Anchored Retail

Premier National Developer: Grocery | Mid-Atlantic Grocery

Special Servicer Cuts A Note by $10MM.

challenge

Burdened by economic and competitive pressures, a distressed Shopping Center was subsumed by a 57% vacancy and a:

• $10MM over-leveraged CMBS Loan versus the current property value 

• Weak tenant market and $3MM of Tenant Improvement (TI) requirements 

• New neighboring retail center gaining major traction 

• Sponsor who was not incentivized to contribute the capital necessary to re-lease the property without Lender relief and a preferred return on their new equity

Solution

The borrower originally hired another Borrower Advocacy firm based on a cold call they received. After losing confidence shortly thereafter, they turned to The Henley Group to meet their challenge. Having worked with David in a lending capacity years before, they became aware that The Henley Group had forged a restructuring business and jumped at the opportunity to work with us.

• The Borrower, a sophisticated national firm, relied on our expertise and insider network to help them understand the dynamics and intricacies of dealing with Special Servicing. In particular, our insight about which issues could/should be pressed and which ones were non-starters.

• With our commitment and resiliency, the Borrower was able to work through the loan documents and be flexible, when necessary, to the Lender’s requirements and REMIC guidelines.

Outcome

The Borrower had wished they hired The Henley Group first. The Lender cut the A Note by $10MM and invested the project capital per the Servicer’s requirements. During the following two quarters, Ownership signed leases with two national big box stores, increasing occupancy and debt service to over 1.00x. We were delighted to turn a bad cold call into a happy, productive and successful reunion from those earlier lending days.

Extraordinary Circumstances Call for Extraordinary Reserve.

Challenge

A commercial real estate Borrower owns an 80,000 SF shopping center in the Mid-Atlantic region that is anchored by a 60,000 SF grocery store.

Prior to the CMBS loan underwriting for the shopping center, the grocery store owner had subleased its space to a newer, more specialized grocer and continued as its guarantor under the lease. 

The original grocer went into bankruptcy which triggered a covenant under the CMBS loan, requiring the Borrower’s cash flow from the property to go directly into a lockbox. 

• All cash flow generated by the property was placed with the Lender and inaccessible to the Borrower. 

• The full-cash sweep remained in place AFTER the grocer emerged from bankruptcy as there was no provisional mechanism in the loan agreement for terminating the lockbox.

• The sole capital source for tenant improvements and leasing commissions could only come from a new cash infusion by the Borrower.

Solution

The Henley Group needed to develop an extraordinary strategy that could satisfy four different constituents with very conflicting goals and help make winners of them all. It looked like this:

Borrower: 

• Extend the Specialty Grocer’s lease for 10 years by utilizing funds trapped in a lockbox.

• Refinance the property with a tenant that has term remaining on its lease.

• Maintain the Original Grocer guaranty for the remainder of the lease term (~5 years).

Original Grocer: 

• Continue to subsidize their lease payments and obligations under the lease with rent paid by sub-lessee.

• Avoid loss of this subtenant to a competitive shopping center or location.

Specialty Grocer: 

• Sign a 10-year lease extension at the shopping center.

• Pay less rent during the new lease.

• Ensure funding of the necessary TI and LC commissions by another party.

Master Servicers: 

• Extend Specialty Grocer as an anchor tenant, avoiding a situation where the loan could not be refinanced at maturity.

• Retain Original Grocer on the guaranty as long as possible.

• Avoid triggering a fiduciary breach by releasing a lockbox when no specific mechanism existed in the loan documentation.

Outcome

Through exhaustive research and pouring over the loan documentation, The Henley Group found the key that could enable the Lender to release the TI and LC monies to the Borrower without triggering a fiduciary breach. We convinced the Servicer to create an “Extraordinary Reserve,” which was discussed and permitted per the loan agreement. With the necessary TI monies released from the existing replacement reserve account, the Borrower was able to secure a new 10-year lease to the sub-tenant and to successfully refinance the loan.