Motor City Loan to Watch in Coming Years

One of the stories heralding the comeback of the CMBS market in the fall of 2012 surrounded the first CMBS loan to be written on a Detroit office building in five years. The loan was the $26.6 million One Kennedy Square note. The Wall Street Journal‘s Maura Webber Sadovi had written an article on the loan at the time. A new story from the WSJ on Wednesday revived our interest in the note.

Yesterday’s article was regarding the increase in office property sales in the Motor City. Tucked away in the story was the mention that Meridian Health Plan is constructing a new 16-story office building. Caidan Management, which is an arm of Meridian, is the lead tenant in the One Kennedy Square office with 25% of the space. Caidan is paying $16 per square foot in base rent. According to the Annex A from JPMCC 2012-C8, the lease runs until the end of 2022. Tucked away in the prospectus, however, is a footnote that indicates Caidan can terminate the lease at the end of 2017 with 12 months notice and a termination fee of $366,204. The WSJ article indicates that Meridian hopes to open its new offices in 2017.

That year should be very interesting for the borrowers. In addition to the Caidan story, two other tenants have expiration dates around the same time: Marketing Associates (21% of the space, March 2016) and Ernst & Young (21% of the space, December 2016). In addition, according to the 2012 WSJ article, certain tax incentives will be eliminated that year.

The loan makes up 2.4% of the JPMCC 2012-C8 deal. The note is current and does not mature until 2022. Stay tuned.

Motor City Loan to Watch…Right Now

While we are on the topic of Motown and lease terminations, the property behind the $16.5 million Pricewaterhouse Coopers Office loan saw its value crushed in December. The loan makes up 0.8% of CD 2006-CD2.

The property is a 106,000 square-foot class A office building that is only eight years old. The five-story property sits next to Ford Field in Detroit and the Lions own the property under the building. The office was home to PriceWaterhouseCoopers at the time the loan was securitized. PWC was scheduled to occupy the premises until 2017, but the firm exercised a lease termination in 2012 and vacated at the end of that year. The firm paid a termination fee of $8.9 million at the time.

The office building was appraised for $26.5 million in 2005 but that was reduced to $1.5 million according to the latest servicer data. Despite the low valuation, the note is not carrying an appraisal reduction at this time. The loan is paid through November but it appears the debt service may be covered by the termination fee money. The latest special servicer comments indicate that the borrower is seeking a modification. Separately, we are trying to get the latest appraised value confirmed by the servicer (given that it is so shockingly low).

Compliments of Trepp, LLC – a EACCNY Member