the credit crisis and economic downturn that have virtually stopped any lending to commercial developments. Lenders are reluctant to finance projects as long as the soft economy hurts retailers and other potential tenants. Moreover, banks and insurance companies that also fund such developments are struggling with their own losses, making them reluctant to lend, even after the federal government has provided $700 billion in assistance to stimulate lending.
Gale and Vornado have invested more than $150 million in the development and previously had commitments from other lenders before the deal came undone last fall.
A top official with the Boston Redevelopment Authority, the city's planning arm, said the agency remains in close contact with the developers.
"This is affecting a lot of projects, not just in Boston, but everywhere," said BRA director John Palmieri. He said the BRA has not yet scheduled a board vote needed to approve the proposed revisions to the Filene's project.
The delay is putting a hole in Mayor Thomas M. Menino's effort to revitalize Downtown Crossing and creating problems for potential tenants who were relying on the developers to finish on time.
A representative of Filene's Basement, which hopes to move back this year, said the store is closely monitoring progress. "Our understanding is that either in the fall of 2009 or spring 2010, the developer will be providing us with the property," said Julie Davis, an attorney for the discount retailer. "We don't have any news from the developer."
Another potential tenant, the law firm Fish & Richardson, said it still has a letter of intent to move into the building in 2011, but is weighing other options if the delays persist.
Update story - Boston Globe
Update - March 5, 2009
The quest for cash
The US pumped billions into banks, but big projects in Boston lack financing
The billions of dollars the US government has pumped into banks and the economy have not found their way to the Boston skyline. Developers report that lenders are still refusing to finance large commercial buildings.
If anything, lending conditions have only gotten worse since the $700 billion federal bank bailout began, some developers said, with construction financing becoming even more expensive and difficult to obtain.
"It's an outrage. Banks have money, and they're not lending it out," said David Begelfer, chief executive of the Massachusetts chapter of the National Association of Industrial and Office properties. "That's a big problem in Boston and across the country."
The funding freeze has saddled the city with empty work sites and prompted some developers to scale back their plans, in hopes that smaller projects would be easier to finance.
No such luck. The developer of the Filene's block in Downtown Crossing, who temporarily halted construction on the mega-mixed-used project in November and trimmed seven floors from his tower, is now planning for a longer shutdown, as are the builders of a $300 million biotechnology lab in the Longwood Medical Area, who also stopped work in November.
Several other developers are slowing preconstruction work, fearful they won't be able to get loans.
"I had hoped that with the new [Obama] administration we would see a more positive lending market, but if anything it's gotten even tighter," said Tom Alperin, president of National Development, which is building the Longwood Center biotech lab. "It's a really tough dynamic right now."
Alperin had hoped to resume construction by spring. Now, he's just hoping to get going by year-end.
Yesterday, the Federal Reserve said that loans of $50 million or more for commercial development in New England remain "virtually nonexistent." Overall, lending for development projects is down 19 percent nationwide since passage of the government bailout in October, according to the US Treasury.
As economic conditions worsen, the Obama administration is preparing additional measures to get banks to resume lending. One initiative calls for the government and private investors to spend up to $1 trillion to buy so-called toxic assets from banks to improve their balance sheets. A separate program would spend another $1 trillion of government money to provide funds for investors to buy loans and related securities, thus providing new capital for additional lending.
In the meantime, the largest lenders for commercial real estate in New England - Bank of America Corp., Wells Fargo & Co., Anglo Irish Bank Corp., and others - remain largely on the sidelines when it comes to financing skyscrapers and other large mixed-use projects, according to developers and commercial bankers.
Anne Pace, a spokeswoman for Bank of America, said the bank loaned $7 billion for real estate in the fourth quarter of 2008. But she could not say how much of that was allocated to commercial building projects or to developments in Massachusetts.
A spokeswoman for Anglo Irish, which did not receive US government funds but has benefited from Irish government aid, declined to comment. Wells Fargo, which purchased Wachovia Corp., another major lender to Boston developers, did not respond to a request for comment.
"I'm talking to a lot of people in the capital world right now, and they're basically out of business," said Boston developer Ron Druker, who is trying to proceed with an office development on Boylston Street. "We're in a major trough in the market right now."
There are several explanations for the retrenchment. One is that banks, which used to team up to provide loans of $100 million or more, are now reluctant to do so because of uncertainly about one another's solvency.
Moreover, banks are dealing with their own individual financial problems, making it difficult to negotiate uniform terms for a syndicate of lenders. While one bank might be willing to put up $50 million for a project, others might want lesser amounts and more stringent lending terms.
Another problem is the lack of a secondary market where banks can sell the deals they make with developers. In 2006, the securitized lending market accounted for more than $230 billion worth of deals. But it nearly vanished after huge losses related to subprime mortgages and other bad loans scared off investors. Last year, securitized lending dropped to $20 billion nationwide, and many bankers believe the market will not reemerge 2009.
"The entire business model of making commercial loans and selling them has failed miserably," said George Fantini, a principal in the mortgage banking firm Fantini & Gorga.
Typically, banks rely on their ability to repackage and sell loans to investors to replenish their capital and lend out more money.
On the streets of Boston, the credit crisis is making life uncomfortably quiet. The Filene's block downtown is an idle construction site with a big hole in the ground. The developers of the massive Columbus Center project over the Massachusetts Turnpike, where construction was stopped almost a year ago, have gone from one delay to another as they continue to hunt for funds to resume the $810 million development.
Elsewhere, the builders of a proposed 40-story tower over South Station have held off, as has developer Joseph Fallon on the second office building at his 21-acre Fan Pier site in South Boston.
The funding delays have prompted Mayor Thomas M. Menino to ready a $40 million pool of loans to restart development, targeting projects that have financing gaps.
At the state level, the slowdown is threatening to undermine Governor Deval Patrick's plan to use federal stimulus money to trigger a slew of private building construction. The governor wants to use some of the expected $5 billion to $6 billion for bridges, roads, and other construction near private development, but it would have limited impact if those builders can't move forward.
"We're clearly in the down part of the cycle right now," said Greg Bialecki, Patrick's secretary of Housing and Economic Development. "We will still have about $500 million in new road and bridge money. But admittedly, it would be a better thing of those dollars were a catalyst for private developers to build their buildings."
Update Story - Boston Globe
Update April 3, 2009
Menino prods Filene's site developers
Five months after developers halted construction at the Filene's site in Downtown Crossing and left two historic buildings torn apart and a gaping hole in the city's center, Boston Mayor Thomas M. Menino directed the builders to secure the remaining structures.
Menino sent a letter yesterday to the developers, New York-based Gale International and Vornado Realty Trust, expressing concern about the condition of the buildings' shells, which have been exposed to the elements for nearly a year, and told them to begin securing them by May 1.
"The current condition of the buildings requires attention to avoid deterioration of the structures and escalated rehabilitation costs," he wrote.
A spokeswoman for Gale declined to comment on the letter yesterday, as did a spokeswoman for Vornado.
Menino's demands come one week after the Globe reported that Menino's administration skirted requirements in the city's zoning code to fast-track the project in 2007 and 2008, including overlooking the absence of a financial interests statement from the developers. The developers told city officials a lack of financing forced them to stop construction last fall.
Administration officials still have not asked the developers to deal with a number of other requirements skipped in the review process, including filing the financial statement. Menino did not mention those in his letter.
The mayor focused instead on the physical state of the site. After the city issued demolition and construction permits, the developers last spring cut one historic building in half, stripped away the wall of another (the Filene's building), and last summer dug a deep hole between the two that looks like a crater left by a bomb explosion. It has been that way since.
"I am very concerned that Vornado and Gale have failed to secure the two building envelopes against the elements," Menino wrote, noting that both buildings have historical significance and ordering the developers to follow up with the Boston Landmarks Commission.
The Filene's building is listed on the National Register of Historic Places, and the Landmarks Commission had asked the developers in a letter Jan. 28 to submit an engineer's report on the open building conditions and weather protection, particularly for the terra cotta and brick cladding on the highly decorative facade. The developers have not complied.
"I have directed the BLC to take action to enforce the required work as necessary to protect the buildings," Menino wrote.
The developers first proposed the $700 million project in November 2006, outlining plans for a sparkling tower of condominiums and office space flanked by a hotel and shops in the Filene's building. The department store Filene's Basement would be housed in its old location.
The Boston Redevelopment Authority board of directors gave preliminary approval to the project in August 2007, as the nation's credit markets were already beginning to deteriorate. BRA officials then signed off on demolition and construction permits over the next eight months, allowing the work to proceed despite zoning code requirements that the developers follow several more steps and obtain final approval, a certification of compliance, before construction was allowed to begin on such a large project.
Menino had maintained last week that he had nothing to do with fast-tracking the project. However, yesterday he acknowledged that he did meet with Gale and Vornado executives early in the city's project approval process, and they told him they wanted construction permits quickly. Still, the mayor said he did not help them with that.
"They told me what their plans were, and I supported it," Menino said yesterday. "I told them they had to go through a process at the Redevelopment Authority. I never told them that I would fast-track the project at all."
The mayor said he is now taking action to force the developers to fix up the site because he is "frustrated by their inaction."
"This is ridiculous," he said. "It already went through one winter; it can't take any more. The buildings will be destroyed."
Update Story - Boston Globe
Update - May 6, 2009
Developer may alter plan for Filene's site
One idea: Add rental units
Developer John Hynes is exploring yet another plan to build his stalled Filene's project, one that would reduce the cost by $250 million and add back 250 residential units to the proposed complex in Boston's Downtown Crossing.
This version is intended to make the development more attractive to lenders, who have been unwilling to fund Hynes so he can resume construction. Hynes, managing partner of Gale International, was forced to halt work on the site in November.
Since then, he has been tinkering with the components of the development, first cutting the number of floors to 32 from 39 and eliminating 150 luxury condominiums. Hynes said yesterday that the new version calls for 38 floors, about 250 rental units, and a more slender design. That would cut the cost to $450 million, from $700 million.
He emphasized, however, that he is only brainstorming and would propose a formal change only if credit markets improve and he is able to attract interest from lenders.
"All we're doing is exploring our options," Hynes said. "We're trying to find a formula that works."
Hynes is still looking for loans of at least $200 million. Currently, the large financial institutions that typically provide such loans are not lending in those amounts. Most institutions are lending less than $50 million, and few are willing to join with other banks to pool funds for a single project, because of concerns about each other's balance sheets.
That has forced Hynes and other developers to seek funding through public sources. Hynes said yesterday that he is seeking tax-exempt bonds through Boston Connects Inc., a nonprofit agency that provides government financial assistance to projects that benefit economically distressed city neighborhoods.
He has also applied for federal stimulus money the state government is distributing to commercial developers, and financial assistance from Boston officials.
"Maybe we can get $100 million from the state, another $50 million from the city, and a bank could step in and provide the missing piece," Hynes said. "We're trying to chip away at it and find something that works. This is new territory for everybody."
John Palmieri, director of the Boston Redevelopment Authority, said the city would entertain requests for assistance but has not received a formal request from Hynes, whose partner in the project is Vornado Realty Trust, a New York City investment firm.
"It's too early to predict what financial assistance we might look at," Palmieri said. "But we would keep the door open to any such proposal, based on the positive features of the plan and its economic impacts."
Update Story - Boston Globe
