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05. Commercial Property Partnership

SITUATION:

Two separate limited partnerships owned, and an affiliated entity managed, two suburban office buildings adjacent to one another. Both office buildings were primarily occupied by separate business units of the same defense contractor. The leases for the defense contractor were both expiring and the defense contractor was requiring substantial tenant improvements to renew its leases. The management company attempted to obtain the necessary approvals and restructuring to accommodate the defense contractor's requirements from the Master Servicer for more than a year with no success. Under the proposed renewal, the defense contractor would be leasing additional square footage for a five year term. In the event the defense contractor did not renew its lease, between the two buildings, 28.6% of the tenancy would be lost, resulting in an inability to meet debt service and operating expenses for the foreseeable future, as well as necessitating the securing of new tenants for 28.6% of the then vacant rental space. The need to secure new tenants would drive up costs by accruing the concurrent expenses of rental commissions and associated build-outs at a time when the income from the premises declined precipitously. In addition, three other tenant leases were expiring with certain tenant improvements, or alternatively, tenant allowances, required by the tenants as a condition of any lease extensions.

To enable the property owner to fully fund the tenant improvements needed for the defense contractor at the outset and avoid giving rent credits, while maintaining sufficient funds for the various other tenant improvements needed, the property owner needed over $1,000,000 in additional funds. The cost of the tenant improvements for the defense contractor was $653,000 with lease commissions of 4% ($170,000) for a total cost of $823,000. The three other tenants also requiring tenant improvements contributed an additional expense of $225,000.

With this substantial cash flow shortage, Management knew it was facing imminent default on an asset which, despite needing tenant improvements, ordinarily was a cash flowing asset and of significant value to property owner.

WHAT WAS DONE:

The Mitigation Team was retained by the management company to intervene and work toward a solution in advance of the defense contractor's lease expiration to secure the lease approvals and obtain the necessary restructure. The Team was able to analyze the pertinent data, determine the best position to take, and negotiate special servicer approval of mezzanine financing, use of reserve funds, a loan extension and restructure. The Team proceeded with an aggressive negotiation and was able to successfully reach an agreement on an extension and restructure which included an 18 month interest only period at a reduced rate of 3.75%, followed by a 12 month interest only period at the note rate of 7.94%, with principal and interest payments to resume pursuant to the promissory note thereafter, and a five year maturity extension at a note rate of 7.94% with no defeasance in exchange for a cash management agreement for the term of the extended loan.