Supermarket Anchored Retail, Mid-Atlantic

Early Intervention with a Master Servicer

Situation

Borrower owns an 80,000 SF shopping center anchored by a 60,000 SF grocery store (A&P, owned by Great Atlantic Pacific Tea Company). Occupancy in the shop space is weak and demand, low.

Prior to the loan being written, A&P sub-leased its 60,000 SF of space to Global Foods, a specialty grocer primarily serving the Korean community. The Borrower secured a CMBS loan with Global Foods as the anchor tenant, while A&P remained as guarantor under the lease with the Borrower. With five years remaining on A&P’s lease, Global’s five-year sub-lease was coming due. Global wanted to extend its lease, but wanted to negotiate a reduced rent and needed monies for TI/LC.

Complexities

In March 2011, A&P went into bankruptcy, triggering a covenant under the CMBS loan documents that required the Borrower’s cash flow from the property to go directly into a lockbox. Consequently, all cash flow generated by the property was placed with the Lender and inaccessible to the Borrower. When A&P emerged from the bankruptcy in 2012, the full-cash sweep continued because there was no provision in the loan documents outlining the mechanism under which the lockbox could be terminated. As a result, any tenant improvements or leasing commission needed to come from a new cash infusion by the Borrower.

Challenges

Develop a win-win-win-win deal from which all constituents could benefit: the Borrower, A&P, Global Foods, and the Master Servicer. All brought different and potentially conflicting goals to the table.

Goals

One of the key challenges was to develop a solution that considered four different constituents:

  • Borrower’s Goals: 1. Extend Global Foods lease for 10 years by utilizing funds trapped in a lockbox; 2. Refinance the property in 2015 with a tenant that has term remaining on its lease; 3. Maintain the A&P guaranty for the remainder of the lease term (~5 years)
  • A&P’s Goals: 1. Continue to subsidize their lease payments and obligations under the lease with rent paid by Global Foods; 2. Avoid loss of this subtenant to a competitive shopping center or location
  • Global Food’s Goals: Sign a 10-year lease extension at the shopping center; 2. Pay less rent during the new lease; 3. Ensure funding of the necessary TI and LC commissions, by another party
  • Master Servicers’ Goals: 1. Extend Global Foods as anchor tenant, thereby avoiding a situation in which a loan could not be refinanced when due (2015) ; 2. Retain A&P on the guaranty as long as possible; 3. Avoid triggering a fiduciary breach by releasing a lockbox when no specific mechanism existed in the loan documents
Execution

The Henley Group convinced the Master Servicer to create an “Extraordinary Reserve,” an item discussed and allowed per the loan documents. This permitted the release of the necessary TI monies from the existing replacement reserve account based upon TI requisitions made by Global Foods, and the passage of time.

Outcome

While fronting a relatively small portion of the commitments, the Borrower was able to create a loan that can be refinanced at maturity in 2015 by doing the following:

  • Secure a new 10-year tenant at a market rent that kept the loan current
  • Fund the majority of the tenant improvements from existing reserve replacement account funds on hand with the Master Servicer
Whether your loan is currently in Special Servicing or may be heading down that path in the next 24 months, we can help. Contact us