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https://new-york/2023/02/01/nearly-completed-west-chelsea-office-project-heads-to-foreclosure/
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Nearly completed West Chelsea office project heads to foreclosure​

Warehouse conversion at 541 West 21st Street beset by construction delays, liquidity issues
The Frame building at 541 West 21st Street (Newmark, Getty)

FEB 1, 2023, 7:00 AM
By
It was a blank canvas for new office space, until it got stretched a little too tight.
A nearly finished boutique office building in Chelsea’s art district is headed for a takeover, most likely by one of its lenders, unless the owner can stave off a pending foreclosure sale.

An auction for the eight-story warehouse-to-office conversion at 541 West 21st Street, dubbed “The Frame,” is set for Feb. 14, according to marketing materials seen by The Real Deal.
Erno Bodek, the property’s longtime owner, can stop the UCC foreclosure by cutting a deal with mezzanine lender SME Capital Ventures, or by putting the 65,000-square-foot project into bankruptcy. If the auction does take place, SME would likely come away with the property.

The redevelopment of the century-old warehouse between 10th and 11th avenues kicked off in 2019, with $56 million in senior loans from G4 Capital, and a $4.75 million mezzanine loan from SME.
But construction delays caused by liquidity problems scared off potential office tenants, including web designer Wix and online retailer Shopify, according to SME co-founder Eran Silverberg. All eight stories, including ground-floor retail space, are available for lease, according to the marketing materials.

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Exterior work on the project appeared to be wrapping up earlier this month, according to New York Yimby, but Silverberg said another $10 million would be needed to finish the conversion.
“We think this building is in the right location to be successful,” said Silverberg, who mentioned the Cortland, a nearby residential development, and the High Line as neighborhood draws.

Silverberg said SME would finish the project and stabilize tenancy before selling. Bodek initially tried selling the property as either a hotel or office conversion in 2015 and sought $65 million for it before taking on the redevelopment himself.
A representative of Newmark, which was tapped to market the foreclosure sale, declined to comment. Bodek, who bought the property in the 1980s, could not be reached for comment.
Chelsea has drawn more residential development than office in recent months, including new projects by MaryAnne Gilmartin’s MAG Partners and John Catsimatidis’ Red Apple Group, although the latter’s is mired in legal disputes.

 

David Goldsmith

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Lenders sue American Dream mall for $389M​

Western Asset Management, South Korea bank claim breach of contract

The American Dream mall’s financial woes continue to pile up.
Two lenders filed a lawsuit alleging a breach of contract by Triple Five Group, the owner of the beleaguered retail and entertainment center in New Jersey, NorthJersey.com reported. Bloomberg Law first reported the suit by an administrator representing Western Asset Management and South Korea-based Nonghyup Bank.

The lawsuit, filed last week in New York State Supreme Court, seeks $389 million on behalf of the firms. A spokesperson for the American Dream declined to comment to NorthJersey.com regarding the lawsuit.
At the heart of the lawsuit is an extension Triple Five recently received to pay off its debt on $1.7 billion in construction financing. Senior lenders in November gave the mall owner a four-year extension on the loan, taking the debt to October 2026. That extension effectively cut out the two junior lenders, according to The Bond Buyer trade newspaper.

The lenders’ attorneys did not respond to a request for comment from NorthJersey.com.
It’s the latest wrinkle at the East Rutherford retail complex that’s had its fair share of issues during its brief run.

Don Ghermezian’s firm this month missed an $8.8 million semiannual debt service payment for interest due on $290 million in municipal bonds. Triple Five claimed the state bore the responsibility of releasing the funds to make that payment, at least the second time it has made that argument.
In June, Triple Five missed a semiannual payment on an $800 municipal bond, which was ultimately paid later. The firm received $2.7 billion from banks and bondholders to complete the complex. In 2021, the mall reported $60 million in losses.

With the backdrop of the mall’s troubles, Asian supermarket chain H Mart is set to hold its grand opening at the complex this week. The debut comes four years after the store’s occupancy at the mall was announced.
 

David Goldsmith

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RFR seeks $1B refi of Seagram Building​

Aby Rosen and Michael Fuchs’ firm face debt package, preferred equity due in May
RFR Holding is on the hunt with for refinancing with three months until maturity at the Seagram Building.
Aby Rosen and Michael Fuchs’ firm hired Eastdil Secured to secure a loan to retire the outstanding debt on the 38-story office property at 375 Park Avenue, the Commercial Observer reported.

The $1 billion financing package RFR secured a decade ago is scheduled to mature in May, according to Commercial Mortgage Alert. The package comprises $783 million in senior CMBS debt from Citigroup and Deutsche Bank and $217 million of mezzanine loans. None of the outstanding debt has been paid; RFR has discussed extending the loan.
An additional $100 million of preferred equity in the deal — provided by MSD Partners — is also maturing alongside the larger package. If it’s not paid off, MSD can purchase the preferred equity at par and exercise mezzanine rights.

In total, RFR needs a $1.1 billion capital stack. The firm did not return the Observer’s request for comment.
RFR recently conducted a $25 million renovation of the 860,000-square-foot tower, adding a 35,000-square-foot amenity space to replace a parking garage.

Private equity firm Blue Owl Capital recently signed a lease for 138,000 square feet, increasing the volume of leasing at the building last year to at least 375,000 square feet. Still, RFR is smarting from the departure of Wells Fargo a couple of years ago; the bank shifted to Hudson Yards.
Commercial mortgage maturities are cascading across the New York City office market, facing a one-two punch between rising interest rates and waning interest in full-time in-person office work. More than $16 billion in loans secured by commercial properties are scheduled to mature this year, according to Trepp.

The $783 million CMBS debt is one of the most significant loans set to mature this year. The property is approximately 96 percent leased.

 

David Goldsmith

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Distress Rate in NYC Multifamily CMBS Set to Rise​

BY MARC MCDEVITT FEBRUARY 28, 2023 11:44 AM​

Manhattan skyline

PHOTO: ANGELA WEISS/AFP VIA GETTY IMAGES

A point of interest among multifamily investors reviewing February 2023 reporting data for CMBS securitizations was the special servicing transfer of a $270.3 million floating- rate mortgage secured by a 637-unit, 11-property multifamily portfolio owned by Blackstone.
CRED iQ anticipates the special servicing transfer to elevate the distressed rate for CMBS loans secured by multifamily properties within the New York City Metropolitan Statistical Area (MSA). Prior to February 2023, CRED iQ’s distressed rate for NYC Multifamily was 0.71 percent. The distressed rate is defined as the percentage of loans that are specially serviced, delinquent, or a combination of both.

Although the distressed rate for New York City multifamily appears nominal at first glance, the New York MSA still ranked as the sixth-highest for multifamily distress among the top 50 markets tracked by CRED iQ.
Other notable distressed properties in the New York MSA include 1209 Dekalb, a 127-unit mid-rise property in Brooklyn. The property secures a $46 million mortgage that has been specially serviced since October 2020.

Among multifamily markets with higher distress than New York were San Francisco (5.83 percent) and Los Angeles (1.24 percent). To be fair, the New York MSA is by far the largest multifamily market in the U.S and is expected to continue to attract multifamily investment given vacancy rates that trend below national levels and favorable demographics. These positives are balanced by headwinds such as negative net migration away from the metro and geographical resident deterrence stemming from remote working alternatives.
Reframing our view of distress to a historical perspective, the New York MSA has improved on an absolute basis compared to 12 months prior when the multifamily distressed rate for the market was 1.41 percent. However, the distressed rate appears to have reached its apex in October 2022 when the distressed rate declined as low as 0.51 percent. After October 2022, the New York MSA multifamily distressed rate increased for three consecutive months, without yet accounting for the latest $270.3 million addition to the distressed bucket.
Compared to the overall CMBS distressed rate for multifamily loans, historical trends for the New York MSA have exhibited similar patterns over the past year. The multifamily distressed rate for CMBS has been trending higher for six months.
The low-point for distress in CMBS multifamily loans over the past year occurred in July 2022 when the distressed rate was 1.41 percent. There were spikes in distress in August and November caused maturity defaults that were worked out by the next month. The multifamily distressed rate for CMBS has nearly doubled since July 2022.

Overall, the performance of the CMBS multifamily sector can be put into perspective when considering other property types and the broader multifamily market. Multifamily, along with industrial, have been the two best performing property types in recent history.
Other property types like retail, lodging and more recently office have faced secular headwinds due to shifting usage trends. For comparison, Fannie Mae’s multifamily delinquency rate — defined as loans that are 60-plus days delinquent — has consistently and steadily declined from its February 2022 mark of 0.40 percent. The Freddie Mac K-deal multifamily delinquency rate has barely registered with a delinquency rate — defined as loans that are 30-plus days delinquent — of just eight basis points as of year-end 2022.
CMBS multifamily collateral tends to have more idiosyncrasies than Fannie Mae and Freddie Mac collateral, partially explaining the variation in distressed rates. Additional idiosyncrasies and pockets of distress, such as the New York multifamily default, may materialize market by market as maturity balloon payments come due and floating-rate debt service continues to pressure coverage ratios.
Marc McDevitt is a senior managing director at data analytics firm CRED iQ.
 

David Goldsmith

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Twitter lists Chelsea office space​

Company offers 200K sf on West 17th St. after Columbia Property Trust default
Twitter is looking to cut costs in Manhattan, joining scores of tech firms offering New York City office space for sublease.
The social media company listed 200,000 square feet of space up for sublease at its Chelsea offices, brokerage Savills told Bloomberg. The connected buildings at 245 West 17th Street and 249 West 17th Street comprise a property owned by Columbia Property Trust, a subsidiary of PIMCO.

The addresses surfaced last week as one of seven properties tied up in a recent default by Columbia.
The office landlord last week defaulted on $1.7 billion in loans tied to the properties, including three in New York. The REIT has said it is working with lenders to restructure the debt in the wake of one of the largest office defaults since the onset of the pandemic.
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Twitter, which cut its entire public relations department, did not respond to a request for comment from the outlet.
Columbia has had its issues with Twitter and Musk’s alleged non-payment of rent. Two months ago, an affiliate of Columbia sued the social media company for allegedly not paying rent for its San Francisco office at 650 California Street, claiming Twitter owed more than $136,000 in back rent.

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Rent disputes have become a recurring problem for the social media platform. A landlord in Boston sued the company last week, claiming the company owed $632,000 in rent. Other landlords for Twitter in San Francisco have sued the company, as has the Crown Estate, which manages property for King Charles III of the United Kingdom.

Twitter’s opting to sublease places it in line with a larger retreat from the Manhattan office market by big tech firms, which have been laying off employees in large amounts in recent months. Amazon and Meta are among the companies to roll back office plans in the borough in the past year.
 

David Goldsmith

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Toby Moskovits’ Bushwick Generator heads to foreclosure auction​

Developer owes $48M on original $33M mortgage

Toby Moskovits’s Bushwick Generator is headed to a foreclosure auction.
The judge in Fortress Investment Group’s foreclosure lawsuit against Heritage Equity Partners’ Moskovits and Michael Lichtenstein ruled earlier this month that their development at 215 Moore Street in Bushwick can head to auction after more than three years of legal wrangling.

The auction will take place at the Brooklyn county courthouse at a date yet to be determined.
Moskovits and Lichtenstein owe $48.2 million on the $32.6 million mortgage they took out on the property in 2018, according to a referee’s report from mid-January. Interest is accruing at more than $17,000 per day.

Fortress filed to foreclose on the property in 2019 but Moskovits shot back with a litany of allegations, claiming the Softbank-owned lender was running a loan-to-own scheme.
Moskovits asserted that Fortress interfered with her effort to refinance the debt and even chased other lenders away. But the judge ruled that, despite those allegations, there was “no dispute” that Moskovits failed to repay the debt.

“None of defendants’ arguments alleging that plaintiff fabricated their default rebut the alleged defaults,” Judge Reginald Boddie wrote in his decision this month.
Neither Moskovits nor her attorney immediately responded to a request for comment.

Heritage had planned to redevelop the property on Moore Street into a 75,000-square-foot “innovation collective” described by its architect as the “antithesis of the sterile Silicon Valley office park.”
Moskovits has been navigating several lawsuits and trying to fend off creditors.
Her bankrupt Williamsburg Hotel was approved for sale in January for $96 million.
 

David Goldsmith

All Powerful Moderator
Staff member


Concerns Grow as Tighter Lending Threatens Commercial Real Estate​

The recent banking turmoil added scrutiny to a sector already weighed down by office vacancies, rising interest rates and mounting debt.

Ephrat Livni
By Ephrat Livni
April 6, 2023
3 MIN READ
The turmoil that drove Silicon Valley Bank and Signature Bank out of business last month, rocking the wider banking sector, has analysts bracing for the next possible crisis: the $20 trillion commercial real estate market.
The bank failures brought new scrutiny to other regional banks, which provide the bulk of commercial real estate loans. Those loans are then repackaged into complex financial products for investors in wider markets. And the outlook for the industry appears stark, market watchers say.
Commercial real estate, the lifeblood of the lending business for regional banks, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warned investors in a note this week, adding to a growing chorus that has been expressing concerns about the industry’s looming challenges. Critics say the sector is precarious thanks to a potentially toxic cocktail of postpandemic office vacancies, rising interest rates and a mass refinancing of mortgages that lies ahead.
Cities across the United States had been experiencing a plunge in demand for office space that accelerated during the height of the pandemic, and many were still struggling to bounce back, according to the National Association of Realtors, a trade group. The bigger the city, the larger the decline, which has added up to a 12 percent office vacancy rate in the United States, from 9.5 percent in 2019, the industry group reported in February.

“Remote and hybrid work, layoffs and higher interest rates further increased office space availability in the market,” the group wrote.
The debt on those office buildings will soon come due, whether or not the spaces are full. More than half of the $2.9 trillion in commercial mortgages will need to be renegotiated by the end of 2025. Local and regional banks are on the hook for most of those loans — nearly 70 percent, according to estimates from Bank of America and Goldman Sachs.
And interest rates are expected to continue to rise as much as 4.5 percentage points, according to Morgan Stanley. That debt load will weigh on businesses as low occupancy rates put pressure on property values.
The effect is likely to put a chill on lending, experts say, which will make it harder for developers to borrow money to build shopping malls and office towers and could spill over into wider markets.

“We are reluctant to declare ‘all clear’ on recent regional banking stress,” Candace Browning, who heads global research at Bank of America, wrote in a note this week. In a sign of market uncertainty, the Federal Deposit Insurance Corporation, which took control of Signature Bank last month, is still searching for a buyer for the bank’s $60 billion loan portfolio, which comprises primarily commercial real estate loans.

Federal regulators are trying to find a buyer for the $60 billion loan portfolio of Signature Bank, which collapsed last month.Credit...Gabby Jones for The New York Times

The economic impact is vast. Even as it struggled with the effects of pandemic restrictions, commercial real estate — which includes office buildings, shopping malls and warehouses — contributed $2.3 trillion to the U.S. economy last year, an industry association calculated.
Critics say that, with parts of the banking sector so fragile, the Federal Reserve should rethink its aggressive monetary policy, which has included nine interest rate increases since March 2022. The high price of refinancing commercial real estate loans in coming years will “likely lead to the next major crisis,” the Kobeissi Letter, a newsletter that covers the economy and markets, wrote on Twitter last week, adding that “the Fed plays a major role.”

So far, the Fed is unswayed: At least one more rate increase is in the cards this year.
Still, the criticism is not limited to the central bank; poor risk management was also to blame, some say. Silicon Valley Bank, for example, ignored warnings from bank regulators. The bank was invested in government bonds that would have been more valuable if they were held to maturity — but when clients began withdrawing funds rapidly, the bank was forced to sell those assets at a reduced value to meet the demand for cash.
Silicon Valley Bank was not alone in its approach. A National Bureau of Economic Research paper that tracked bank asset values as interest rates rose last year found that banks across the country hold a total market value that is $2 trillion lower than what’s reflected on their books. This suggests that many banks are already taking unnecessary risks and may struggle as economic conditions tighten, said Amit Seru, a professor at Stanford Business School and one of the paper’s researchers.
Mr. Seru did not blame the Fed, however, saying it had “no choice but to raise rates” to tackle inflation, though he admitted the central bank did make a “complex situation more complex.”
 

David Goldsmith

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NYC investment sales plummeted 52 percent in the first quarter
High interest rates resulted in sharp annual declines across office, multifamily and industrial

High interest rates brought a long, cold winter to New York City’s investment sales market.
Buyers and sellers traded $5.3 billion in commercial property in the first quarter, a 16 percent decline from the fourth quarter and a 52 percent drop from the same period a year ago, according to Ariel Property Advisors.

That was spread across 481 deals completed in the first three months of the year, an 11 percent quarterly decline and 36 percent drop year over year.
Sales volume declined across multifamily, office and industrial properties, but offices saw the steepest decline. The quarter’s $470 million in office investment represented a 55 percent decrease from the fourth quarter and an 85 percent drop from the first quarter last year. While 17 different deals for office buildings closed in the first quarter, a slight uptick from the fourth quarter, the number of transactions was down 54 percent year over year.

The multifamily market netted $2.1 billion in dollar volume last quarter, a 33 percent decline from the fourth quarter and 39 percent annual drop. There were 268 deals recorded for multifamily properties, a 17 percent decline from the fourth quarter and 35 percent fall from last year.
The market for development sites cooled off as well. The asset class saw about $968 million in dollar volume last quarter, down 17 percent from the fourth quarter and 58 percent from last year. There were 69 deals for development properties in the first quarter, a decline of 13 percent quarter-over-quarter decrease and 41 percent year-over-year.

One relatively active area of the market was in industrial sites. About $388 million in land deals was recorded last quarter, a 36 percent increase over the fourth quarter. However, that figure was down 43 percent from a year ago, when industrial properties were about as hot as they have ever been.
That 54 deals for industrial sites in the quarter represented an 18 percent increase from the fourth quarter but an 11 percent decline year-over-year.

Ariel Property Advisors’ Shimon Shkury said dealmaking could pick back up in the second half of the year as maturing loans force some property owners to sell to avoid foreclosure.
“As we look ahead, we anticipate that mortgage maturities will become a catalyst for significant transactions … ushering in a new wave of opportunities for sophisticated investors,” Shkury said.
 

David Goldsmith

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Another CRE Giant, Brookfield again, Defaults on Floating-Rate Office Mortgage. Again, CMBS Get this Mess, Not Banks​

by Wolf Richter • Apr 18, 2023 • 66 Comments

Maybe banks, instead of keeping the riskiest CRE loans, securitized them and sold the CMBS? Would be a hoot to find out over the next few years as this plays out.

By Wolf Richter for WOLF STREET.​

So another big office landlord – another Commercial Real Estate fund by Canadian CRE giant Brookfield Corp – defaulted on another big floating-rate mortgage for a portfolio of office buildings.
And once again, it’s the holders of CMBS that are getting to deal with this mess, and not banks, maybe because the riskiest CRE loans with floating rates were securitized into CMBS, and banks hung on to the less risky CRE loans? We’ll find out over the next few years as this office-debt-unwind plays out.
Brookfield Corp. funds defaulted on a $161.4 million floating-rate mortgage for a group of office buildings, mostly in the Washington, DC, area.
The mortgage, which had been securitized into CMBS, was transferred to a special servicer, representing the holders of the CMBS. The servicer is working with “the borrower to execute a pre-negotiation agreement and to determine the path forward,” according to a filing on the CMBS, reported by Bloomberg.

Floating rate mortgages on CRE, particularly offices that are being vacated by one tenant after another, have turned into a deadly combination when short-term interest rates surged from near 0% a year ago, to nearly 5% this year.
On the Brookfield mortgage, monthly payments nearly tripled from just over $300,000 before the Fed’s rate hikes last year, to about $880,000 in April, according to the special servicer report.
And occupancy rates at the dozen office buildings in the portfolio dropped to 52% on average in 2022 – meaning nearly half of the space had no tenants and wasn’t generating any rent while mortgage payments were in the process of tripling – down from 79% in 2018, when the mortgage was issued, according to the special servicer report.
By comparison, the overall occupancy rate in Washington DC was 78% in Q1, and in Northern Virginia, the occupancy rate was 75%, both historic lows, according to Savills.
Special servicing rates of CMBS of office mortgages have soared. Among post-Financial Crisis-vintage CMBS, the special servicing rate shot up from 3.1% a year ago to 4.8% in March, according to Trepp, which tracks CMBS.
But that’s just the latest wrinkle for CMBS. The special servicing rates in March were much worse for retail (11.6%) and lodging (6.3%).
This default by a Brookfield fund follows the two defaults by Brookfield DTLA on mortgages and loans on two office towers in Downtown Los Angeles: The trophy tower at 555 West 5th Street defaulted on a $350 million mortgage, which had been securitized into CMBS, and two mezzanine loans, all of it totaling $465 million; and the tower at 777 South Figueroa Street, which defaulted on a mortgage and a mezzanine loan of $319 million.
The big office defaults that have been percolating around the US have largely hit CMBS holders and non-bank lenders. Lenders have recently taken huge losses when office towers were sold at foreclosure — and those lenders were largely CMBS holders.
It’s the riskiest loans with floating rates on buildings with occupancy issues that get weeded out first, such as older office towers. And that’s the wave of defaults we’re now seeing.
Of the overall CRE debt, only about 45% is held by banks, and the remaining 55% is held by investors, such as life insurers and pension funds, and non-bank lenders such as mortgage companies, mortgage REITs, or PE firms, or has been securitized into CMBS, CDOs, and CLOs, which are spread around global bond investors. About 21% of CRE has been securitized into government-backed Agency or GSE multifamily MBS (I discussed the banks’ share of CRE debt in detail here).

Free-money feeding frenzy among investors?

It would be a hoot to find out over the next few years that the chase for yield during the free-money era created such a feeding frenzy among investors of all kinds that they aggressively outcompeted banks by offering better terms on CRE loans.
And so they eagerly originated floating-rate mortgages on overvalued buildings because they figured that the Fed would hike rates soon, and that they would benefit from those rising short-term rates which would push up the floating rates and thereby push up the yield and income from the loan, and therefore protect the value of the loan.
And that makes sense, if they were counting on the Fed to hike by 200 basis points at the total max and then promptly pivot as it had done last time. And maybe they didn’t take the shift to work-from-home seriously, and maybe they expected office buildings to always remain at the center of the US economy, ensconced in an aura of a permanent office shortage. And so maybe they didn’t figure that rates would rise by 475 basis points, while office occupancy rates would plunge, turning into a toxic mix for borrowers, so that they would just default on the floating-rate loans to renegotiate the loans or walk from the properties?
And maybe banks were onto it, and instead of hanging on to those riskiest loans, they securitized them and sold the CMBS to investors? That would be a hoot to find out
 

David Goldsmith

All Powerful Moderator
Staff member

L&L, Mitsubishi default on Plaza District office tower​

Metropolitan Tower likely district’s largest distress case since Financial Crisis
Owners of the Metropolitan Tower in the Plaza District have stopped making payments on their mortgage in what is likely the largest case of distress in the city’s premiere office district since the Financial Crisis.
L&L Holding and its partner are in default on the $92.5 million loan backing the office portion of the 68-story, mixed-use tower at 142 West 57th Street, sources told The Real Deal.

The lender, Aareal Capital Corporation, is looking to sell the non-performing loan. A new buyer could renegotiate the debt or try to take control of the property through foreclosure.
Representatives for L&L and Aareal Capital declined to comment.

The loan offering is sure to be watched closely as a barometer for New York’s office market and the distress many are expecting with debt maturing, lending tight and interest rates having risen. A Newmark team led by Adam Spies and Dustin Stolly is marketing the note for sale.
Rob Lapidus and David Levinson’s L&L bought the 18-story office portion of the glass-and-steel tower with BlackRock in 2006 for an undisclosed sum. The building, developed in 1987 by Harry Macklowe, has residential condominium units above.

L&L and BlackRock in 2016 sold the majority of the equity in the office portion to the Mitsubishi Corporation through a fund administered by GreenOak Real Estate, which merged with Bentall Kennedy in 2019.
BlackRock exited the property and L&L retained a 1.14 percent stake. It was at that time that the new owners took on a $100 million loan from Aareal. Aareal refinanced the debt in 2021 with a $92.5 million loan — the one now in default.

The three-year loan is interest-only with a rate of 300 basis points above LIBOR, according to marketing materials from Newmark. That interest rate jumps by 300 points once the loan is deemed to be in default.
It’s not immediately clear what led the owners to stop paying, but rising interest rates and the shift to hybrid work have put stress on office owners.
The increasingly troubled WeWork is a tenant in the building.

 

David Goldsmith

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Staff member

RFR seeks $1B refi of Seagram Building​

Aby Rosen and Michael Fuchs’ firm face debt package, preferred equity due in May
RFR Holding is on the hunt with for refinancing with three months until maturity at the Seagram Building.
Aby Rosen and Michael Fuchs’ firm hired Eastdil Secured to secure a loan to retire the outstanding debt on the 38-story office property at 375 Park Avenue, the Commercial Observer reported.

The $1 billion financing package RFR secured a decade ago is scheduled to mature in May, according to Commercial Mortgage Alert. The package comprises $783 million in senior CMBS debt from Citigroup and Deutsche Bank and $217 million of mezzanine loans. None of the outstanding debt has been paid; RFR has discussed extending the loan.
An additional $100 million of preferred equity in the deal — provided by MSD Partners — is also maturing alongside the larger package. If it’s not paid off, MSD can purchase the preferred equity at par and exercise mezzanine rights.

In total, RFR needs a $1.1 billion capital stack. The firm did not return the Observer’s request for comment.
RFR recently conducted a $25 million renovation of the 860,000-square-foot tower, adding a 35,000-square-foot amenity space to replace a parking garage.

Private equity firm Blue Owl Capital recently signed a lease for 138,000 square feet, increasing the volume of leasing at the building last year to at least 375,000 square feet. Still, RFR is smarting from the departure of Wells Fargo a couple of years ago; the bank shifted to Hudson Yards.
Commercial mortgage maturities are cascading across the New York City office market, facing a one-two punch between rising interest rates and waning interest in full-time in-person office work. More than $16 billion in loans secured by commercial properties are scheduled to mature this year, according to Trepp.

The $783 million CMBS debt is one of the most significant loans set to mature this year. The property is approximately 96 percent leased.

 

David Goldsmith

All Powerful Moderator
Staff member

Invesco willing to take loss on Meatpacking office​

Firm shopping converted garage’s leasehold for $90M+ after buying it for $150M in 2018

Major commercial real estate players are continuing to play hot potato with a Class A office building in the Meatpacking District.
Invesco has tapped Eastdil Secured to shop the leasehold on 430 West 15th Street, a fully leased 100,000-square-foot converted parking garage that the investment management giant acquired in 2018, according to marketing materials viewed by The Real Deal.

Invesco is seeking upwards of $90 million, according to sources familiar with the listing — far less than the $150 million it reportedly paid for the lease five years ago.
The building’s current tenant — Live Nation — occupies all eight stories and 100,000 on a sublease it obtained from Palantir Technologies in 2017.

The mid-block property, directly across the street from Chelsea Market and a block west of Google’s massive office building at 111 Eighth Avenue, has changed hands a number of times over the past decade.
In 2014, Atlas Capital Group and the Rockpoint Group secured a 99-year lease on the site for $17 million with plans to convert the existing parking garage and warehouse into offices by adding four glass-walled stories on top of the structure.

Atlas and Rockpoint then flipped it to TH Real Estate — the real estate arm of TIAA — for $107 million in 2016, after Palantir had signed on to lease the space. Invesco picked it up two years later for more than its $150 million asking price, the Commercial Observer reported at the time.
It’s the second major West Side property Invesco has sought to unload of late. In December the company sold the 162-unit luxury rental portion of the Mercedes House in Hell’s Kitchen for more than $100 to Empire Capital Holdings, the investment firm run by former brokers Josh Rahmani Ebi Khalili, which has been on a buying spree of its own lately that’s included a 40-story tower at 133 Sixth Avenue for $320 million and Midtown office building at 345 Seventh Avenue for $107 million.

For Invesco, the sales come after a string of purchases outside New York City. Last year, the firm bought Cortlandt Crossing, a Westchester County shopping center, for $65.5 million, an industrial campus outside of San Jose for $119 million and a life sciences building in Berkeley, California, for $40 million.
Invesco did not respond to requests for comment.
 

David Goldsmith

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Staff member

CMBS Delinquency Rate Jumps 7 Percent in May​


The CRED iQ delinquency rate for CMBS for the month of May increased for the fourth consecutive month to 4.2 percent.
The delinquency rate was 28 basis points higher than the prior month’s rate of 3.93 percent, equal to a 7 percent increase. The CRED iQ delinquency rate has risen by approximately 29 percent since the start of 2023 as a result of headwinds facing the commercial real estate industry.
SEE ALSO: Civitas Capital Group Supplies $27M Loan for Santa Monica Retail Project
Main drivers for the increased delinquencies include more distress in the office sector and a tighter refinancing environment for loans coming due at maturity.
The delinquency rate is equal to the percentage of all delinquent specially serviced loans and delinquent non-specially serviced loans for CRED iQ’s sample universe of more than $600 billion in CMBS conduit and single-asset single-borrower (SASB) loans.

CRED iQ’s special servicing rate, equal to the percentage of CMBS loans that are with the special servicer (delinquent and non-
delinquent), increased month-over-month to 6.01 percent, from 5.39 percent. After a slight decline in April, the special servicing rate continued its upward trendline started in December 2022, when the rate equaled 4.62 percent. Aggregating the two indicators of distress — delinquency rate and special servicing rate — into an overall distressed rate (delinquency plus special servicing percent) equals 6.43 percent of CMBS loans that are specially serviced, delinquent, or a combination of both.

April’s distressed rate was equal to 6.08 percent, which was 35 basis points lower than the May distressed rate. The month-over-month jump in the overall distressed rate mirrors increases in the delinquency and special servicing rates. Distressed rates generally track slightly higher than special servicing rates as most delinquent loans are also with the special servicer.
May data revealed additional turmoil for the office sector for which the property-level delinquency rate rose to 3.98 percent, compared to 3.81 percent in April. One of the largest loans to be reported delinquent was a $783 million senior fixed-rate mortgage secured by 375 Park Avenue, a 38-story, 830,928-square-foot office tower in Midtown Manhattan. The loan failed to pay off at its scheduled May maturity date and subsequently transferred to special servicing to execute a modification, which extended the loan’s maturity date one year, among other terms.

Additional financing for the 375 Park property included $217 million in mezzanine debt that was also extended. A near-term delinquency cure is likely given the closing of the modification; however, the maturity default exemplifies the choppy waters facing impending office debt maturities.
Perhaps more concerning was the 30-day delinquency of a $275 million mortgage secured by EY Plaza, a 920,308-square-foot office tower in downtown Los Angeles. The loan transferred to special servicing in April due to a missed payment. Similar to 375 Park, EY Plaza has mezzanine financing ($30 million).
However, a primary difference from a credit perspective is that EY Plaza is encumbered by floating-rate debt, which highlights issues with debt service coverage more so than refinance risk.
The delinquency rate for office properties has been the most volatile among property types.
The lodging delinquency rate (4.55 percent) exhibited a modest month-over-month increase but is down annually. The retail delinquency rate (7.59 percent) is higher than April’s rate, but has exhibited signals of plateauing with recent workouts of loans secured by regional malls.

The multifamily delinquency rate (1.87 percent) has exhibited year-over-year increases but remains relatively lower than other major property types. Industrial (0.34 percent) and self-storage (0.00 percent) continued to outperform from a delinquency perspective in May.
Pivoting to special servicing rates by property type, office loans exhibited the most activity. The special servicing rate for loans secured by office properties increased to 6.08 percent, compared to 5.57 percent as of April. With its rate now above 6 percent, the office special servicing rate is nearly double its level from 12 months ago.
The May surge in specially serviced office loans was driven by the transfer of a $1.3 billion loan secured by a 146-property office portfolio owned by Workspace Property Trust. The floating-rate loan transferred to special servicing in April ahead of its upcoming July maturity date. The loan has an extension option remaining but obtaining an interest rate cap may be cost prohibitive.
Aside from the office sector, the special servicing rate for retail loans declined to 9.95 percent, compared to 11.04 percent as of April. The special servicing rate for lodging came in at 6.38 percent, a modest increase compared to April.
Multifamily (3.87 percent) exhibited a decrease in its special servicing rate, and the special servicing rate for industrial properties(0.42 percent) was relatively flat compared to the prior month. There was no self-storage specially serviced inventory.

CRED iQ’s CMBS distressed rate by property type accounts for loans that qualify for either delinquent or special servicing subsets. For May, the overall distressed rate for CMBS increased to 6.43 percent, which was 35 basis points higher than April’s distressed rate (6.08 percent), equal to a 5.7 percent jump. CRED iQ observed a relative surge in the overall distressed rate over the past four months as the distressed rate pushes to its highest level since early 2022.
 

David Goldsmith

All Powerful Moderator
Staff member

Pyramid’s $244M debt on Crossgates Mall to be auctioned after default​

Retail landlord failed to refinance after securing one-year extension last spring

Mall owner Pyramid Management Group has spent the past few years fighting fires across its portfolio, but it may soon have one fewer property to deal with.
Three mortgages totaling $243.7 million on Pyramid’s Crossgates Mall outside of Albany are headed to auction after the Syracuse-based developer failed to refinance the debt and defaulted last month, according to the Times Union. Bloomberg Law first reported the sale, which is being conducted by Newmark.

The default comes after Fitch downgraded the debt in March, citing both performance decline and concerns that Pyramid wouldn’t be able to refinance despite extending the maturity date by a year.
The debt sale could spell the end of the road for Pyramid at the Crossgates Mall, one of the largest in the state. The buyer of the loans will have the power to take control of the property. Pyramid, which did not respond to the Times Union’s request for comment, could bid on the debt, though it could also be an opportunity to walk away from a struggling property.

The Crossgates debt first hit special servicing due to delinquency in 2013, only a year after it was originated, according to Morningstar. It returned to special servicing in April 2020 — along with loans on multiple other Pyramid properties, including the Palisades Center in West Nyack — over an imminent monetary default.
Pyramid’s retail portfolio has endured blow after blow. The value of its Poughkeepsie Galleria in the Hudson Valley has declined 71 percent since 2011 ,from $237 million to $68 million as of March, according to CRED iQ appraisal data. Pyramid has also run into trouble with New York’s largest mall, Destiny USA in Syracuse, where it secured a five-year extension on $430 million worth of debt originally due to mature last summer.
 

David Goldsmith

All Powerful Moderator
Staff member

Debt problems surface at crop of Brookfield malls​

New Jersey’s Woodbridge Center in foreclosure, seven more in distress
,
Following heavy losses on two L.A. office towers, Brookfield now faces distress on a $1 billion crop of malls, including an East Coast giant staring down foreclosure.
North Jersey’s Woodbridge Center, a super-regional mall across the river from Staten Island, is in foreclosure proceedings after Brookfield defaulted on the property’s $225 million loan.

Like many troubled malls, Woodbridge is in part a casualty of the pandemic.
Brookfield lost an anchor tenant when Sears, which occupied a quarter of the mall’s rentable area, exited in April 2020. Within a month, Brookfield had fallen behind on debt service. In June, the loan was transferred to special servicing for imminent default.

Lender Rialto Capital Advisors sued to foreclose in late 2021. Court records show little sign of when or how Brookfield will settle its debt.
As of April, a receiver is still collecting rent from mall tenants. A source familiar with the matter says the firm continues to work toward a resolution, noting that workouts take time.
But a look at Woodbridge Center’s financials shows the immense challenge facing it.
Cash flow is not covering debt service. The property carries a debt service coverage ratio of 0.42. Anything below 1 signals revenue is less than loan payments. The standard minimum for good health is 1.25.
Occupancy stands at 63 percent and could fall another 15 percentage points over the next year, as “near-term rollover risk is noteworthy,” Morningstar servicer commentary explains.

All told, the mall’s value has plummeted a staggering 77 percent to $86 million from the $366 million it was appraised for in 2014.
Woodbridge is just one piece of an iceberg. In May, servicers watchlisted the $265 million loan backed by the retail component of Lower Manhattan’s Brookfield Place.

The loan is not delinquent and the mall is 92 percent occupied. However, the debt service coverage ratio stood at just 0.66 in December and its appraised value has slipped nearly 10 percent since 2021. The loan comes due in August. Brookfield told its servicer it plans to tap one of its extension options.
The firm owns seven other malls that Trepp flagged for troubled debt. They span the Midwest, including Minnesota, Indiana and Michagan, and the East Coast, specifically Virginia, South Carolina and Alabama.

All are at least 60 days delinquent. On several properties, servicer commentary indicates that Brookfield plans to throw in the towel.
Lenders on the $174 million debt collateralized by Virginia’s Chesterfield Town Center and Michigan’s RiverTown Crossings are considering deeds-in-lieu of foreclosure.
At Glenbrook Square in Indiana, Brookfield tried to hand the property back to its lender during the pandemic but appears to have rolled back that plan. A servicer note says “there are still current and future capital needs that need addressing.”
And in Minnesota, Brookfield has not recapitalized the $82.5 million debt behind Crossroads Center after a maturity default in April. That property’s value has fallen 70 percent in the last decade.
“Borrower is unwilling to inject additional funds into loan,” servicer commentary states. “Will assist lender in consensual sale or cooperate in traditional foreclosure.”

The firm did notch a workout on a $281 million loan on three properties from its acquisition of General Growth Properties in 2018.
Brookfield modified its loan in 2022, but declined to take a one-year extension option in the process, which Trepp characterized as “surprising.”
Brookfield declined to comment.

 

David Goldsmith

All Powerful Moderator
Staff member

Inside the Room: How Handing Back the Keys On Commercial Real Estate Works​

Amid generational office distress, Commercial Observer breaks down what happens when borrowers hand back the keys​

Real estate world that appears to be unraveling, the headlines tell only part of the story.
For much of the past six months, commercial real estate’s beleaguered office sector has been dogged by negative news, with some of the industry’s most prestigious names either struggling to refinance formerly performing properties, defaulting on commercial mortgage-backed securities (CMBS) loans worth hundreds of millions of dollars, or attempting to hand back the keys to underwater office buildings to lenders.
SEE ALSO: Examining the Dulles Corridor
Some of this might be a game of chicken between lender and borrower: renegotiate my terms or take my asset. And, indeed, that seems to be the way it’s playing out.
In February, Brookfield (BN) defaulted on loans tied to two Downtown Los Angeles skyscrapers carrying $784 million worth of debt; in May, Scott Rechler’s RXR handed back the keys to 61 Broadway in Manhattan’s Financial District, and defaulted on $240 million in outstanding debt; and last December, Jeffrey Gural’s GFP Real Estate defaulted on the $130 CMBS loan tied to 515 Madison Avenue, before receiving a three-year extension in March.

As jarring as it may be to see some of commercial real estate’s biggest owners turn over the keys to once-trophy assets, things are likely to get worse. All told, the Mortgage Bankers Association estimates $92 billion in debt for office buildings comes due in 2023 with another $58 billion maturing in 2024, according to Bloomberg.
“No one is surprised this is happening. The asset class has become structurally impaired by technology that facilitates remote work,” said Nitin Chexal, CEO of Palladius Capital Management, a real estate investment firm, referring to commercial office space. “Larger institutions have already run the calculus on whether or not to hold, and many are handing back the keys. It clears the way for smaller firms to follow suit.”
But the headlines only scratch the surface of the machine. In fact, the variety of paths lenders and borrowers can end up taking amid a workout, default or foreclosure — and the complexity of the negotiations inherent in each scenario — make the act of handing back the keys one of the great untold stories in commercial real estate, and one of increasing importance for the American economy.
“Many of the lenders [on office assets] aren’t even the sole lenders, especially in CMBS they’re not, and in a whole loan, or a portfolio loan, there may be co-lenders, participations, and some may want out of the deal under no uncertain terms even if it’s at a loss,” explained Jay Neveloff, partner and chair of the real estate practice at Kramer Levin. “Depending on who the sponsor is, depending on what the building is, the response is, ‘You know what? You’re absolutely right, you can foreclose,’ and you’ll sell the note at a distressed sale or in two years … but most lenders don’t want to own assets because they don’t know what to do with them.

“So, this is lawyer heaven,” Neveloff added.
Those who’ve been at the round table during workouts, modifications, restructurings, defaults and foreclosures have come back with harrowing tales of what goes on inside the proverbial “room where it happens,” to steal a line from Hamilton.
Meet me inside
“There’s a high level of tribalism,” said Shlomo Chopp, managing partner at Terra Strategies, a real estate advisory firm that specializes in distress. “Usually when a borrower gets involved, it gets contentious.”
GFP’s Gural, who owns dozens of buildings in Manhattan and recently worked out a loan extension, said that he’s generally been able to stay in the good graces of lenders throughout his career by paying down a portion of the loan at the lender’s request.

“The trick to avoid [default] is you need not be over-levered, and be able to maintain a decent occupancy in your buildings,” Gural explained. “Then you can usually avoid having to give the keys back.”
Others put the negotiations in more colorful terms.
“A lot of these borrowers are so aggressive in terms of ripping the face off the lender, but they don’t like it when the lender rips their face off when they default,” said Robert Verrone, principal of Iron Hound Management, an industry specialist in workout advisory. “Some borrowers are smart and understand that everything is a balance, and the ones who don’t stop, it’s harder to get accommodation from their lenders.”
Verrone emphasized that no two workouts are the same, and that multiple wildcards come up in the course of these negotiations — often radically changing the direction of the workout.
“Every lender, and every negotiation strategy, is different depending on who your lender is and how that lender finances themselves,” Verrone said. “Are they a bank with deposits or are they a non-mortgage lender or a life company or a CMBS lender? That matters a lot in terms of what happens inside these rooms.”

Moreover, those industry experts who’ve sat either between — or on either side of — lenders and borrowers, underscored how handing back the keys is nowhere near as simplistic as it sounds.
“You can’t not operate the property, or you’d violate some recourse carve-out triggers … then tenants put you in default and the lender doesn’t have cash flow,” explained Chopp. “Borrowers think they can do that, but you can’t tell a lender, ‘I’m leaving.’ You can’t just send back the keys and say, ‘Take it,’ because there’s no clause for that in loan documents.”
Besides, even if borrowers could get away with dumping their nonperforming or underwater office properties, oftentimes their lender — for instance, a balance sheet lender such as JPMorgan Chase (JPM), or a private equity syndicate made up of numerous, disparate capital sources — has virtually no experience managing downtown office properties.
“Banks are not set up for it, they don’t have the expertise, nor the manpower allocated to it,” said a longtime capital markets executive, who requested anonymity. The executive added that office buildings are also extremely capital intensive, which makes them difficult for banks to manage.
Stay alive

Those lenders who are most reluctant to take a property back are usually the balance sheet lenders, or banks, who originated the loan themselves, hold it on their balance sheets for the lifetime of the loan, and typically have a personal relationship with their borrower.
Other times, it’s not so benign, and the late payment on the loan, or request for a workout, triggers a business decision for the balance sheet lender — so, what’s the property worth, what are my remedies, and how do I squeeze the borrower?
Michael Cohen, managing partner at Brighton Capital Advisors in Charlotte, has over 25 years of experience in restructurings. He broke down the path an underwater balance sheet loan usually takes:
The first thing that happens if a property goes into default — usually triggered by a missed loan payment — is the lender sends a note to the borrower stating that they’re in default. If the borrower doesn’t respond, they send a foreclosure notice to begin the dual tracking, when a lender pursues a foreclosure while simultaneously exploring other resolutions such as a loan modification or a sale, explained Cohen. If the lender can see the borrower isn’t running the property correctly, they’ll put in a receiver — a third party elected by the bank — to oversee it temporarily.
Within this bizarre state of real estate limbo are the Scylla and Charybdis of recourse and nonrecourse carve-outs inside the loan documents, which lenders study with a fine-tooth comb during the receivership phase to see whether the default has triggered additional judgments on the underwater property.

Recourse loans allow a lender to seize additional assets if the borrower’s debt surpasses the property value; nonrecourse loans protect a borrower by limiting a lender’s clawbacks to collateral specified in the loan agreement, even if that collateral is less than the outstanding debt.
While every nonrecourse loan document carries language specifying that the lender won’t pursue money judgments against the borrower, but rather only a judgment to foreclose on the property, there are two exceptions: above-the-line recourse items and below-the-line recourse items, both of which allow the lender to go after the borrower personally, according to Chopp.
Above-the-line items include allegations that the borrower committed fraud, failed to cover insurance payments, or committed waste or damage to the building, and the lender needs to prove this before submitting a money judgment for the damages. Below-the-line judgments occur mainly when the borrower declares bankruptcy, which triggers full recourse against the borrower, even beyond the damages.
This might make balance sheet lenders out to be something like Scrooge, but below-the-line covenants have been included in loan documents only since the Global Financial Crisis, and for good reason.
“Fifteen years ago, borrowers would say to lenders, ‘Screw you, we’re filing for bankruptcy,’ and lenders would be held up in their tracks,” Neveloff recalled.

An element of memory is also taking precedence in the proceedings.
“Depending on the situation, and within reason, many institutional sponsors are endeavoring to be as cooperative as possible because they understand the importance of maintaining strong lender relationships,” explained Jack Howard, executive vice president at CBRE (CBRE) Capital Markets. “Institutional memories are long, and as we move out of this cycle into the next period of growth, lenders will remember who their best counterparties were.”
At least, this is the case for some sponsors.
Duel commandments
Of course, not all lenders are created equal in the world of commercial real estate. Sometimes there will be competing interests and approaches within one loan, just to further complicate matters.

In lending syndicates, where multiple funding sources originate the loan, all lenders have to agree on major decisions. So when one lender might argue for foreclosure, another might argue against it, a third might push to sell the loan, while a fourth could try to muck things up just to create their own financial leverage.
“The truth is, a lot of time, one or two people in that syndicate really want to get paid off, so they’ll say no because they don’t care about future business, and what they’ll do is they force the syndicate to try to buy them out,” Verrone explained. “The guys who run the syndicate have to walk that line, and see what’s the bluff, what’s not the bluff, and who’ll they’ll buy out, or they must buy out, to get the deal closed.”
While these messy internal machinations are going on, many sponsors are left in the dark about the state of their loan — especially when it’s a whole loan, which is usually sold off on the secondary market into different tranches of debt, not unlike CMBS loans.
“In whole loans, you don’t know who the lender has as a co-lender. There is a whole market of people trading participations in deals,” said Neveloff.
The segment of the commercial real estate lending universe that leans most into the sale of whole loans and the splicing of debt and other sources of financing is the poorly understood non-bank lender section of the market, a.k.a. debt funds: the private equity piece of the puzzle.

Debt funds like Apollo Global Management (APO) or Starwood Property Trust might have originated the loan and continue to hold a small piece of it, say 5 percent, but they have participated out 95 percent of its interest to other debt funds or private equity firms or hedge funds, according to an example from real estate attorney Brian Cohen, director at Goulston & Storrs. Moreover, if the debt fund has a credit facility on which they originated the loan, that credit facility has rules that say the debt fund must lower its exposure when the loan is out of balance or near default, Cohen added.
“What’s happening is there’s an agreement between lenders and who they actually participate it out to, and that agreement is driving the decision-making process of the lender when there’s distress,” Cohen explained. “So [when you’re a borrower], you think you’re talking to the lender, but you’re not, because your lender has someone else telling them what to do.
“Sometimes your lender’s arms are tied,” he added.
If this all sounds complicated, it might be wise to buckle up, because diving a bit deeper into the CRE financial ocean enters the cavernous world of CMBS loan defaults, arguably the most byzantine nether region of real estate waters — one that makes balance sheet loans and debt fund distress look like small puddles by comparison.
Helpless

“CMBS is just infinitely complex in this sort of situation,” said Neveloff. “CMBS is more challenging because there’s so many different tranches of debt … and control often depends on valuation of the property.”
In CMBS, all debt payments into the CMBS trust flow to investors, and because the trust and its master servicer handle the bundled loans in a passive manner, any individual loan isn’t supposed to be modified, so cash flows and loan terms are each fixed. To this end, every single CMBS loan is nonrecourse, ensuring that only the asset itself serves as collateral in the event of default. Both of these elements — together with the risk grade system — theoretically make CMBS an attractive, relatively safe investment.
A default, however, triggers an avalanche of complications for the borrowers between CMBS servicers, and the different levels of bondholders.
On one side of the equation is the capital stack that’s investing equity and debt to fund the real estate asset. Each part of the stack has priority over the others and different rates of return on their investment. And if one of the holders in one of the tranches of that debt puts the loan into default, it causes the capital behind that tranche to get nervous, and now you have a war — or “tranche warfare,” according to Goulston & Storrs’s Cohen.
“If you’re a borrower, and you know the property is no longer worth the equity, and the value might be below the debt, and you don’t see a path out, the first thing you want to say to yourself is: Let me understand the capital stack and find where the leverage is,” explained Cohen.

“As a borrower, you must do the groundwork to understand the nonrecourse carve-outs of your loan and what your personal guarantee obligations are at each level of debt, because those are the lever points that will dictate how that workout is structured,” he continued.
Then there’s the lender, CMBS trust, and the servicing side of the equation, which is even more complicated.
When things are normal, the master servicer is the day-to-day point of contact for the borrower’s performing loans, as they collect the cash flow and conduct traditional loan servicing. Wells Fargo (WFC), Midland Loan Services and Key Bank conduct a vast majority of master servicing in the U.S.
A loan default, however, starts an elaborate dance between the borrower and the special servicer, who steps in at the time of default.
Here’s where all hell breaks loose: The problem is at the loan’s time of transfer, the special servicer knows little about the loan, or the borrower, because they are too busy handling other distressed assets. The new asset is a mystery that requires the special servicer to first hire an asset manager to appraise the property, then underwrite the loan, then figure out who in the investment pool is the controlling class bondholder (more on them later), then decide what’s the best course for the bondholders, and that’s before they even follow up with the borrower on what’s best for them — a process that usually takes up to half a year.

“The special servicer is not your friend. They will never be your friend,” emphasized Richard Fischel, partner at Brighton Capital Advisors. “They are there to maximize the [CMBS trust’s] return on the property.”
Not your obedient servant
Furthermore, there’s an inherent conflict of interest once the defaulted loan is controlled by the special servicer: the special servicer is paid each month the loan is in default.
“The special servicer has zero motivation to move fast. They get paid a fee every month the loan is in special servicing,” said an executive who requested anonymity. “Whereas, if I’m a balance sheet lender, I might want to do a workout in two months. The average CMBS workout is in nine to 12 months.”
Neveloff echoed this point.

“There are conflicts [of interest] in that situation because the servicer is getting fees, so they aren’t letting go so fast,” he explained. “Some special servicers are easier to deal with, some are not easy to deal with, and some of them don’t want to give too many concessions because word will spread they’re giving concessions and that makes their lives difficult.”
Even if the special servicer isn’t in the mood to be difficult, they still control the path the entire negotiations takes, and ultimately what happens to the loan and asset.
“If they see inherent value in the building, then they’ll want to hold onto the asset and they’re not going to want to give a discounted payoff,” said Brighton Capital’s Cohen, who added they could also sell the note to another buyer.
“But another reason they may want to hold onto is because the controlling class holder is the ultimate decision-maker with what happens in a loan modification or a foreclosure,” he continued.
Ah, yes, the controlling class representative, or CCR, often the ultimate wrench in the proceedings.

While the special servicer’s job is to work out the loan in accordance to what’s best for all certificate holders, the special servicer is ultimately taking orders from only one interested party: the CCR, or the B-Piece — the lowest level of bondholder in the waterfall structure of the investor pyramid.
Because they are the last ones to be paid, this entity has all the decision-making power.
And when it gets to the point when the CCR is dictating the future of a defaulted CMBS loan, all bets are off in regard to what happens next.
“Nobody really contemplated having to go this deep into servicing prior to COVID,” said Cohen. “As long as you paid your loan, you kind of went on with life … we didn’t have this situation.”
This tangled web of CMBS loans is already impacting the greater American economy, mainly because the CMBS sector has its own wall of maturities coming due as we speak, with many of the 10-year loans signed in 2013 and 2014 hitting their maturity dates in the coming months.

Between January and March 2023, there have been roughly $3.7 billion in new maturity defaults with CMBS unable to be paid off on time, while the aggregate amount of CMBS debt in maturity default has increased 28 percent over the past 12 months, according to CRED iQ, a national data analytics firm.
“Oh, my gosh, there’s a problem here,” said Chopp. “I would liken what’s happening now to if we had a downturn just as Henry Ford came out with the car and we had a lot of horse and buggy loans due.
“It’s not what it used to be. A lot of office just isn’t viable in its current form.”
 

David Goldsmith

All Powerful Moderator
Staff member

Brookfield hands landmark Brill Building to lender​

Big-band mecca swings to Mack Real Estate Group

The Brill Building is swinging once again — this time to a new owner.
Bruce Flatt’s Brookfield Asset Management has transferred control of the former big band jazz haven in Midtown to its lender, the family owned and operated Mack Real Estate Group, in a transaction valued at $216.1 million.

The transaction is an entity-level transfer, meaning Mack bought the LLC that owns the property, not the property itself. The deal was first reported by PincusCo. Mack had provided a $145 million consolidated mortgage in 2018.
Brookfield acquired the building for $213.2 million in 2017 after foreclosing on a $60 million mezzanine loan. The previous owners were Allied Partners, Brockman & Associates, New York’s Conway Capital and an Israeli pension fund. They had hoped to lease the retail space to Jimmy Buffett’s Margaritaville restaurant, but the deal didn’t materialize.

Located at 1619 Broadway, the Brill Building has a long, storied history in music and pop culture. After its opening in 1931, the property became an epicenter of big band jazz composition, producing charts for the Benny Goodman, Glenn Miller and Tommy Dorsey jazz orchestras.

That was only the beginning. By the end of the 1950s, the property was so synonymous with a particular slice of pop music that the subgenre was coined “the Brill Building sound.” Merging pop with a Latin feel, its examples include Bobby Darin’s “Dream Lover,” Neil Sedaka’s “Calendar Girl” and Connie Francis’s “Stupid Cupid.”
Musicians who were headquartered at the Brill Building include Liza Minnelli, the Ronettes, the Shangri-Las, Frankie Valli and the Four Seasons and Dionna Warwick. The building was also home to a number of record companies. It was designated a landmark in 2010.

Today the distinctly Art Deco Brill Building is an 11-story retail and office property with 24 units and 158,000 square feet. The ground floor retail tenant is CVS.
Both Brookfield and Mack Real Estate Group declined to comment.

 

David Goldsmith

All Powerful Moderator
Staff member

CMBS Realized Losses Climb in June​

BY MARC MCDEVITT JULY 24, 2023 9:00 AM​


CMBS transactions incurred approximately $41 million in realized losses during June via the workouts of distressed assets.
CRED iQ identified 14 workouts classified as dispositions, liquidations, or discounted payoffs in June. Of the 14 workouts, five were resolved without a principal loss. Of the nine workouts resulting in losses, severities for the month of June ranged from 1 percent to 90 percent, based on outstanding balances at disposition.

Aggregate realized losses in June were more than five times higher than May due, in part, to a higher volume of distressed workouts, including two notable retail workouts. The aggregate realized loss total of $40.7 million was lower than the average aggregate monthly CMBS loss total for the trailing 12 months, which was equal to approximately $101 million.
By property type, workouts were concentrated in lodging and retail. Lodging workouts accounted for five of the 14 distressed resolutions in June, and retail workouts accounted for four distressed workouts. Distressed workouts for retail properties had the highest total of aggregate realized losses ($25 million) by property type, which accounted for 60 percent of the total for the month.

Distressed lodging workouts had the second-highest total of aggregate losses by property type with $11.1 million, or 27 percent of the total.
The two largest individual losses were associated with real estate owned (RE) retail properties. First,the Romeoville Towne Center, a 108,242 square-foot community center located 40 miles southwest of Chicago, liquidated with a $13.4 million loss. Outstanding debt at the time of disposition totaled $17.1 million, equal to a 78 percent loss severity. The property had been REO since February 2019 and had been in special servicing since 2014.

Second, a 155,309 soiree-foot big-box retail outparcel of the Potomac Mills Mall in Woodbridge, Va., known as Square 95, was liquidated with a $10.1 million loss. Outstanding debt on the property totaled $22.1 million prior to disposition, equal to a 46 percent loss severity.

The largest individual loss severity involved a suburban Chicago office property, 2250 Point Boulevard. The 80,978-square-foot office building transferred to special servicing in July 2020 and became REO in November 2021. Outstanding debt prior to disposition totaled $5.5 million, and the liquidation resulted in a realized loss of $5 million, equal to a 90 percent severity.
The largest workout by outstanding balance was a $220 million mortgage secured by 693 Fifth Avenue, a 96,514-square-foot mixed-use (retail-office) property located in Midtown Manhattan. Prior to the loan’s transfer to special servicing in May 2022, the property primarily generated revenue from its retail component, including ground-floor space formerly leased to Valentino. The retail space was backfilled by Burberry in April 2023, and the loan was paid off in June without incurring a principal loss.
Excluding defeased loans, there was approximately $5.2 billion in securitized debt among CMBS conduit, and single-borrower large-loan securitizations that was paid off or liquidated in June, which was roughly a 53 percent increase compared to $3.4 billion in May.
In June, 2 percent of the loan resolutions were categorized as dispositions, liquidations or discounted payoffs, which was in line with the prior month.
Loan prepayment remained subdued in June — approximately 8 percent of the loans were paid off with prepayment penalties. Retail had the highest total of outstanding debt payoff by property type in June with approximately 30 percent of the total by balance.

Lodging had the next highest percentage of outstanding debt payoff in June with 25 percent of the total. The $540 million loan secured by the MiracleMile Shops retail complex in Las Vegas was among the largest mortgages to pay off during the month.
 

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Where Is the Bottom in Commercial Real Estate? Nobody Knows: Q&A​

Michael P. Regan
July 22, 2023, 4:00 pm
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(Bloomberg) -- A slow-motion crisis is unfolding in the commercial real estate market, thanks to the double-whammy of higher interest rates and lower demand for office space following the Covid-19 pandemic.
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John Fish, who is head of the construction firm Suffolk, chair of the Real Estate Roundtable think tank and former chairman of the board of the Federal Reserve Bank of Boston, joined the What Goes Up podcast to discuss the issues facing the sector.
Below are some highlights of the conversation, which have been condensed and edited for clarity. Click here to listen to the full podcast, or subscribe on Apple Podcasts or wherever you listen.
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Q. Can you talk to us about why this rise in interest rates that we’ve experienced is so dangerous to this sector?
A. When you talk about these large structures, especially in New York City, you get all these buildings out there, almost a hundred million square feet of vacant office spaces. It’s staggering. And you say to yourself, well, right now we’re in a situation where those buildings are about 45%, 55%, 65% occupied, depending where they are. And all of a sudden, the cost of capital to support those buildings has almost doubled. So you’ve got a double whammy. You’ve got occupancy down, so the value is down, there’s less income coming in, and the cost of capital has gone up exponentially. So you’ve got a situation where timing has really impacted the development industry substantially.

The biggest problem right now is because of that, the capital markets nationally have frozen. And the reason why they’ve frozen is because nobody understands value. We can’t evaluate price discovery because very few assets have traded during this period of time. Nobody understands where bottom is. Therefore, until we achieve some sense of price discovery, we’ll never work ourselves through that.
Now, what I would say to you is light at the end of the tunnel came just a little bit ago, back in June when the OCC, the FDIC and others in the federal government provided policy guidance to the industry as a whole. And that policy guidance I think is very, very important for a couple reasons. One, it shows the government with a sense of leadership on this issue because it’s this issue that people don’t want to touch because it really can be carcinogenic at the end of the day. It also provides a sense of direction and support for the lending community and the borrowers as well. And by doing such, what happens now is the clarity.
Basically what they’re saying is similar to past troubled-debt restructuring programs. They’re saying, listen, any asset out there where you’ve got a qualified borrower and you’ve got a quality asset, we will allow you to work with that borrower to ensure you can re-create the value that was once in that asset itself. And we’ll give you an 18- to 36-month extension, basically ‘pretend and extend.’ Whereas what happened in 2009, that was more of a long-term forward-guidance proposal and it really impacted the SIFIs (systemically important financial institutions). This policy direction is really geared toward the regional banking system. And why I say that is because right now the SIFIs do not have a real big book of real estate debt, probably less than 8% or 7%. Whereas the regional banks across the country right now, thousands of them have over probably 30% to 35% and some even up to 40% of the book in real estate. So that guidance gave at least the good assets and the good borrowers an opportunity to go through a workout at the end of the day.
Q: This “extend and pretend” idea seems to me almost like a derogatory phrase that people use for this type of guidance from the Fed, or this type of approach to solving this problem. But is that the wrong way to think about it? Is “extend and pretend” actually the way to get us out of this mess?
A: Let me say this to you: I think some well-known financial guru stated that this was not material to the overall economy. And I’m not sure that’s the case. When I think about the impact that this has on the regional banking system, basically suburbia USA, we had Silicon Valley Bank go down, we had Signature Bank go on, we saw First Republic go down. If we have a systemic problem in the regional banking system, the unintended consequences of that could be catatonic. In addition to that, what will happen is when real-estate values go down? 70% of all revenue in cities in America today comes from real estate. So all of a sudden you start lowering and putting these buildings into foreclosure, the financial spigot stops, right? All of a sudden, the tax revenues go down. Well, what happens is you talk about firemen, policemen and teachers in Main Street, USA, and at the end of the day, we’ve never gone through something as tumultuous as this. And we have to be very, very cautious that we don’t tip over the building that we think is really stable.
 

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Commercial real estate has always been subject to shifts and changes due to economic, technological, and societal factors. While I cannot definitively say what the future holds, there are several trends and possibilities that could impact the commercial real estate sector:

  1. Remote work and technology: The COVID-19 pandemic accelerated the adoption of remote work and highlighted the importance of technology in facilitating work from home. This trend may continue to impact the demand for office spaces, as businesses might embrace more flexible work arrangements and reconsider their office space needs.
  2. E-commerce and retail: The rise of e-commerce has affected the demand for traditional retail spaces. Brick-and-mortar stores may continue to adapt or downsize, while there could be an increased demand for warehousing and distribution centers to support online shopping.
  3. Sustainability and wellness: There is a growing emphasis on sustainability and wellness in real estate. Companies and individuals may prioritize environmentally friendly buildings, energy-efficient designs, and spaces that support the health and well-being of occupants.
  4. Urbanization and suburbanization: Shifting population trends and lifestyle preferences may influence the demand for commercial spaces in urban centers versus suburban areas. Businesses might choose locations that align with their target demographics and employee preferences.
  5. Flexible spaces: The popularity of co-working spaces and short-term leasing arrangements has grown in recent years. The demand for flexible and adaptable commercial spaces might continue to rise.
  6. Economic factors: Economic conditions, interest rates, and business cycles will always influence the commercial real estate market. Economic growth or downturns can impact demand for office spaces, retail properties, industrial buildings, and more.
  7. Government policies: Changes in tax laws, zoning regulations, and incentives for real estate development can significantly affect the commercial property market.
While it's clear that the commercial real estate sector is subject to change, the specific outcomes and their long-term impact remain uncertain. Market players will need to continually adapt and stay informed about the evolving trends and developments to thrive in the ever-changing landscape of commercial real estate.
 
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