Property: Class B Office Building – 78,246 SF Loan Balance: $14.2 million
Problem: The loan was transferred to special servicing due to cash flow issues related to declining rents, increased vacancy and value erosion. Additionally, the property needed capital improvements and leasing funds to facilitate future leasing. Given the declining NOI and rising cap rates, value did not merit an additional equity contribution by the Borrower. Tenancy for the building has historically been challenged due to the small 300-1,000 square foot nature of the suites.
The Borrower secured a CMBS loan in 2007 for the principal amount of $14,200,000. The loan had a 30 year amortization schedule, 5 year interest only period, with a 10 year balloon. At the time 1st Service Solutions entered the picture, the loan was in default and in foreclosure. The value was estimated at $9,400,000.
Solution: The 1st Service team successfully negotiated a modification on the note. The modification allowed the Borrower to bring new equity into the capital stack, at a valuation that was realistic for a recovery and return. This new equity was used as a means to deleverage the debt stack, in addition to providing for future capital improvement and leasing dollars. The modification saw the lender taking a write down on a portion of the note, while also creating a B Note facility to recapture some lost yield. The going forward debt payments are based on today’s valuation.
In summary, 1st Service Solutions secured an agreement in which both Lender and Borrower could benefit from the others participation.