lead the $420 million construction loan for a Times Square office tower in New York, sources said.

The New York and German banking companies beat out FleetBoston and Hypovereinsbank for the plum assignment of syndicating one of the biggest construction loans in years.

But the two winners face a challenge. Some banks may be reluctant to take part in the syndicate because the building's main tenant, the accounting giant Ernst & Young, is a private partnership with no disclosure requirements. And Bank of New York and Commerzbank will be marketing the deal at a time when bank regulators are expressing concerns about commercial loan quality.

Experts said Bank of New York probably won the mandate to finance Five Times Square because it already has experience in the transformation of the once-seedy neighborhood. It was lead agent for the $340 million construction loan for the Conde Nast building that developer Douglas Durst built at Four Times Square, and it provided a letter of credit for the $270 million construction loan and mortgage to the Rudin Organization for the new Reuters headquarters at Three Times Square.

"Their involvement with Four Times Square and the Reuters building gave them knowledge that was very valuable," said Mark Edelstein, a real estate lawyer at Morrison & Foerster LLP in New York.

For example, Bank of New York was already familiar with the complicated ground lease for the site, which is more than 1,600 pages long. It is the same ground lease for the other two Times Square buildings the bank has been involved with. All three projects, plus one other site that Boston Properties controls, are part of the 42nd Street Development Project, a parcel of land owned by the state.

Douglas T. Linde, senior vice president at Boston Properties, confirmed that his company had signed a commitment letter for $420 million, but he would not comment on which banks were selected. Bank of New York did not return calls. A Commerzbank official would only confirm his bank's involvement.

Industry sources said the two lead banks have already lined up Hypovereinsbank and one other bank to take about $75 million apiece. The lead banks are expected to dole out smaller pieces to a bigger group of banks later on. The total cost of the project is expected to be $550 million.

The deal is something of a coup for Commerzbank, for whom Boston Properties is a relatively new customer. Earlier this year the German bank participated in a $200 million construction loan for 111 Huntington Avenue, an office building the real estate investment trust is building in its hometown, Boston. Bank of New York is a participant in the REIT's credit line.

Boston Properties acquired the Five Times Square development site in January, and by August had secured one of the most important prerequisites for construction financing by pre-leasing most of the office space.

Ernst & Young signed a 20-year lease for one million square feet in the planned building between 41st and 42d streets on the west side of Seventh Avenue. Upon completion -- which is scheduled for the first half of 2002 -- the building would become Ernst & Young's headquarters, and the accounting firm would move most of its 4,000 New York employees from space leased in seven other New York buildings.

But the fact that Ernst & Young is a private firm spooks some bankers, who have long memories of the early 1990s, when major law and accounting firms were hit with suits by Resolution Trust Corp. over failed thrifts that the accountants had audited.

"You can't sell this on the basis of it being 90% pre-leased," said a real estate banker at a competitor of Bank of New York.

To address such concerns, Boston Properties is talking to Ernst & Young about obtaining a "private letter" rating of the accounting firm from one of the major credit rating agencies, Mr. Linde said. However, he said, such a rating would be to comfort the "takeout" lender that eventually refinances the loan, not the construction lenders.

Many banks, Mr. Linde said, already have exposure to Ernst & Young and therefore are familiar with the firm's financials. "We expect E&Y will have an important and high credit rating," he added.

The tenant notwithstanding, bankers can take comfort in the health of the Manhattan office market, one of the hottest in the country.

According to Torto Wheaton Research, a division of CB Richard Ellis, the office vacancy rate in Times Square in the third quarter was 2.9%, compared with a national average of 10.4%. Office rents in the neighborhood grew 18.3% in the first half, to $40.83 per square foot, while nationally rents grew only 7%, to an average of $22.19.

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