Construction Financing with Equity
Problem: Client was a newly established firm in the Southeast, looking to build a large student housing facility approximately 3 miles off campus to the University. The combination of inexperience, having never developed a property on their own, the location off-campus and the need for an equity partner posed a unique challenge in a tight construction lending market. Further complicating matters, the deal had been out to market for almost a year with another broker with no success. Not one lender had shown interest in even quoting the deal making it crucial to identify all parties that had previously been approached. Time was running out for the young developers and unless we could raise the capital in the coming three to six months, the partners would have had to sell the land.
Solution: Putting forth a powerful marketing and finance strategy, a large group of potential players were individually called and presented a detailed and professional book. With focused persistence and a keen eye on detail, a group of lenders and equity players willing and interested came to the table. After spirited negotiations, mostly due to the nature of the risk and the equity player involved, we successfully secured 85% of the capital stack. All in the time needed for the property to be built for the upcoming year of returning students.
The success of this deal has enabled the client to grow their portfolio with an established record and reputation.
CMBS Loan: This $90 million loan was made in 2007 to a well-known developer in the Northeast with a significant retail and office portfolio. The collateral was an aging 610,000 SF regional mall constructed in the late 70’s.
Problem: The loan was nearing maturity with no hope of getting refinancing. The mall had a lackluster line-up of anchor tenants and would need to be redeveloped into more of a life-style center to have any hope of survival. This would, however, require a substantial investment with an investment horizon of at least 10 years in order to get any return on the additional investment. Initially the Special Servicer (SS) was approached with a proposed AB note with a 3-year extension. Disagreement between the SS and the Borrower not only on the size of the A note based on widely divergent opinions of value, but also on the amount to be invested during the 3-year extension brought this approach to a dead end. The SS was then approached with a proposal to sell the note with the Borrower providing a stalking horse bid at the value of the property as determined by the Borrower. Although this was met with some enthusiasm by the SS the Controlling Class Representative (CCR) stepped in and declined this approach since they were not willing to take a big loss on the bonds they owned. This loss alone would have been big enough to wipe out their bond position.
Solution: Seemingly at a stand-off with little choice but to hand the keys back to the Lender the Borrower faced a huge tax liability on the associated debt forgiveness since they had owned the property for well over 30 years with a current tax basis of zero. Knowing that the typical Deed-in-Lieu documents of the SS were designed to make the transaction look like a sale the SS was approached with the idea of creating a 1031 Exchange so the Borrower could defer their $30+ million potential tax liability. The 1031 Exchange poses some risks to the Lender as title has to be transferred to the intermediary in these transactions and this would be the first time in CMBS workout history something like this would have been done. Based on the trust built up between the SS, Borrower and Advisor assisting the Borrower the SS reluctantly agreed and the Borrower was able to find a suitable property to exchange into resulting in a huge tax saving to the Borrower.
CMBS Loan: The client was a well-known developer in the Northeast with a significant office portfolio. Two crossed loans were originated in 2007 totaling $70 million on two adjoining office buildings totaling 260,000 SF.
Problem: The two loans were approaching maturity with no hope of getting refinanced out. The larger of the two buildings comprising about 90% of the total square footage was 60% occupied by one major tenant with a lease expiring 3 months prior to the maturity of the loan. It was questionable if the tenant would stay unless a deal could be made with the Lender to keep the current owner in the property. Generally, the market where these buildings are located was lackluster at best so there was little hope to backfill the space with a new tenant in the short term. Further complicating the leasing situation was the fact that the tenant had made some significant changes to their space which would be very costly to undo in order to restore the property to a leasable condition. With the value of the properties determined to be slightly below or at the debt even with the large tenant in place there was little incentive for the Borrower to contribute additional capital given the uncertain leasing climate. However, given the Borrower’s long-term ownership of the properties and generally good reputation in the marketplace the Special Servicer was persuaded that it was in the Lender’s best interest to work with the Borrower to try to renew the large lease and give the Borrower some additional time to potentially find additional tenants. The Controlling Class Representative (CCR) supported this approach as they were not interested in taking losses on their bond position in the short term. However, should things not work out at the property level the Borrower would face a big tax liability on the debt forgiveness should they have to give the property back to the Lender.
Solution: In order to mitigate the tax liability issue an agreement was negotiated with the SS whereby the Borrower could do a Deed-in-Lieu with a 1031 Exchange at the end of the extension term. This was only the second time in CMBS history this was accomplished after the success of a similar transaction on the Regional Mall described above. After intense negotiations between the Tenant, Borrower and SS the Borrower was able to renew the large lease, get a 6-month extension with a small amount of additional capital invested, which basically just covered closing costs, and the assurance of a pre-baked 1031 Exchange deal at the end of the extended term should they not be able to find additional tenants in order to finance out.
CMBS Loan: The client was a major off-shore, student housing REIT. This $53 million loan on an 800-unit was originated in 2006 with a mid-rise student housing building in a major metropolitan area as collateral.
Problem: The loan was approaching maturity with no hope of refinancing without a significant capital injection. The occupancy at the property had been hovering around 70% in spite of being located across the street from the campus of the University due to deferred maintenance and generally poor management. The reputation of the building had suffered and was in need of significant capital improvements in order to become competitive again. The Borrower was well aware that they had not paid enough attention to the asset but was committed to turning it around. The Special Servicer (SS) had determined that the building was worth just below the debt so there was not a high motivation on their part to enter into any deal – especially with a Borrower that had not managed the property properly. After extensive talks and on-site visits with the SS and Borrower the SS was convinced that the Borrower had a viable plan to turn the asset around. This included replacing management with senior staff from their other properties around the world along with a significant capital contribution. The situation was further complicated by the fact that the ultimate investor, an offshore pension plan, was represented by an independent Board of Directors, who had to be convinced that it was prudent to invest further money in the project.
Solution: After intense negotiations with not only the SS, but also with the Board of Directors, and a very complicated closing process due to the offshore nature of the transaction the Borrower was able to secure a one-year extension with two one-year extension options with additional capital invested at each extension. This allowed the Borrower to spread the investment out over 3 years making it more attractive to the investor in case things would not work as planned after a year or two. The fees to the Lender for the extension was also deferred for a year in order to be able to direct as much money as possible to the improvement of the building up front. The fees would then be paid out of cash flow from the building.