David Goldfisher, The Henley Group, Inc.In the 4th quarter of 2015, a well operated northeast shopping center received a $10 million loan reduction when the special servicer agreed to bifurcate the loan into an A and B note. The reduction of the A note decreased the owner’s monthly mortgage payment considerably as the B or Hope note accrues interest but is not paid current.
In the past few months, the ownership has signed leases with two national, big box stores increasing occupancy by 39,000 s/f. The center’s overall occupancy has improved from approximately 43% to approximately 82% occupancy and debt service is now comfortably over 1.00x.
Prior to the loan restructuring, the property’s cash flow was insufficient to cover the lender’s monthly mortgage payment. The owner’s 160,000 s/f grocery-anchored shopping center had a 57% vacancy. Given the grocer’s space accounted for north of 60,000 s/f, the in-line retail vacancy rate of approximately 75% was an economic drag on the property. Due to the sustained anemic retail submarket conditions along with new competitors gaining traction, releasing the storefronts was difficult. Additionally, a major employer had closed down operations in 2011 negatively impacting consumer demand.
The value of the property had dropped significantly since the CMBS loan was securitized ten years prior and withoutl ender relief the sponsor was not incentivized to make investments needed to release the property.
The borrower’s successful loan restructure was the result of several factors. 1) The borrower was able to invest capital into the project commensurate with the servicer’s requirements. 2) The lender perceived the borrower as their most favorable option to own and operate the shopping center and their best opportunity to create economic value in the future. 3) The borrower, a long-time operator in the area, ceased on market intelligence and aggressively targeted tenants whose leases were expiring in nearby competitor centers. Essentially, convincing themselves and the lender that a few L.O.I.’s would convert to actual leases and 4) The borrower was resilient in working through the loan documents and was flexible as needed to close the transaction.
Nationwide, newer retail centers are phasing out aging plazas and strip malls. Having worked on a myriad of retail projects, we strongly suggest that retail owners assess their property value at least 6 months prior to their refinance. While approximately 2/3 of retail loans pay off in full at maturity, 1/3 of these loans do not.
Borrowers may need to modify or restructure their loan if the reinvestment capital does not produce an acceptable return given the current capital stack. The 2006 and 2007 vintage CMBS retail loans maturing in 2016 and 2017 respectively are particularly vulnerable since many of these properties were significantly over levered at origination.
David Goldfisher is a principal at The Henley Group, Inc., Natick, Mass.