Assessment: In 2016, your bank financed at 72% Loan to Cost the acquisition and re-tenanting lease up of a Class B 105,000 square foot office building in your community. The asset was constructed in 2001 and sits on 10 acres. The loan was underwritten as non-recourse but with carve out or "bad boy" guarantees from the three principals. The loan has paid as agreed and the asset has produced significant cash flow well in excess of operational and debt service requirements. The in-place debt yield is 14% and DSC is 2.13X. You estimate that the principals have received from excess cash flow distributions approximating $2MM beyond their original $5.1MM equity investment. The project is 100% leased today to three tenants. The sponsor has just informed you that one tenant is going to downsize, and the other two tenants have given notice of their intent to not renew their leases that expire this year. At this time, the building will be 40% occupied. After unsuccessful attempts to refinance the asset, the borrower estimates it will take another $5MM to re-tenant space and an additional $1MM for capital improvements. The sponsors (who provided only carve out guarantees and no personal recourse) met with you recently to inform you that unless they receive a substantial discounted payoff, they were planning to give you the keys to the building and walk away. The balance on your loan today is $10.3MM. A recent appraisal indicated an "as is" value of $7.4MM and a 6-month disposition value of $5.2MM. Identify at least three least cost resolution strategies?
Assessment: In 2016, your bank financed at 72% Loan to Cost the acquisition and re-tenanting lease up of a Class B 105,000 square foot office building in your community. The asset was constructed in 2001 and sits on 10 acres. The loan was underwritten as non-recourse but with carve out or "bad boy" guarantees from the three principals. The loan has paid as agreed and the asset has produced significant cash flow well in excess of operational and debt service requirements. The in-place debt yield is 14% and DSC is 2.13X. You estimate that the principals have received from excess cash flow distributions approximating $2MM beyond their original $5.1MM equity investment. The project is 100% leased today to three tenants. The sponsor has just informed you that one tenant is going to downsize, and the other two tenants have given notice of their intent to not renew their leases that expire this year. At this time, the building will be 40% occupied. After unsuccessful attempts to refinance the asset, the borrower estimates it will take another $5MM to re-tenant space and an additional $1MM for capital improvements. The sponsors (who provided only carve out guarantees and no personal recourse) met with you recently to inform you that unless they receive a substantial discounted payoff, they were planning to give you the keys to the building and walk away. The balance on your loan today is $10.3MM. A recent appraisal indicated an "as is" value of $7.4MM and a 6-month disposition value of $5.2MM. Identify at least three least cost resolution strategies?
Financial Accounting Intro Concepts Meth/Uses
14th Edition
ISBN:9781285595047
Author:Weil
Publisher:Weil
ChapterA: Appendix - Time Value Of Cash Flows: Compound Interest Concepts And Applications
Section: Chapter Questions
Problem 42P
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Transcribed Image Text:Assessment: In 2016, your bank financed at 72% Loan to Cost the acquisition and re-tenanting lease up of a Class B
105,000 square foot office building in your community. The asset was constructed in 2001 and sits on 10 acres. The loan
was underwritten as non-recourse but with carve out or "bad boy" guarantees from the three principals. The loan has
paid as agreed and the asset has produced significant cash flow well in excess of operational and debt service
requirements. The in-place debt yield is 14% and DSC is 2.13X. You estimate that the principals have received from
excess cash flow distributions approximating $2MM beyond their original $5.1MM equity investment.
The project is 100% leased today to three tenants. The sponsor has just informed you that one tenant is going to
downsize, and the other two tenants have given notice of their intent to not renew their leases that expire this year. At
this time, the building will be 40% occupied. After unsuccessful attempts to refinance the asset, the borrower estimates it
will take another $5MM to re-tenant space and an additional $1MM for capital improvements. The sponsors (who
provided only carve out guarantees and no personal recourse) met with you recently to inform you that unless they
receive a substantial discounted payoff, they were planning to give you the keys to the building and walk away.
The balance on your loan today is $10.3MM. A recent appraisal indicated an "as is" value of $7.4MM and a 6-month
disposition value of $5.2MM.
Identify at least three least cost resolution strategies?
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