Office

Class A Suburban Chicago | New Jersey Office Building | Class A Office Landmark

Strong Teamwork and Motivated Special Servicer Makes the Dream Work. Deal in under 90 days.

challenge

Prior to hiring The Henley Group, the Borrower’s largest tenant at its 600,000 SF Class A, LEED Silver Trophy office building exercised an early termination option causing a 27% drop in occupancy. Earlier that same year, two smaller tenants exercised similar termination options leaving the borrower with a potential 66% occupancy rate by fall of 2022.

The early termination by the largest tenant caused a “Significant Tenant Termination Trigger” and a resulting cash sweep event. The tenant would continue to pay rent for another 12 months, but the hunt was on to find a replacement tenant to avoid any further erosion of the property’s value as it would be impossible to pay their debt obligation at a 66% occupancy level.

Miracles do happen. A tenant was identified to not only replace the square feet vacated by the large tenant, but also take an additional third of the space vacated by the smaller tenants. While finding a tenant of this magnitude in a down market was like a needle in a haystack, big challenges remained:

• Lender approval of the new tenant and the lease.

• A cure for the “Significant Tenant Termination Trigger”.

• Raising significant capital to upgrade the property’s common areas as well as the costs associated for the new lease tenant improvement and commissions.

• A 24-month freeze of the JV agreement financial obligations with the Borrower’s equity partner until the new tenant is in place.

• Access to all existing escrow funds for capital improvements, tenant improvements and leasing commissions.

• A DSCR Trigger waiver from the Lender as the Property would not pass DSCR test.

• An accelerated approval process from the lender due to new tenant’s deadline for lease execution.

Solution

Act swiftly on all fronts. The new tenant wasn’t going to hang around. They needed to know if this deal was going to happen. We put a comprehensive proposal together explaining why this was a great deal for the Lender and underscored the need for quick review and turnaround. We emphasized the following: 

• Current market conditions were not conducive to identifying an office tenant of this size. In fact, the brokers described finding this tenant as a once in a lifetime lease.

• The Borrower was willing to invest a significant amount of equity in the deal to upgrade the common areas, building systems, TI and leasing commissions.

• The Borrower was solid and had masterfully navigated their way through an unprecedented pandemic, providing full transparency to the Lender every step of the way.

• A nationally renowned commercial property manager was already in place and would continue to manage the property. 

outcome

The Henley Group was able to get an accelerated Loan Modification in less than 90 days, including lease approval, a cure for, and replacement of, the “Significant Tenant,” and access to all of the escrow accounts for common area renovations, building systems, tenant improvements and leasing commissions. The Loan Modification enabled the Borrower to: execute an 11-year lease with the new significant tenant, freeze the financial terms of the JV agreement for 24 months, be willing to infuse a substantial amount of their own capital into the building, and attract new equity to the deal.  

The Most Powerful Warriors are Patience and Time. And, Smart Negotiating.

challenge

The Borrower’s biomedical tenant fully occupied the New Jersey office building when the company decided to move out. There was no other available tenant in sight. With the Borrower’s CMBS loan maturing, it was impossible to refinance. Complicating the situation further:

• The Property's highest and best use accommodated biomedical not general office.

• Attracting a single tenant for an industrial complex that was already 60% vacant was extremely unlikely. 

• The value of the Property had dropped precipitously since the loan was securitized. Without Lender cooperation, foreclosure would be the only alternative.

Solution

The Henley Group needed to focus on the best outcome for the Lender in order to help the Borrower hold on to the Property. Buying time was an important part of the plan.

• We predicted the Lender may be willing to delay a foreclosure if we could center the conversation on the vacant Property’s deteriorated value and the long lease-up period needed to stabilize the building without the Borrower.  

• The Henley Group highlighted the Borrower’s strong track record of re-positioning biomedical and industrial office assets in tough markets.

• We focused discussions on advancing the LOI’s in place. And, knew that prospective tenants do not want to lease in Receiver-run buildings. 

• Leveraging our construction Lender experience, we created and fine-tuned realistic construction and lease-up analyses that satisfied the Servicer and accommodated the TI monies required by the new tenants. 

• Neutralizing disruptive deal issues and staying patient and permanently involved was critical to closing the deal. Even after the modification terms were agreed to, we remained consistently involved as documenting the loan was delicate. 

outcome

Foreclosure was avoided. The Lender agreed to forbear and give the Borrower the time needed for lease-up as well as to extend and modify the loan terms. With the new commitment from the Lender and leasing traction, the Borrower was willing to infuse capital to facilitate the tenant improvements.

footnote

The Henley Group extended discussions with the Servicer to allow the Borrower time to canvas the market for prospective biomedical tenants and to determine the feasibility of finding a single user at the rent level necessary to service the debt. In the meantime, together, we determined that a more likely lease-up scenario would be to subdivide the space into four multi-user tenant spaces in order to stabilize the Property and maintain ownership.

The Importance of Understanding Institutional Underwriting and Market Trends.

challenge

The Office Park was suffering a 45% vacancy in a 20%+ available sub-market due to the loss of two major long-term tenants. The loan was maturing and the Property required significant capital investment in order to attract new tenants. To further complicate the situation:

• Cash flow was insufficient to service the existing debt.

• The debt-service coverage ratio (DSCR) was at 0.5x. 

• The existing institutional venture partner was not interested in investing any additional capital into the Property and specifically requested to be bought out.

• The office complex was originally built by the grandfather of this third generation Owner, creating an emotionally fraught challenge to preserve a family legacy and local landmark.

Solution

The most common client complaints about the Servicer are: “non-responsive,” “fee-driven,” and “not willing to negotiate.” This is when Borrowers often just give up. Our client spent many months being frustrated by the Servicer negotiation process, investing an inordinate amount of time and effort only to get to a dead end with the Lender. We understand. 

• The Henley Group had to sit back patiently and wait for the Borrower to realize that they really needed us and our expertise to restructure, renegotiate, and resolve their debt.

• We continued our conversations and waited for the “aha” moment when the Owner realized their failed negotiations and efforts had caused traumatic emotional stress.

• Once engaged, The Henley Group took the crucial tact to neutralize the Owner’s strong emotional attachment to his grandfather’s Property and shift the focus and energy to working on an objective compromise. 

outcome

After 12 months of complex negotiations with the Special Servicer, The Henley Group closed on a sub 50% discounted payoff for the Office Park. Due to the significant discounted payoff and a lower cost per square foot, the Owner was able to refinance the debt with a local bank and stabilize the Office Park, returning it to cash flow positive very quickly. Furthermore, the Owner was able to attract a new joint venture partner who shared their investment philosophy, and they began working together on new investment opportunities.