The National Press Building Corp., struggling with massive cost overruns on the renovation of its 55-year-old building, has decided to "sell" the historic structure at 14th and F streets NW to a syndicate in which it will be a partner.
The price escalation has forced the corporation's officers to seek new, long-term financing of $75 million to complete the work, according to corporation President William D. Hickman. Original estimates had placed the renovation cost at $57 million, he said.
Part of the money will be raised by selling the National Press Building to an investment syndicate, of which the Press Building Corp. will be a minority partner, for a 45-year period. In return, the syndicate will advance $15 million in equity funding to the corporation to be applied to the renovation costs. The corporation will retain ownership of the land.
An attorney specializing in commercial real estate who is not connected with the deal called the plan "a desperation move," under which the Press Building Corp. will give up most of the income from the building, residual benefits and control of the property until the investors who buy the structure are repaid at the end of 45 years and full ownership of the building is returned to the corporation.
Hickman, however, said the plan "is in no way a desperation move. It is an affirmatively good move.
"We had 10 or 12 different plans to choose from," he said. "It was carefully selected because it was the best deal for us at this stage of the game."
Under the plan, he said, the "renovation project can be completed and paid for with a minimum of risk to the National Press Building Corp. and the National Press Club."
The club, which holds 78 1/2 percent of the corporation's stock, has called a meeting of its members on Friday. They will be asked to approve the sale of the building to the syndicate, which then will raise the $15 million from investors. Under 1981 changes in federal tax law, a 20 percent tax credit is available to owners of the renovated building because of its age, making it an attractive buy.
An additional $60 million loan will be provided by Merrill Lynch-Hubbard, a Wall Street brokerage firm, at 13 percent interest, with the building and land as security. The yearly interest payments on the $60 million mortgage will be about $8 million, Hickman said.
When the renovation was planned, the corporation obtained a commitment from the New York State Employees' Retirement System pension fund for a $45 million long-term loan, Press Club President Don Byrne told members in a letter announcing the Friday meeting. Because many tenants were expected to stay in the building during the renovation, the corporation expected income from their rents to make up the $5 million difference in the expected $50 million renovation cost.
"Since then . . . the cost of the project has been revised upward to a total of about $75 million," Byrne said in his letter. After "months of hard work" the new financing plan was pieced together, he said.
A first step under the new plan was to ask the New York employes' pension fund "to let us out from under a deal which no longer makes sense to us," Hickman said. "They offered to let us borrow some more, but it was not as much as we needed. And the original commitment was made when interest rates were high, and this would have priced the amount of the payback high."
But a spokesman for the retirement fund said, "we have not withdrawn our commitment to provide mortgage funds of $45 million. We are operating on that premise although we are aware of the fact that they have serious financial problems." If the press building corporation doesn't take the $45 million by the October 1984 expiration date of the commitment, it will forfeit a $450,000 commitment fee, the spokesman said.
The problems with financing and cost overruns stem "from fact that the club runs the renovation operation. They don't know anything about real estate and construction," said Robert Robotti, whose New York brokerage firm represents holders of 209 shares in the press building corporation. The press club holds more than 20,000 of the corporation's approximately 26,000 shares.
Hickman maintained there are several advantages for the press club under the new plan. The Press Building Corp. would become a minority partner with an investment syndicate known as L-G Associates in the building's purchase. The corporation will continue to manage the Press Building and will have a 10 percent interest "to help offset some of its own tax liabilities," Hickman said.
L-G Associates, made up of Langelier Historic Properties of Boston and Gardner Capital Corp. of New York City, will raise the $15 million, or more, by selling shares in the building to investors attracted by the generous tax credits.
Hickman says the advantages of the financing proposal to the corporation and its major shareholder, the press club, include a lower interest rate and a repayment schedule tailored to the corporation's expected income. The interest on the $45 million loan commitment obtained from the New York retirement fund was 15.4 percent, while "the overall effective cost of borrowing" under the new proposal will be 10.72 percent, Hickman said.
Repayment requirements "recognize that the earliest years will be leanest," Hickman said, adding that the corporation will not be required for the first six years to make any payments on the $15 million in equity funds to be advanced by the syndicate.
The corporation will retain 100 percent of the building's cash flow for the first 10 years, in addition to a guaranteed income of $2.7 million per year for the life of the agreement, according to Hickman.
After the 10th year, however, the corporation must begin sharing "the building's cash flow with the investors," Hickman said. Under the plan, the investors then will receive 50 percent, the syndicate 25 percent and the corporation 25 percent of the buildings earnings, above the $2.7 million annual guarantee.
The press club will occupy the top two floors of the renovated building rent free for the first six years, and then will pay rent of $350,000 a year for the next 10 years. After that, the club will again occupy its quarters rent-free.
Some minority shareholders see the press club's low rent advantages as evidence that "they are getting screwed" in the new deal, said Robotti. The free rent the press club enjoys gives it an advantage that minority stockholders cannot share, and at the same time cuts into the earnings shareholders could receive from tenants required to pay market rates for their space, he said.
Rent in the renovated structure will be $26 per square foot, nearly double the rental in the old building. Tenants who move in before the renovation is completed will pay $20 to $23 per square foot until all work is completed.
Critics also complain that the noise and disruption caused by the renovation work and the prospect of higher rents in the new building are driving out press organizations that have been loyal tenants of the building for years.
Hickman acknowledged that a number of press organizations have moved their offices to other buildings, including McGraw Hill, the Reuter news service, the Baltimore Sun, and several midwestern newspapers.
But he said that more than half the 440,000 square feet of rentable space in the renovated building is leased. The National Press Club will use 45,000 square feet and the Rouse Co. has signed a "letter of agreement" for 63,000 square feet, on which it plans to develop a shopping mall.
As renovation costs escalated, plans for the project were scaled down. A planned 150-car parking garage under the building was scrapped and retail space was cut back.