The recent receivership sale of Comerica Bank Tower, a 1.5 million-square-foot office building in Dallas, is a template for how to bring together distressed assets and yield-hungry investors, while minimizing trust losses, according to Shlomo Chopp, managing partner at the workout advisory firm, Case Property Services. The lender took a distressed property and maximized recoveries by selling it to an investor at a solid price, albeit with very high leverage, explained Chopp, who was not involved in the deal.
The 60-story trophy property at 1717 Main Street fell into distress after Bank One Texas, the largest tenant, decided not to renew its 350,000-square-foot lease. Although the bank inked substantial subleasing agreements, there were still about 104,761 square feet of vacancy, and an annual rental income loss of $2.6 million, according to data from Trepp, LLC. The loan was securitized in WBCMT 2007-C30 and had an original balance of $177 million.
Often, when a mortgage goes into default, the foreclosure death cycle, as Chopp termed it, can turn a troubled property into a cash-starved zombie building. Rather than completing the foreclosure process and extinguishing the debt, special servicer CWCapital decided instead to find a new buyer for the Comerica Bank Tower and reincarnate the $177 million CMBS loan as an A/B note, Chopp said.
CWCapital structured a deal in which M-M Properties stepped into the shoes of the owner, an affiliate of Metropolitan Real Estate Investors controlled by a court appointed receiver. The buyer assumed the restructured mortgage and paid $10 million in cash allocated to the lease-up and improvement of the property.
CWCapital split the mortgage into a $143.5 million A-Note and a $33.7 million B-Note. The B-Note is a hope note that will only collect an equity kicker, or a share of profits in the property above a certain threshold. Essentially, the buyer acquired an underperforming $153 million deal financed by a 93.5% LTC loan at a 5.767% interest rate, Chopp said. This exemplifies one of the better workouts ever done by a special servicer, he added. I like the creativity, proactiveness and the recognition by CWCapital that lenders can facilitate, but they are not turnaround artists.
Chopp believes the takeaway is this: at a time when commercial real estate investors are scrambling for yield and off-market opportunities are thin, market participants need to be more proactive in sourcing distressed workout opportunities. While the rest of the world is jumping over each other for the scraps, be aggressive and create a deal, he said.