Related changes in property values enabled the borrower to contribute $6 million in new equity to the loan, according to a Barclays report, since the workout consists of a hope note “as part of an assumption by a new buyer.”
According to analysts, the property was underwritten for a $195 million loan in MSC 2007-IQ14 that is similar to the Savoy Park loan modification. The roll-up $195 million, MSC 07-IQ14 loan received a hope-note mod with a 69/31 AB split.
The new loan term was extended five years to December 2017. The payment rate on the A-note was reduced to 3% for the first two years and up to 4% for the remaining three years. The accrual rate also begins at 4.25% and over five years gradually increases to 5%.
The hope note splits the loan into a $135 million A-note and a $60 million B-note. As with most such modifications in the past, marks the split “slightly higher than the latest appraisal,” which in this case was at $131 million, in February 2012.
The structure of the loan is unusual, analysts note since unlike other hope-note modifications, “the new borrower equity has not been placed ahead of the B-note, and there does not appear to be any preferred return earned.”
Plus, the monthly cashflow waterfall will pay down the A-note interest after tax and other deductions before compensating any borrower expenses, based on a 50-50 split between the B-note principal and the borrower. Also, “any amounts incurred by the borrower due to litigation” are treated as an amount paid towards the B-note.
The special servicer “used a nonrecoverable determination” to retrieve $22 million of previously outstanding advances this past autumn.
Analysts calculate the $2 loss for every $1 paydown on the B-note structure “locks in at least $40 million of losses on the loan.”
The minimum sale price at $135 million and will be used to pay the A-note first, followed by a 50-50 split to the borrower and the B-note. Refinancing at no less than 125% of its 2010 appraisal is allowed for any part of the portfolio at any time with proceeds distributed the same way.
Analysts argue that because “the mod sets a minimum amount for refinance proceeds higher than the A-note balance, the structure provides some likelihood of some principal being recovered on the B-note in the event of a rebound in property valuations.”