A $396M mortgage tied to a Chelsea office that began its life as a biscuit factory is showing some cracks.

The CMBS loan for Vornado Realty Trust and Related Cos.’ 85 10th Ave. has been transferred to special servicing, according to a Morningstar Credit alert, which noted that the transfer was due to a potential “imminent default.” The debt is scheduled to mature in December.

The 11-story, 635K SF office building is also encumbered by $229M of mezzanine debt. The property is 89.9% occupied, according to Vornado’s second-quarter supplemental earnings report, but its cash flow has “significantly lagged” since the pandemic. 

The largest tenant in the office tower, formerly a Nabisco factory, is Google, which renewed its 300K SF space in the building in 2024 with asking rents at $100 per SF. Biometric tech firm Clear leased 119K SF in 2021 but is still in its free rent period, according to Morningstar.

The building’s cash flow last year was 28% below the projected level when the owners refinanced the building in 2016 with a loan from Deutsche Bank, according to Morningstar.

The transfer is likely just a product of the upcoming maturity and the lower-than-expected cash flow, Morningstar Credit Analytics Associate Managing Director David Putro told Bisnow. 

“Ultimately, this seems like something that would get modified and extended pretty easily,” he said, adding that he doesn’t expect the owners will have to chip in large equity sums to get new debt because of the building’s occupancy rate and the strong NYC office market.

“There’s a lot going for this property,” he said. “There’s a lot of reasons for Vornado and the servicer to work to get something done.”

Vornado declined to comment. Related and special servicer Situs Holdings did not immediately respond to requests for comment.

Related first acquired the 1913-built property from Somerset Partners for $430M in 2007. Vornado, which had been a lender to Related, acquired a 49.9% stake in the building in connection with the 2016 refinancing deal, which totaled $625M.

The debt came with a weighted average interest rate of 4.55%, Vornado said in a release at the time — far below today's elevated rates.

The building’s strong occupancy stands in contrast to the surrounding area. At 26.8%, Chelsea had the second-highest vacancy rate in Manhattan, according to Cushman & Wakefield.

But across the city, landlords have regained leverage as the availability of quality office space has dwindled dramatically. Vacancy in Manhattan offices fell to 19.3% in the second quarter from 22.6% a year prior, according to Cushman & Wakefield.