Discounted Payoff
Properties: Nine self-storage facilities in New York and Pennsylvania
Loan Balance: $25.5 million CMBS debt and $14.0 million on-book bank debt
Problem: The complexity of this transaction was that all nine properties were underperforming, and the collateral was backing multiple loans. To support the insufficient cash flow from the properties and keep the loans current, the borrower was funding new equity out of pocket for a significant number of months. This was not a financially viable option long-term.
Five of the properties were part of a portfolio loan held in a CMBS trust, on a non-recourse basis, and the balance of the loans were on-book with a traditional banking institution and had full recourse provisions. Generally speaking, motivations and resolution strategies can vary widely on a CMBS loan workout versus a traditional bank workout. It was necessary in this case to weave the differing motivations and strategies together because two of the properties were divided into two phases: One phase was held as collateral with the bank, and the other was held as collateral with the CMBS trust. Any solution, whether it was by the borrower alone, or with a new capital partner, had to result in both phases of these two properties being united under one umbrella.
In addition to the underperforming nature of the assets, the borrower had limited new capital to commit to the resolution. Following a thorough analysis of the borrower’s situation, the parties decided that the best solution was to recruit a joint venture partner with cash to contribute and execute a discounted payoff, ideally consolidating all loans into a single, simultaneously closing transaction.
Solution: After multiple potential partners were vetted, a single accredited joint venture partner was identified, in this case a private individual. In parallel negotiations with both the bank and the CMBS trust, efforts resulted in a discounted payoff of $12.0 million related to the CMBS debt and $8.4 million related to the bank debt. The new capital partner and borrower executed a new joint venture agreement and subsequently funded the discounted payoff, with part of the funding coming from a new lending institution. Additionally, the borrower was fully released from the recourse provisions upon execution of the payoff.