Weston, Florida
The Financing Assignment
Reduce the interest rate and increase or match the remaining term on a permanent loan that we had placed for an existing client in 2008.
The Background
In 2008 we had placed a loan with Sun American Bank secured by a two-story 60,090 rentable square foot medical office building located in Weston Florida for $6,500,000. The purpose of the loan was to redevelop a property that was previously used for industrial warehouse into a clinical and administrative medical office building. The property was to be tenanted by the Cleveland Clinic. We were successful in obtaining the financing, closing in August of 2008 for a ten year term at 5.975%. From 2008 through 2012 rates substantially declined, Sun American bank failed and was eventually acquired by First Citizens Bank and we went through the Great Recession.
The Hurdles
1. In 2008 the Cleveland Clinic signed a lease with an initial term of 10-years with two 5-year extension options. By 2012 there was only 6 years remaining on the initial lease term.
2. The property was exclusively lease by the Cleveland Clinic. In 2018 when the initial lease term would expire the building would either be 100% occupied or completely vacant.
3. When we initially placed the financing for the retrofit for the Cleveland Clinic we negotiated 24 months of interest only financing. Consequently, very little principal amortization had occurred by late 2012.
4. The sponsor, in his late 60s was very well established and did not want recourse on the loan.
5. Because we were emerging from the Great Recession and tenants were very much in control regarding rental rates we could not ask the borrower to go back to the Cleveland Clinic and get them to exercise one of their 5-year lease extension options. It would have cost the borrower rental rate which in turn would have diminished the value of the property securing the loan.
The Solution
1. In cooperation with the primary sponsor we engaged an engineering company to perform a cost take-off on the interior improvements that existed in the subject property. The Administrative space, which encompassed approximately 60% of the building, was typical office with perimeter offices and bullpen partitions. This would not be terribly expensive to recreate, however, the 40% balance of space was clinical. It proved to be extremely expensive to recreate.
2. Utilizing CoStar we performed a market study of the competing properties within 2 square miles of the subject property. Our search was narrow, however, the Cleveland Clinic Hospital was within walking distance of the subject property and we knew that if they were to relocate it would be in close proximity to the Hospital. We visited the competing properties could not afford to offer this rent and make a $2,570,000 investment in just the clinical space.
3. We convinced Florida Community Bank, with recourse, to refinance the loan plus closing costs at a rate of 4.5% for an additional 7-year term applying a 25-year amortization. We essentially matched the maturity of the existing loan and reduced the interest rate 1.475%, saving the borrower $668,200 over the 7 year loan term.