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Mortgage Woes Cost Northland Prime Tenant

Greg Bordonaro

March 14, 2011

When Bank of America was hunting for new real estate for its Connecticut headquarters last year, Northland Investment Corp.’s CityPlace II property was a front runner to land the major corporate tenant.

But the deal for 75,546 square feet of new space — one of the larger downtown Hartford leases in recent years — never materialized. Northland’s financial woes and inability to reach an agreement with lenders of its securitized mortgage caused Bank of America to look elsewhere. The bank eventually inked a contract with neighboring CityPlace I, a building owned by New York investors.

That was one of the revelations made by Northland CEO Steven P. Rosenthal in a recent deposition he gave as part of the foreclosure case involving the company’s CityPlace II property.

The two-hour deposition, which was transcribed into an 80-page court filing obtained by The Hartford Business Journal, sheds new light on Northland’s business dealings and financial troubles in Hartford.

The testimony reveals Northland’s CityPlace II property became “cash negative,” in 2007, but the Massachusetts-based developer used funds from “outside the property,” to temporarily prop up the building before eventually ceasing its debt payments in 2009.

And, in the deposition, Rosenthal vents his frustration on several occasions about the company’s inability to renegotiate its $25 million mortgage with its lenders.

“We made multiple, repeated attempts to engage the lender in a conversation about what was going on at the property. We were met with absolute silence, no response,” Rosenthal said during the Jan. 13 deposition. “The lender’s conduct in the course of this period of time was such that it was completely disengaged from its own collateral. It refused to even visit its collateral or acknowledge what was going on at the property… But the lender’s conduct here was in bad faith, was outrageous, was extremely unfortunate for the operation of the property.”

Northland, downtown Hartford’s largest commercial landlord, has two of its properties in foreclosure — CityPlace II and Goodwin Square — and has had another property — Metro Center — recently repossessed by its lender.

Northland also owns the retail and residential Hartford 21 property and the Standard and Crosthwaite buildings.

Company officials have remained relatively quiet so far on their financial problems, declining repeated interview requests and instead providing prepared written statements. So Rosenthal’s deposition provides the most on the record insight to date.

In that deposition, Rosenthal blamed the the building’s deteriorating financial performance on “market conditions,” “rent roll,” and the “tenant roster.”

At the time, Northland used funds from outside the property to help stay current on debt payments. But Rosenthal said he decided to turn off that spigot in 2009. CityPlace II sank into foreclosure soon after.

Without the debt service payments, however, the property had positive net operating income, Rosenthal said.

Rosenthal said Northland tried for months “to work out an appropriate restructuring of the note and the payments,” but it was unsuccessful. Northland took out a $25 million mortgage on the property, which it purchased in 1999, but the loan was securitized and sold to investors. That makes it much more difficult, if not impossible, to renegotiate the mortgage when it comes due or if financial problems arise.

“I believe the lender acted in bad faith in our attempt even to have a conversation with them,” Rosenthal said in the deposition. “To date the person or persons responsible for this loan have never even been to the building, never even seen the property, notwithstanding multiple requests, invitations, pleadings by us to even visit their collateral.”

Despite the financial woes, Rosenthal said Northland continues to operate the “property in a first-class manner.”

“It’s a great building and it’s I think run extremely well,” Rosenthal said in the deposition.

A large portion of the deposition was centered on the Bank of America lease. Rosenthal said he believes CityPlace II was the first choice for the bank’s new Connecticut headquarters, especially since it already had a presence there. But the bank announced last year that it was vacating its 200,000 square feet of leased space at 777 Main St., and moving into CityPlace I instead, a building owned by New York investors.

Rosenthal said in his deposition Bank of America proposed to lease 75,546 square feet of space in CityPlace II, but the bank tenant wanted “reasonable assurances that the lender is in favor of the lease and that the property will not be foreclosed upon in the near term.”

But Rosenthal said Northland was unsuccessful in getting the lender’s “approval of a lease that required a significant term and significant tenant improvements and other provisions.”

“Our inability to negotiate the terms of this in a timely and satisfactory manner caused them to seek space elsewhere,” Rosenthal said. “I believe CityPlace II was their first choice. But they were under significant time constraints.”

A Bank of America official declined to comment.

The lawyer representing the lenders during the deposition, Gary Mennitt of Dechert LLP, also questioned Northland about its Web site and why, at the time, it did not list CityPlace II as one of its Hartford properties. Rosenthal said he wasn’t sure, but possibly because it was in foreclosure. Northland, at one point, did remove from its Web site listings for CityPlace II, Metro Center and Goodwin Square.

“Would Northland rather lease space in the buildings that it has in Hartford that are not in foreclosure proceedings?” Mennitt asked.

“No,” Rosenthal responded. “We own an enormous amount of space in the city and other cities and have been aggressively trying to lease space in that building as well as in our other properties.”

Rosenthal continued, “Your reference earlier that we weren’t in some way trying to lease the properties, you can talk to any broker in Hartford as to whether or not we are aggressively marketing or managing the property and you’ll hear that we are. We may be the largest landlord in the city, as well as the fact that people are well aware on a regular basis of the availability, the significant availability of space in that building.”