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Case Study

The timing of this Case Study mirrors today’s office building challenges in 2023 and 2024.

A Class “A” office property had been operating well despite multiple turnovers of property management and leasing brokers. During the “good times” important property level matters went unattended. The issues were not problems for property management, which was a fundamental problem. The anchor tenant was paying a very low rental rate and the lease expiration date was approaching. The lease was agreed during a distressed economy and was considerably under prevailing market rents. The tenant, a financial institution, did not want to vacate the premises and fought hard to keep a low rental rate. The lease had also been drafted by the tenant, an issue for the owners who wanted a new and balanced lease, not a tenant-oriented lease.

The owners were always current with the mortgage payment; however, the lender was an insurance company and became aware of the depth of problems in the market via their periodic loan portfolio investigation. The owners were quite frustrated with poor property performance and considered giving the property to the lender but had not communicated this to the lender. The mortgage was non-recourse.

Hawthorne was engaged to solve the problems. We first carefully analyzed the problems in the order of which the timing of each task needed to occur. Order was critical, to not throw good money after bad, and avoid even larger problems.

Rick Hawthorne met with the insurance company lender to achieve a discounted pay off. The meeting attendees were the Director of Real Estate, Chief Counsel and Rick. After sharing key operating reports and market surveys, Rick proposed a discounted pay off at a specific amount. Both the Director and Counsel laughed and said, “we don’t have a problem, the loan is current.” Rick replied, “yes, the loan is current which could change next week. Here is a sheet with the math of the proposed pay off transaction and here is another sheet without a quick pay off which will not end well. It should be clear to all parties this has become an unpleasant issue and the parties are presently in a bind. This proposal is a very reasonable pathway for all parties.”

The two asked to speak privately for 15 – 20 minutes. Upon their return they said they would “do the deal, but under a short time frame.” Rick had already prepared the owners this pay off will have to be completed in 30 days and a lower pay off was negotiated with a non-refundable good faith deposit. They were also reminded their year-end was approaching, so a delinquent loan would not have to be reported vs. a paid loan in a distressed market with additional cash on their balance sheet. The owners paid the loan timely at a good discount. The following is a summary of subsequent actions:

  • The anchor tenant’s rent tripled.
  • All measurements were per BOMA standards.
  • Most of the other smaller tenants renegotiated their lease agreements.
  • New property management and leasing broker replaced the previous companies.
  • All capital improvements for ADA and building modernization completed on time and on budget.
  • Rental income was stabilized during a distressed market and economy.