March 2015DEAL OF THE MONTH
Single tenant office building in the Northeast
The property is a Class A single tenant office building in a large CBD in the northeast. The property was built in the early 80s as a build to suite for the single tenant. The tenant had a lease in place through May 2014. The tenant notified the borrower in early 2013 that it would either need to vacate the building all together or significantly reduce the amount of space it occupied at its lease expiration. The loan was transferred to the special servicer for a resolution.
$115 million at Origination
$46 million at modification
- Tenant improvement and leasing commissions would be astronomical given the size of the space
- The value of the property was only 70% of the total loan amount
- The borrower (or any other capital provider) was not interested in putting up new money in the form of TI, LC or other capital costs given these facts
Losses Reduced By:
The only viable structure that made sense given all the challenges was an AB structure. The A note was sized to $45MM and a debt service reserve was established at the time of the modification for use in keeping the $45MM A note current at a low IO payment. The borrower placed the new funds required for TI and LC costs in a reserve held by the servicer (to be used for the TI and LC costs). The loan was also extended for 3 years, so the new maturity date is June 2019. The tenant wound up staying in the building with much smaller space. The borrower immediately engaged a broker to find other tenants to occupy the space to be vacated by the single tenant. Overall, this structure should allow the borrower sufficient time to stabilize the property before the new maturity date. It also provides the bond holders a much higher recovery on their investment. Both of these components are a requirement for a successful CMBS restructure.